Retail banking is evolving rapidly. It’s a good thing too, as firms across the financial services sector. Pay-as-you-go car insurance by the mile or by the hour, with premiums based on how well you drive using telematics are offered by start-ups like InsureTheBox and By Miles. Alibaba and PayPal offer SMEs micro-loans within minutes to finance working capital solutions. And companies like Rocket Mortgage and Quicken Loans can provide home buyers with an approved loan decision in under eight minutes.
To keep pace, lenders like Royal Bank of Scotland (RBS) manage and operate several innovation hubs based everywhere from the UK to India and Silicon Valley to Tel Aviv.
“We are always scanning what is happening across the technology market,” says JP McKenna, strategy and innovation for personal banking at RBS. “We know a lot of big tech companies and we understand what they are offering.”
“We also recognise that customers expect the same level of innovation that they have come to expect from major tech companies, so we challenge ourselves to deliver that same seamless digital service to our customers.”
The approach has seen RBS aim to offer innovative products and solutions to its customers ahead of its rivals. It was the first UK bank to pilot biometric debit cards. It also led to the launch of RBS Cora, a chatbot that leverages bleeding edge artificial intelligence (AI) to offer 24/7 customer support, answering a variety of banking related questions in seconds.
AI comes of age
Over the next decade, smartphones and new technologies will give bank customers increased freedom over how they manage and consume financial products and services. A major factor driving this change will be AI, according to Josh Bottomley, global head of digital, data and development at HSBC.
AI-powered applications are already carrying out relatively complex tasks as shown by RBS’ Cora chatbot and similar virtual assistant programs have been developed by other retail banks, as well as offerings from start-ups like Cleo.
But as advances in data storage are enhancing the power of big data, AI solutions are increasingly capable of analysing vast amounts of information which will soon have a significant impact on retail banking customers.
“Automated programs are already capable of carrying out security checks speedily and accurately, helping spot criminal activity and combat fraud,” Bottomley says. “In the future, customers will be able to ask banks to analyse their spending patterns and give them tailored recommendations on investing and saving.”
“Banks could also offer hints on decisions such as switching utility provider to save money – or even switch automatically on a customer’s behalf if they prefer,” he adds.
It is worth noting that smaller, nimbler start-ups have already developed similar such solutions, with companies like Look After My Bills using advanced algorithms to automatically switch utility providers on the basis it will help consumers save money on their gas and electricity bills.
Retail banks have been criticised for not developing and adopting new technologies sooner, but these critics tend to forget that larger institutions are better off waiting and watching before jumping on the bandwagon: launching a technology solution under a single product and brand like many start-ups do is vastly different to a retail bank operating at significant scale. Start-ups benefit from being able to make decisions quickly and can fail fast. But for large retail banks that boast a customer base in the millions and a workforce of more than 70,000 people, making changes to product and platform poses significant challenges and risks.
Innovating outside the core
A workaround for incumbent banks looking to build and develop new capabilities to meet customer needs and demands, while simultaneously defending against fintechs nibbling at their market share is to launch greenfield digital-only units separate from the core.
“A digital-only proposition requires a unique set of capabilities across people, infrastructure and a way of working that enables rapid and continuous innovation,” according to a report by McKinsey.
“If building these capabilities involves a significant overhaul of the current model, incumbent banks may be better off ‘incubating’ them in an independent business unit first, and then gradually migrating capabilities to the larger organisation through a structured change-management program.”
A recent survey conducted by the Economist Intelligence Unit (EIU) showed that over a third of retail banks globally have or are looking to build greenfield digital banks in a bid to fend off competition from challengers and fintechs.
In the UK, this trend has led to incumbents like Clydesdale & Yorkshire Bank (CYBG) acquiring and rebranding itself as Virgin Money, along with launching B, a smart mobile banking app. Meanwhile, RBS is expected to launch its standalone digital bank Bó, before the end of this year in a bid to create a challenger to fintechs.
“Where we are positioned in the market, we believe that we have an advantage over some digital competitors based on our scale, trust, service and the security we offer to customers,” says McKenna. “And while we have seen some of our customers sign up to companion accounts offered by the likes of Monzo or Revolut, very few are transferring their banking relationship which remains firmly with us.”
“While challengers offer an interesting customer experience, as we and other incumbents gather pace, we are confident we will eventually beat those offerings,” he adds.
Incumbents argue that they are closing the gap on challengers like Starling, Tandem, Zopa and N26 in terms of improving and transforming the overall customer journey, but large retail banks still have a long way to go.
However, the UK banking sector is dominated by the Big Four – Lloyds, Barclays, RBS and HSBC – who collectively control more than 75 percemt of market share, with little sign that their grip on the industry loosening anytime soon.
No matter how technologically savvy some digital challengers’ propositions might be, retail banks have yet to see customers flock to them en masse and, therefore, still have plenty of time to continue on their innovation journey.