Innovation, in financial services, is often driven by infrastructure developments (eg. real time payments), regulatory developments (eg. open banking and the issuance of digital banking licenses) and technology developments (eg. AI, chatbots and robotic process automation). While these developments remove friction and improve speed, thereby improving customer experience and reducing the bank’s operating costs, they do little to create ‘stand-out’ differentiation in the market. Most customers maintain a ‘neutral’ relationship with their bank(1) despite the industry spending more than $500bn annually on technology(2).
Do banks need to invest in ‘stand-out’ innovation? When it comes to innovation, the financial services industry is relatively conservative, compared with other industries(3). But with the growth in adoption of innovative fintech propositions and the confident strides that non-banks (eg. big tech) are taking to enter the market, there is a case for banks to elevate their investment in customer-relevant innovation. Indeed, 73% of financial services executives consider that the disruption caused by the Covid-19 pandemic presents a significant growth opportunity(4).
Investing in customer-relevant innovation requires new technology - to power banks with meaningful customer insight, then launch and iterate propositions, quickly. Where customer-relevant innovation is the trigger for technology investment, banks will benefit from revenue growth and cost reduction, with the added benefit of solving for the gap left by traditional transformations - moving customer relationships from ‘neutral’ to ‘positive’ through compelling and differentiated offerings.
Where banks think like modern customers
Industry verticals are starting to blur. Telcos, such as Verizon, have moved into media offering TV, movies, music and games(5). Utilities, such as Centrica, have moved into consumer electronics with Hive Home(6). Toyota, the car manufacturer, is actively involved in robotics - amongst other things, they have developed a brain-machine interface to control wheelchairs through thought(7). This integrated network economy - where industry verticals move into adjacencies, where they have a ‘right to play’ - could be worth $70tn in the next decade(8).
Banks are also moving into adjacencies. Banks can serve as the starting point for their customers to encounter non-banking experiences. OCBC in Singapore offers Wanderwise(9) - a place for customers to be inspired about travel, with exclusive deals for hotels, experiences and flights. CapitalOne in North America offers AutoNavigator - a place where customers can find and buy cars, gaining access to finance at the point of purchase. Maybank in Malaysia runs a property auction service(10) to help people buy a home and in so doing, offer customers a mortgage to help facilitate the purchase. Standard Bank in South Africa offers a mobile phone service(11) where the monthly cost of a customer’s bank account fee is credited as air time; customers can also buy handsets on finance. Lloyds Bank in the UK has launched Citra Living(12), a property rental business, which is a natural adjacency given it is the largest mortgage lender in the country. CaixaBank in Spain offers HolaBank Club(13) which helps expatriates manage overseas properties with domestic services.
Banks are also embedded into others’ platforms - being where customers are, when they need a financial service. This is not new - for example, customers can buy cars on finance, supplied by major banks, at dealerships at the point of purchase. One such example is Wells Fargo in the North America, which has relationships with more than 12,000 dealers(14). However, new platforms offer new opportunities. For example, Banorte in Mexico partnered with Rappi, the super-app, to offer RappiCard(15) - an attractive product in its own right, customers can sign up via Rappi and use it to make purchases within the Rappi ecosystem. HSBC has partnered with Chinese tech titan, Tencent. Customers can view balances, find branches and get financial and lifestyle information through a programme on WeChat(16).
Social themes are also a driving force for innovation as banks seek to elevate their relevance. Take poverty and social inclusion. Brazilian state-owned Caixa launched TEM(17) - a mobile service - to help distribute benefits to the un(der)banked, electronically, during the Covid 19 pandemic. It has proven such a success, dispersing benefits to more than 35m citizens and is considered to be the largest ever social inclusion initiative in modern history(18). With more than 250m downloads, new features will be added to provide an added level of peace of mind through an insurance policy which will pay for funerals and food baskets for families in the event of a tragic loss of life(19).
Another important theme is health and wellbeing. Emirates NBD in Dubai, launched the Fitness account(20) - a savings product where the interest rate grows as the customer does more exercise. This aimed to incentivise customers to become fitter and healthier. OCBC in Singapore offers Healthpass(21), which gives customers remote access to doctors. This gives customers peace of mind, knowing that they can access medical advice where and when they need it most. Barclays in the UK offer customers advice and guidance on managing their lives through economic hardship through a personal consultation service called Money Mentors(22). This helps improve the wellbeing of people who can find themselves in a stressful period of life, perhaps having suffered a personal economic shock.
Global warming and safeguarding the environment, more generally, are the highest ranking issues of our time amongst the pre-career generation(23). DBS in Indonesia(24) has launched a Green Savings account in which a portion of a customer’s interest can be donated to buy fertiliser, seeds and train cocoa farmers. MUFG Union Bank(25) in North America has launched green deposit accounts; customer deposits will be used to finance ESG projects such as renewable energy, green transport and forestry.
Whether successful or not, these pioneers are taking bold steps forward to deliver a step change, in their markets, in an otherwise conservative industry.
Customer-relevant innovation: tapping into the benefits through technology
Customer centric banks show superior growth in their net interest income(26). In addition, 70% of purchasing decisions are made with emotional, rather than rational, considerations(27) - customers seek connections with ‘human truths’. As such, customer-relevant innovations, which are designed for ‘human truths’, can help banks win the war against utility.
For banks to understand their customers, then develop, launch and iterate new propositions, at pace, operating mode changes are required, such as the move to agile ‘ways of working’ and value streams(28). However, the ability to deliver the stated objective of being customer-relevant, is dependent on the effectiveness of 1) the organisation model and 2) fit-for-purpose technology. Arguably, technology is the most important enabler of becoming customer-relevant - without the capabilities to launch new propositions quickly and iteratively, no company, however effective the organisation design, can deliver on its stated objective.
All banks have annual IT allocations for ‘change’. How those investments are planned, and the context in which they are made, is important. For example, 51% of banking executives plan to increase their investment in data & analytics(29). Use cases can include more accurate payment screening and credit decisioning. However, those same capabilities can be used to better understand customer behaviour and attitudes to inform the design of new propositions. One of the most endemic constraints to innovation at banks is decades-old core banking infrastructure which is expensive, slow and complex to run and change(30). However, new platforms exist, such as Mambu, which power banks with the agility to operate at the speed of digital.
Combining modern data & analytics capabilities with a modern cloud native core banking platform has been shown to help banks design new propositions, launch them quickly and iterate in the market, effortlessly. The two are dependent on each other - the insights from analytics are only as good as the available data, which is where a real time ledger, from the cloud native core banking platform becomes important. Combining these two capabilities can increase revenue by up to 15bps per customer(31) and reduce IT costs by 50%(32).
A customer-led approach to technology modernisation, therefore, delivers top-line and bottom-line benefits while creating differentiation in the market - the metaphorical triumvirate leading the charge to create the competitive advantages which all banks seek.