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Lee Thorpe, Head of Risk Business Solutions, SAS UK & Ireland

The current banking landscape is still dominated by traditional players. However, a new wave of digital banks is steadily disrupting these old high-street staples by offering a differentiated customer experience and an alternative value proposition for consumers. With new channels and opportunities comes change, but the real threat to traditional banking lies in losing the customer relationship to new high-tech players.

Old vs. new

Though high-street banks retain a dominant position within the consumer banking landscape, the combination of a low interest rate environment resulting in lower margins and the recent innovations of digital banks are chipping away at once reliable revenue sources. Consumer confidence in financial services has remained low since the banking crisis, leaving a yawning gap ready for an army of new entrants to fill.

Additionally, in anticipation of increased competition from these challengers, traditional banks are focused on cutting costs by driving more consumers to digital channels through minimising brick and mortar branches. Yet, this strategy has only worked to encourage the more agile digital banks, unburdened by deep-rooted legacy systems, to innovate and define a new customer relationship in a bid to develop a differentiated business model.

The threat to familiar institutions doesn’t come solely from digital banks. The payments industry has been completely transformed in recent years by tech firms that are pioneering the offer of mobile wallets and integrated payment services, cutting banks off from a potential source of additional revenue.

Customised customer service

Through blockchain, distributed ledger and AI technologies, fintech companies have seriously disrupted the status quo in banking. They have also proven particularly innovative in their use of customer data.

Data collection on a massive scale has become a crucial way for banks to provide new value for their customers through personalised products and services. The more data a customer grants banks access to, the better they know them and the better they understand their needs and wants. Using this insight, banks can then offer the most relevant products and services to these customers, resulting in a more satisfying, personalised customer experience.

The strategic mining of big data can also help banks make better business decisions. For example, if a bank is collecting data on how many customers are viewing a certain product, and can actively notice an uptick in the number of people viewing that product, it can respond immediately with more options in this area, at once providing more customer choice and responding cleverly to market demand.

Traditional banks of course have an immense amount of customer data at their fingertips. However, legacy IT and data infrastructures often prevent them from utilising it effectively. By contrast, challenger banks have generally benefitted from modern, centralised systems where data is central to the decision-making process. This has enabled them to develop a new model of engagement – a customer-centric approach to capitalise on the perceived inflexibility and lack of care and attention that the finance sector has been accused of.

Automation – unknown unknowns

In the era of the always-connected customer, challengers have benefitted greatly from the ability to automate key processes and provide instantaneous customer services that are far more convenient than the interpersonal services offered by established high-street competitors.

Yet automation has its dangers. In an automated system, it is impossible for a bank’s human employees to have visibility over all services at all times. While we have not yet encountered a significant failure of automation that has severely impacted the profitability or reputation of a bank, the more they rely on coding and software without adequate governance, the more likely that the process will suffer interference or downtime at some point during its lifecycle.

Increased automation means that businesses are more reliant on data models and algorithms. At its core, banking remains a complex but deeply customer-focused enterprise. If something goes wrong due to a failure of automation while the customer is directly involved, it could significantly dampen the customer experience and damage their relationship with the bank.

Not only must banks seek to understand what went wrong for internal improvement, they will need to communicate that explanation to an audience of customers wondering why the system has failed them. Yet in an automated system, it will likely take the bank a great deal of time and effort to answer this question, all while its reputation suffers.

A tale of two systems

The technology that gives challengers their edge, also poses a significant risk. The titans of retail banking have maintained their dominance so long for good reason. If disruptors wish to enjoy the same longevity in the future, their technology will need to be water-tight and configured to provide the best possible customer service. Speed of service is one thing but, when it comes to a customer’s personal wealth, reliability is all-important.

This, however, does not change the fact that disruptors are speaking to the needs of today’s always-on customers. Unless they learn the lessons of the new entrants and can provide comparable convenient and personalised services, traditional retail banks are at risk of losing valuable market share to their agile challengers.

Perched atop a deep reservoir of customer data, traditional banks are well-placed to re-evaluate their digital strategies. This means automating customer-facing services, as well as digitising and expanding their omnichannel approach. Digitisation holds many benefits for retail banking, but only if it is grabbed by the horns.

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