Digital tipping point: Banks must focus on innovation to harness opportunities

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A major new report sets out key recommendations for the banking 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

Mobile phones showing a mobile wallet
Digital tipping point: Banks must focus on innovation to harness opportunities

customers to a new wave of competitors, according to a new report by the British Bankers Association (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.

“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,” says Anthony Browne, Chief Executive of the BBA.

“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.”

Changes driven by the digital revolution include:

  1. 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.
  2. More than £1.7 billion being transferred each week using mobile or tablets at the major banks.
  3. Since the launch of Faster Payments in 2008, 3 billion payment transactions have been made. These totalled £75,000 for each UK household.
  4. 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.

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