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Retail banking is under pressure from every angle. Technological advances, and the evolving attitudes they shape, have lowered the barriers to entry for new challengers and rendered ‘legacy systems’ a competitive disadvantage for the established players. Technology giants cast a growing shadow, and the march of the regulators is gaining pace – with the Competition and Markets Authority conducting an investigation into current accounts and SME retail banking provision.
Some have heralded innovation as the silver bullet, suggesting this is banking’s ‘innovate or die’ moment. But the reality is less dramatic – the most valuable innovation merely represents banks listening to their customers and evolving as a result. Others argue the sector must reinvent itself for the digital age, but question its capacity to follow through. So what role should innovation play in the banks’ thinking now?
However banks tackle it, their innovation efforts must be aimed at better serving customers. More than one million current account holders in the UK changed banks last year, and calls are growing for the UK government to enforce ‘instant’ switching capabilities. Customers aren’t hanging around. They represent a complex set of continuously evolving needs within increasingly smaller segments – technology will play a key role in the way banks respond and adapt to this ever more complex set of customer needs. Recent research highlights this, with 60% of UK consumers now using digital banking services, but over half also still looking for a physical bank presence. The tables have turned, and customers must now drive banks’ innovation strategies – not the other way round.
Despite negative press, shifting public sentiment and new competitors, the high street giants enter this evolving battle in a position of strength: high brand awareness and a large customer base. But while consumers trust their bank, they don’t trust banking as a whole. New challengers and technology giants face the opposite problem: more appealing brands, but without the banks’ longstanding experience and resources. The large banks can also tap into new ideas in other ways, of course – and many do. The ‘coopertition’ route has become increasingly popular, with the major banks using incubators and start-ups as a low-risk testing ground for new technologies before scaling up and implementing them. Just this week, Santander InnoVentures – the Spanish bank’s venture fund for financial technology startups – implored the industry to adopt this approach. It suggested that “banks need to invite fintechs to work within our industry, even inside our own businesses”.
Let’s be clear: successful innovation is a positive outcome for individual players and the industry as a whole. But it should be just that – an outcome, or a by-product, rather than the goal. From new entrants to incumbents the banks must seek relevancy, and innovation by osmosis – not the other way round. The highly-publicised ‘retreat from the high street’ may be one way to cut costs, but it risks the wrath of alienated customers. Banks would be better served by offloading cumbersome back-office operations that matters so little to customers, and focusing on differentiation through cost-effectively delivering the products and services customers really want. That, above all, will be key.
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