How Digital Will Change Banking Forever



Banks are changing dramatically amid an avalanche of regulatory change and widespread debt reduction. They will be safer and, sadly for users of bank services, costlier as a result. Yet all of this may soon seem somewhat irrelevant, because technology could transform the way banking works far more profoundly.

Banking is very ‘digitizable’. Cash is the only part of the industry that is inherently physical and that is a tiny part of what a bank does. The rest is really about transferring and modifying property rights and information of various sorts, all of which can be digitized.

Banks are next in line

Of course banks have invested huge sums in technology – automating processes and enabling customers to bank online – but we haven’t yet seen the fundamental transformation of business models that have taken place in other sectors, such as music.

It will happen, and when it does it will have a huge impact.

Some of the consequences are clear from other industries. Intermediaries disappear or get marginalized unless they discover new ways of adding value.

Look at what has happened to recorded music companies or bookshops. Banks are the primary intermediaries of the financial world, so their margins will fall unless they reinvent what they offer their customers and how they work.

Winners take it all

In the digital analytics world, things work differently. Scale and network effects drive competitive advantage. Winners tend to take all, as Google and eBay demonstrate. Discrete products get turned into bundled services. Customers of Spotify, a music service, do not buy recordings of individual songs – they buy a subscription to a cloud-based archive.

Perhaps surprisingly, the transparency of the Internet doesn’t always lead to the disaggregation of bundles and the disappearance of cross-subsidies. Things get pulled apart and put together in different ways. Monetisation, costs and customer value can be even more often disconnected than in the physical world.

New business models will emerge, as we have already seen: Lending Club’s peer-to-peer model is changing personal lending. Some will thrive, many will fail.

Banking will get cheaper

Above all, customers will benefit enormously. Greater transparency will mean better prices for customers. Digital analytics delivery will mean never having to go to a branch. More information and more flexible service configurations will put the customer in control.

Why is it happening so slowly compared to other industries? Part of the answer lies in the banks themselves. Contrary to what many believe, banks are extremely risk-averse. They don’t like failing, and it’s almost impossible to innovate unless you are prepared to fail. In a context where trust is so important, and where there’s increasingly little tolerance for any kind of failure, that’s extremely difficult.

...it’s almost impossible to innovate unless you are prepared to fail."

But regulation is an even more powerful impediment – and not only because ‘financial innovation‘ is a four-letter word in banking supervision circles. Technology-driven innovation that leads to big winners and big losers, that replaces established products with flexible service bundles, that overturns established business models and blurs the boundaries of banking, and that sometimes fails to deliver quite what was intended, doesn’t fit well with today’s regulatory zeitgeist.

Real innovation needs to happen

To be fair to the regulators, it’s not like banks are straining at the leash. Mostly they’re investing in technology to meet ever-increasing regulatory demands, or to reduce costs. There’s relatively little investment in real innovation that offers major changes in customer experience; and the prevailing ‘zero tolerance’ environment is toxic to new ideas.

Moreover cyber-security and privacy issues are becoming ever more acute. The more finance becomes digital analytics, the more important it is to prevent intrusion, disruption and digital analytics theft.

Yet, despite such challenges, and whether they like it or not, banks and their regulators are going to have to embrace technology-driven innovation. Otherwise it will simply happen by stealth, driven by players outside the industry. We have already seen examples such as M-Pesa, the mobile payments solution pioneered in Kenya, the ubiquitous Paypal, or most recently, Bitcoin – the online currency.

We should be making banks better

Given the scale of customer benefits, and the scope to seize competitive advantage, there are huge prizes for those who can innovate successfully. Too much of the debate about banking is about not repeating the mistakes of the past. We risk missing the opportunity to make banks much better in the future.

We’re stepping up the pace of innovation at the bank I run: generating more ideas, implementing them more swiftly, being quicker to discard the ones that don’t work. By making everything digital analytics, exploiting the power of Big Data and the ubiquity of mobile communications, we see huge opportunities to enhance the value to our customers, to increase efficiency and to manage our risks more effectively.

The upsides are huge, and the downsides are stark. That’s why accelerating technology-driven innovation is a top priority.


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