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By Karen Wheeler, Vice President and Country Manager UK, Affinion

Digital transformation has been at the forefront of discussion in the banking industry for the past few years and the pace of change is only going to increase due to the disruption of the big five global technology firms – Google, Apple, Facebook, Amazon and Microsoft (GAFAM).

Amazon’s entry into the insurance industry and Facebook securing an electronic money license in Ireland shows that these technology giants are thriving and not content with staying within their traditional industries.

With customer’s permission, GAFAMs can gain access to customer information thanks to the introduction of PSD2, and they are using this data to drive their own innovative solutions. Given the financial power of these technology giants, as well as their digital expertise and the information from previous customer relationships, this data could be priceless and have a game-changing effect on the banking industry if they can find the right product.

 Who are the challengers?

In addition to GAFAMs, challenger banks are breaking into the market and focusing on how consumers interact with their banks. These challengers have driven up customer experience expectations, although industry fears that they could enter the picture and immediately steal market share have been alleviated. The reason for this is because they continue to be seen as secondary banks with an interesting USP, rather than being  genuine alternatives to traditional retail stalwarts.

GAFAMs are clearly well-placed to transform how customers engage with banks, although debate continues to rage amongst the wider industry. Paul Riseborough, CCO at Metro Bank predicted it could take as long as five years before the “average man in the street sees any real value” in the introduction of Open Banking across the EU. PWC research, however found that 88 per cent of the financial industry is worried they will lose revenue to disruptive innovators.

 New innovations

Technology platforms are already changing the way financial institutions are engaging with their customers. China’s WeChat app, launched in 2011 initially as a messaging platform now has one billion users globally, allowing people to do anything from booking a doctor’s appointment to paying a parking fine. Inevitably, the platform has grown to facilitate money transfers and other banking processes, with users now able to add international bank cards to their app.

Traditional retail banks, so dependent on the data they hold, risk falling behind their new competitors if GAFAMs manage to produce this type of all-encompassing platform and introduce it to their global subscriber bases. With consumers embracing third party technology to manage their financial transactions, retail banks could see their engagement levels significantly decrease alongside customer experience. If retail banks are to survive amid the disruption, they must respond in kind with their own strategic innovation.

 Innovative response

In the current climate, opportunities for banks to drive innovation rely on their differentiating factor – the vast array of data they have on their customers. If utilised by GAFAMs, the likes of PSD2 and Open Banking clearly pose a serious threat, but as a recent McKinsey report notes, banks may still hold the advantage, as “customers would not find it attractive to provide third parties access to their data or accounts.” Retail banks can actually strengthen their market position, if they can take a strategic approach before their giant competitors can transform the industry.

Traditional banks have begun to revitalise their approach, RBS for example has announced plans to launch a standalone digital bank, competing with online challengers, like Monzo and Starling as well as the GAFAM giants. The effect of industry disruptors is prevalent in developing markets too, such as Indonesia, where 84 per cent of banks plan to invest in digital transformation over the coming 18 months.

The threats posed by GAFAMs and challengers alike have forced retail banks to think outside the box, leading to creation of global collaboration networks which actively encourage software developers to use existing APIs to build innovative platforms. If investment is spent in the right areas, these networks  can enable retail banks, wealth management firms and fintechs to improve both the internal and customer-facing elements of their businesses and help to resist the competition. The Avaloq Developer Portal currently has more than 1,000 developers sharing knowledge to drive innovation, and is showing how collaboration networks compete with the industry disruptors across the global financial sector.

 More than just a bank service

In disrupting the industry, innovators have shown little regard for the perceived limits of traditional banks, and have transformed customer expectations. As a result, retail banks have been pressured to add value to their service.

Banking giants such as Citi, JPMorgan Chase and Bank of America for example have had to respond to Venmo’s instant transfers space. The traditional industry goliaths have adapted to the peer-to-peer market by partnering with US digital payments provider Zelle which integrates directly with their banking apps.

While the core product remains vital, retail banks will have to ensure they are doing more to make a significant impact on their customers’ lives, by offering them a range of non-banking services, already banks have begun to integrate with insurance providers and offer significant retail discounts. Our ‘Connected Customer’ report shows businesses that offer three or more additional products have considerably higher customer engagement scores, resulting in customers staying longer and spending more. This is just as applicable to the banking sector and will make consumers much less likely to turn to the GAFAMs.

 Collaborative approach

The period of change in the banking industry is unlikely to end thanks to the introduction of PSD2 and Open Banking and as GAFAMs enter the market, retail banks and fintechs must produce in-depth plans to combat the imminent threat that these technology giants pose.

The signs are positive, however. Retail banks and fintechs must continue focusing on innovation while working in flexible, collaborative ecosystems. While the introduction of disruptors may be a daunting prospect for the industry, a renewed strategic approach could present an opportunity for retail banks to improve their services and consolidate their traditional stronghold. Both financial professionals and the customers could benefit from the industry shake-up.

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