February 20, 2019
Reports of banking’s demise have been greatly exaggerated. Banking and banks are here to stay. However, the way banking is conducted – and at times, who conducts it – is changing. An intense focus on cost-cutting and efficiency is ceding to expansion and growth. But growth extends beyond traditional channels. Leading bankers are now prioritizing the creation of secure platforms and ecosystems. By June 2019, 57% of financial services companies will be investing in additional security mechanisms*, such as Salesforce Shield, to protect customer/employee data in Salesforce. These new capabilities rely on sophisticated digital technologies that must meet compliance and security standards in a highly regulated environment, which continues to delay legacy institutions. We talked to Barry O’Connell, Partner, VP, and North American Digital Strategy & Interactive (iX) Lead for Financial Services at IBM to share his insights.
What is the relevance of banks today?
Banking itself is changing. It used to be a bank was somewhere you went or transacted either physically or digitally, but transactions are only a fraction of what customers expect. They need advice and insights beyond the need to simply move their money between people and businesses. And how that's facilitated is changing too. Those services are being provided by ecosystems that include third parties and your bank. The Amazon business model now applies equally to the financial services space. We believe creating a platform that links customers to businesses will drive value for both parties. Banks can act as that magnet also facilitating value beyond financial transactions. The top performers, the market leaders, are those that are working in the ecosystem, to provide services to the customers that meet their holistic financial needs. The rest are just utility players.
What technologies do you believe will make the biggest impact on banks over the next two years?
I don’t look at the transformation in terms of a specific time frame. The way I look at digital transformation in banking is that it has gone through—and continues to go through—a series of stages. The first stage, which took place in the early 2000s, was simply “being present.” That encompassed building better websites, mobile apps, and engagement models across channels.
The second stage from the late 2010s, occurring later in the decade, was about “being more responsive.” This was focused on using big data and automation tools to provide customers with better experiences on the front end either in a branch, call center or digital property.
The current third stage is really just emerging and is what I would call “predictive”—using AI to reinvent the customer’s experience, starting with the customer’s unique needs. As 80% of what customers do is on their smartphone, banks absolutely need to invest in capabilities that help customers complete more complicated tasks on any device and cross channel. For example, banks must make onboarding for example much more intuitive and simpler, while not compromising security or risk and it should be a similar experience across channels. The needs analysis phase of any onboarding experience should be cognitive and recognize the bank already knows a great deal about even a prospect’s candidacy for a service or product.
The final stage, which hasn’t arrived yet (even though all the underlying tech exist) is the “platform stage,”during which traditional banks move beyond their core functions to become trusted advisers, predictive of a customer’s needs and work with an ecosystem of partners to deliver transformative experiences for their customer base. For example, during this phase, AI might be used to determine how to move your money real time to protect your financial interests and achieve your goals, and intelligently make those decisions on your behalf. This requires total trust between the bank and the customer. Likewise, the bank must always protect your digital identity and allow you the customer to provide access to those services who need it, as long as it meets a specific life of financial goal.
Do you see anybody experimenting and leading?
All Banks are experimenting, and banks still own the vast majority of the market in terms of loans and deposits, so they have permission to continue to innovate for their customers. The leaders are those that not only offer the Bank’s proprietary products and services but also collaborate with other 3rd parties and partners to provide value-added services beyond the basics.
For example, many small businesses still require cash services and still need to put that in a bank, so banks still provide that solution, as well as loans and payments products. Yet, small business still requires many value-added services in payments, supply chain, and distribution. Companies like Square have entered that segment and now are valued at over 30B in Market Cap, simply by providing those services via digital channels with simple pricing and engagement models.
Today, the trend is that FinTech’s continue to drive innovation in the banking market but often in partnership with the Banks versus as a competitor. Several major banks in the Small Businesses space will still offer a bank account but will then use companies like OnDeck as an additional way to drive loan acquisition. Furthermore, global regulation and competition is making Banks open up their platforms to work with 3rd parties to help meet their clients’ needs. In Europe, regulation has mandated that banks must provide standardized API access across the EU as part of the Directive on Payment Services (PSD2), a set of rules to modernize payment services. It includes a proposition called Access to Account (XS2A) that requires banks to offer an API to third parties under the supervision of the European Banking Authority. In practice, it allows customers to directly use authorized Payment Service Providers (PSP) to execute transactions on their behalf. But whether the banks are mandated or not, the customers will demand that the bank open their APIs to access better services and more options from Fintechs.
And what about wealth management?
In the mid-affluent market, there has been a spike in Robo advisory platforms targeting the $100-300k USD in AUM, and they offer the best onboarding experience for new customers. However, the larger banks have since all launched their own Robo offering either via a partnership with the Fintechs like SigFig, or by building their own platforms. The Robo providers can onboard customers in a matter of minutes, in a secure way, with less paperwork—whereas legacy institutions are hampered by their complex legacy back office and long acquisition times. They haven't made the leap to modernize the entire vertical stack, and to provide digital-only wealth services to customers. Wealth management continues to be one of the hottest areas for innovation in financial services and competition has intensified.
What’s your feedback for banking overall?
I don't see enough organizational collaboration to serve the customer versus the product line leadership to sell more products. There's still a big gap, and the second gap is the way they serve the market isn't fast enough. They're not agile or fast enough in the delivery of innovations to the market, to the customer, and need to organize between the front office, middle, and back. In a connected office, employees are 2x more likely to say Salesforce enables breakthrough innovation at their companies.*
*Data from The State of Salesforce survey–download your copy of The State of Salesforce report.