“The customer is king”: not a new phrase. But a phrase that probably resonates more than ever in the banking and payments sector as traditional boundaries are broken down and there is almost a free-for-all when it comes to competing for customers.
Undoubtedly the digital world has been at the heart of the changes seen in the financial services landscape, particularly by opening the doors for the vast array of fintech that have spotted opportunities to do things faster, easier, more cost-effectively than before. But it’s important to remember that serving the customer cannot come at the detriment of simply doing things quicker or cheaper courtesy of new technology.
To be fit to compete in the digital space, banks and payments businesses must focus now more than ever on the customer experience. This means they need to concentrate on their core proposition and deliver it well, leaving specialists – ‘utilities’ – to provide the crucial nuts and bolts to underpin their offering.
Payment providers – both new and old – know it makes no sense to build the utilities that underpin their service when they can focus their resources on owning and maintaining the client relationship. Incumbents such as the banks, struggling with legacy systems, and finding it hard to compete with new entrants, may also do better by outsourcing functions such as cross border payments, FX, lending and wealth management, leaving them free to focus on servicing their clients.
A force to be reckoned with
According to the PwC FinTech Global Report published earlier this year, executives at financial institutions fear that it is possible that by 2020, they will have lost nearly a quarter of their business to new market entrants. This increases to 28 per cent of their business when looking at the payments and transfers market. And more than 60 per cent of all survey respondents highlighted payments as the most likely sector to be disrupted by fintechs. They are a force to be reckoned with.
The march of mobile adoption globally has created a generation of consumers who expect immediacy, convenience, and security to be integral to payments. Yet, the traditional banking sector has, so far, struggled to keep pace with these innovations. The world of cross-border payments – often taking days to be settled – is just one example of the challenges being faced by conventional banking providers.
But change is coming. And it appears to be coming in a number of different forms.
Many of the major banking groups are seeing collaboration as their route to slowing down or even halting customer desertion. In the last year a number of banks have taken stakes in fintechs, giving them a foothold in the new world. By applying agile technologies capable of solving long-term problems at a low cost, banks are able to pass savings on to customers.
And it’s not just a one-way street. By partnering with banks, fintechs have access to experienced professionals in the field of finance, and can often receive funding, increase reach, and utilise licenses necessary for them to scale far more quickly than if they were going it alone.
The emerging role of the ‘utility’
Another area of change is the recognition that not everything underpinning a service must be done in-house. And that’s where the role of ‘utilities’ – of which I count the Banking Circle as one – is emerging.
Just like the utilities used in a domestic environment – gas, electricity, water, etc – utilities for the banking and payments sector provide the unseen but necessary power and energy to give the customer a great experience. Working in partnership with specialist utilities also means that a business can move much faster, as well as reduce costs – all of which can be passed onto the customer. And because the utility isn’t in competition with a business – it’s a supporter – both organisations should have like-minded goals, rather than pit themselves against each other.
It is impossible to predict who will win in the digitalisation battle. But I firmly believe that using a ‘utility’ will be the route to success for those operating in banking and fintech. In particular, I believe tier two and tier three banks will become more digitalised, relationship-driven and focused on the customer relationship, outsourcing non-core functions such as lending, FX and cross-border payments to ‘utilities’ like us. And by 2020, the banking industry will be more fragmented, delivering ‘banking services’ in a much more dynamic and broader way than we see today. And increased innovation will ultimately benefit customers, making them the real winners.
Be ‘fit’ to compete
However, the fintech badge still seems to frighten off some. According to the PwC FinTech Global Report, 25 per cent of respondents said they do not liaise with fintechs at all. I believe this misses a key point. You have to know what you’re not good at to be ‘fit’ to compete for your customers. In the fast-moving world of the Internet of Things, that means being able to compete with the likes of Google, Amazon, Apple, Facebook and others. So now is the time to embrace the role of the ‘utility’.
Anders la Cour, Chief Executive Officer, Saxo Payments