Banking must adapt to be future-fit, says futurist Keith Coats
In order to meet the demands embedded in the future, banking will need to adapt. It will need to change the way things are done and bring the delivery closer to the rhetoric. In short, banks will need to rethink their traditional business models completely. Futurist Keith Coats, director at TomorrowToday Global, says it is time for banks to face their demons. Keith sheds light on the top three challenges banks are facing that will determine their future.
1. The digital revolution
The pressure from both customers and regulators means that banks simply do not have an option but to embrace digitalisation. The growing open banking initiative, as it has been called, means that smaller rivals to the big banks - both smaller banks and financial technology firms, will be able be able to build services onto existing customer accounts. What this means is that these smaller, more nimble competitors will be able to extract financial value and service benefits from existing clients of the big banks.
The account holding bank will incur all the costs of maintaining and keeping that account but the competition will extract the benefits of leveraging that account.
The complexity and antiquated nature inherent within big banks makes it difficult to compete with this type of competitor but the only real choice bigger banks have is to either partner or compete.
Such partnerships point to the future and will be the means whereby big banks can enter that future.
Of course, the smartphone, smart devices and wearables are the weapon of choice for the customer. Many new banks are operating on a 'digitally only' platform and this type of service appeals to a generation that inhabits such platforms. Banks simply have to embrace digitalisation. Their capacity to do so will ultimately determine their cost base, risk management and profit margins.
2. Rebuilding trust
Last year Reuters reported that since the economic crisis of 2008, the top 20 global banks have had to pay approximately $235 billion in fines. A cultural change, greater transparency and accountability are desperately needed. Banks are slow to grasp this need and are even slower to innovate towards correcting this legacy constraint.
In a survey on public trust in companies by sector, the financial services sector rated stone last, being trusted by only 51 percent of respondents. Companies in the technology sector fared best, with a 74 percent rating. Public trust is hard won and easily lost. Banks seem to not fully understand the public sentiment that holds them in contempt due to issues ranging from poor service delivery to unscrupulous charges and distorted executive pay-outs. Across seven metrics of the public's perception of the most important trust-building attributes (such as: treats employees well, listens to customer needs and feedback, transparent and open business practices and takes responsibility), banks failed to match expected performance in every single category!
In Capgemini's World Banking Report 2016, it was found that 90 percent of banking executives acknowledge the need to innovate, especially in the face of the rising threat from FinTech. However, performance measures reveal a significant gap between this acknowledgment and the actual ability to implement the necessary innovative steps and process.
The problem is not only the inherent inability to innovate but also the low trust base that meets any such innovative initiatives from big banks. Banks are in desperate need of rebuilding public confidence and trust, yet many of their pronouncements and actions don't seem to acknowledge this reality.
3. The adoption of big data
Big data programmes will enable banks to not only be smarter in personalising their service and product offerings but also in managing their risk. There are several internal barriers to big banks adopting big data, including current limitations concerning data integration capacities, a lack of in-house tools and skills, a lack of corporate vision and understanding of how important big data is to the future and the costs of investment required to install big data capacity. Some powerful external forces are driving the need for banks to incorporate big data projects. These forces include compliance, regulation and legislation, customer demands and broad generic economic pressures.
Big data is already being utilised in governance policing as was evident in the LIBOR and FX rate-rigging investigations. Big data is reshaping the medical and pharmaceutical sectors through the sheer capacity of analysing information, making reliance on human analysis and advice obsolete.
Big data, artificial intelligence (AI) and the technology to deliver this seamlessly to the consumer will be what shapes the future of banks and the financial sector.
Some of this is still a way off, which perhaps makes it easy to be complacent or lazy in understanding both the threat and opportunity. Nonetheless, it poses a very real and present danger to those who choose not to 'look out the window' or who believe that yesterday's logic will be sufficient to meet such turbulence.
Of course, there are many other challenges that banks will need to confront in order to be future-fit. None of what needs to be done is easy or even straightforward in a sector weighed down by regulatory and systems legacy issues. However, in the face of fast-moving competitors who are more nimble, agile and perhaps hungry - competitors who are simply taking the bank's most profitable customers and who understand the new platform that is blockchain - the challenge facing banks and banking executives is as urgent as it is unavoidable. How these leaders and institutions respond to these challenges will determine their future - maybe their entire existence.
This article first appeared in CFO Magazine.