The digital tipping point: Banks must focus on innovation to harness opportunities and address a new generation of competitors

24 March 2015

Major report sets out key recommendations for the industry and urges regulators to give consumers certainty that their money is equally well-protected wherever they choose to bank 

Banks must concentrate on harnessing a range of digital technologies or risk losing customers to a new wave of competitors, according to a new report by the BBA and Accenture.

The study says digital innovation allows banks to offer better and more personalised services to clients as well as cutting costs. However, it warns that there is a risk that technology giants and innovative new start-ups will “cherry pick” key products and services from banks.

Called Digital Disruption, the report features interviews with leading experts from banks setting out their vision of the future and raises questions for regulators about when a non-banking firm should be overseen in a similar way to a bank.

It urges regulators to ensure that all organisations offering banking services are regulated in the same way to give consumers certainty that they are properly protected wherever they choose to bank. Policymakers must also be minded to the threat posed to financial stability from providers of banking services not covered by existing regulation. The report argues that regulators have to take care not to hamper either innovation or competition.

Whereas the BBA’s previous Way We Bank Now reports have focussed on the uptake of consumer-friendly banking technology, the new study focuses on what this innovation means for the banking industry.

The new report sets out six important recommendations for the banking industry:

Anticipation: Innovative entrants are developing lucrative products and services. In order to remain relevant, banks must look ahead to spot those parts of their business models more vulnerable to these entrants.

Speed: The pace of change is greater now than ever before. In order to meet rising customer expectations, banks will need to significantly increase the speed of innovation.  

Branch evolution: Digitisation is enabling faster and more convenient access, but that is not always integrated with the banks’ services. The role of the branch needs to evolve towards offering seamless customer services.   

Harness data: Exploring customer appetite for banks to use the data available to them could open a new channel of communications between banks and their customers. This could also help customers save money and better manage their finances.

Invest: In the digital age, customers expect transactions on their current accounts to be virtually instantaneous. So banks need to continue investing in their IT platforms to meet customer expectations and avoid IT outages.

Culture: Change the internal culture to one which is more agile and innovative, less process-driven and yet still focused on minimising risk.

The report says regulators will be as challenged by the digital revolution as much as banks. They will need to ensure that they do not damage consumer protection, the fight against crime or financial stability by squeezing misconduct or prudential risk out of the regulated banking sector into the non-regulated digital sector.

A good example of this was the growth of payday lenders, whose rapid rise lead to concern from politicians and subsequent regulation from the Financial Conduct Authority. The episode showed the risk of regulation based solely on institutions – such as banks – rather than on activities, such as lending.

Digital Disruption also says technology has raised customers’ expectations. While banks have made progress in adapting to changing consumer needs, they need to put a strong focus on innovation to compete with the new range of competitors. In particular, banks need to fast-track the use of state-of-the-art technology, including big data, biometric security features and wearable devices, and collaborate more with organisations outside the financial industry.

Commenting on the report, Chief Executive of the BBA Anthony Browne, said: “This is a tipping point for the banking world. On the one hand this is a time of great opportunity for our industry, as new types of technology allow us to serve our customers better and more efficiently than ever before.

“But this change poses challenges too. Technology is breaking down the traditional banking model and new entrants are changing our perceptions about what we consider a bank to be. More choice is good news for all, but it’s vital that regulators provide a level playing field giving customers the same robust protection wherever they choose to bank.

“Banking has an exciting future. We need to be vigilant and responsive to the opportunities and threats that lie ahead. If we are, there is no reason why our country cannot enhance its reputation as a world leader in banking services throughout the 21st century and beyond.”

Peter Kirk, a managing director in Accenture’s Financial Services operating group and co-author of the report, said: “The traditional model of banking is under threat from new competitors and is subject to increasing amounts of regulation. Paradoxically, the digital revolution is opening up new opportunities for the banking industry. Digital is enabling banks to provide much better, more personalised services to customers and at the same time cut costs dramatically.

“The UK banking sector has made some good progress in grasping the opportunity that digital has created, but the pace of change will only accelerate and amplify the disruption.”

Changes driven by the digital revolution include:

A tripling in mobile banking usage, with the proportion of customers using mobile services each month rising from 8% in 2010 to 27% in 2014.

More than £1.7 billion being transferred each week using mobile or tablets at the major banks.

Since the launch of Faster Payments in 2008, three billion payment transactions have been made. These totalled £75,000 for each UK household.

Falling branch: the number of branches operated by the UK’s retail banks has decreased from 13,349 in 1997 to 9,702 in 2013.

1.   Perspectives from digital banking experts quoted in the report:

Barnaby Davis, Director of Group Retail Strategy at Nationwide: "The banking industry seems willing to wait and watch for the ‘Uber’ tipping point. We need to be much more ambitious and demanding of technology and innovation to make banking much easier and much more transparent.”

Josh Bottomley, Global Head of Digital at HSBC: "It’s about getting the balance right between branches/ human support and closing the gap between the different experiences.”

Anthony Thompson, Founder and Chairman of Atom Bank: We are building technology so that we can use customers’ data to allow us to offer dynamic and predictive monthly statements – not ones that just showed last month’s outgoings. This way we can show the customer what they are likely to spend next month and potentially tailor savings and credit products to match their upcoming needs… Our vision is to become the first ‘telepathic bank’.”

Chris Popple, Managing Director Digital at RBS: “It is a myth that the take-up of digital drives costs down, it is the externalities of digital that achieve this; digital forces banks to make their processes simpler, reduce the number of rules associated with products and have less exceptions – all drive costs down”.

John Maskery, Managing Director at Accenture: “Banks simply have no option but to simplify the complexity of their legacy systems. This will be driven by business demands with some banks needing a two-speed IT system that blends fast and agile digital delivery with their traditional 'complex waterfall' core platforms.  The banks that grasp the nettle will gain significant customer and digital advantages.”

David Young, Director of Change and Innovation at Metro Bank, says: We don’t distinguish between stores or digital, we use technology to make the customer journey as simple as possible”.

2.  Banks customers’ views of online services

The majority of UK bank customers surveyed by Accenture in 2014 found their experience “easy” (70%) and “effective” (63%), fewer than half found them “enjoyable” (47%). Much of the challenge for banks then is how to create the warmth and engagement of a face-to-face exchange though a remote channel, moving digital beyond a simple driver of transactional behaviour.

3.  A level playing field will ensure better protection for customers

For governments and regulators it is vital that they maintain a level playing field between banks and non-banks as digital leads to dramatic change across the industry. The focus needs to be on making sure regulations of activities, not just institutions, are fit for purpose and balance the needs of customers, investors and financial stability. This will reduce the opportunity for regulatory arbitrage and ensure that standards keep pace with the speed of technological innovation.

4.  Modernising IT systems is a challenge

Another challenge for the banks is to modernise their IT systems to enable the more advanced digital services to be delivered. There has been much debate about legacy banking systems and their complexity. While modern middleware allows the banks to insulate their digital offering from their core systems, eventually they will have to be replaced by more advanced and simpler systems. This is a major test for the banks given the pressure from regulators and politicians to ensure continuity of service, particularly as customers are increasingly used to being able to access banking services 24/7.

5.  Harnessing customer information could transform banking

Big data is arguably the biggest potential opportunity for both banks and their customers. Used in the right way it should be able to enhance what a bank can offer a customer enabling products to be offered in both a tailored and timely fashion. That should mean fewer unpleasant credit surprises for customers. Banks should be able to make better credit decisions too.

6.  New UK and global banking technologies highlighted in the report include:

Barclaycard’s bPay wristbands, which will allow customers to make low-value payments at 300,000 points around the UK.

Customers of Russia’s Alfa-Bank signing up for a wearable health tracker that will transfer small amounts of money into a saving account that pays a higher rate of interest in proportion to how much exercise the customer does.

Digital start-ups are developing a range of biometric features to bolster security, including facial-recognition software. 

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