(This article first appeared in CityA.M. on 6 March 2019)
Despite Brexit uncertainties and stock market collapses, British banks concluded their 2018 earnings season with improved performance.
Profitability increased thanks to cost drives, while balance sheets strengthened through de-risking assets.
Banks’ ability to grow revenue, however, remains a perennial challenge.
The quest to growth may be harder in the digital age. In a recent report by the Financial Stability Board (FSB), the global regulator warned that while fintechs still operate at the fringe of banking, the big tech firms – such as Amazon and Google – are starting to pose an existential threat to incumbent banks.
The scale and scope advantages of traditional banks can often be outshone by the tech giants’ capacity to invest and prowl to acquire. Proprietary customer insights enjoyed by banks are being sidestepped by ubiquitous data collection and superior analytical ability. Meanwhile, regulatory drives, such as PSD2 and Opening Banking, are giving the tech sector a helping hand in entering financial services.
Already, the tech titans have made a stride in payments, asset management, and insurance. The more formidable players, such as Amazon, are also beginning to offer core banking products like business loans and current accounts.
If the origination and distribution of financial products shifts from big banks to tech firms, so too could nearly two thirds of current banking profits. The FSB is not alarmist in its warning that banks may take on greater risks to recapture lost ground.
The financial industry must therefore focus on its “disruption-proof” core: customer experience, institutional trust, and regulatory excellence.
Customer stickiness with incumbent players remains high: the dawn of Open Banking has yet to sway masses into changing their banking provider. Banks have a short window of opportunity to truly upgrade customer experience for the digital age.
Banks’ global digital investment is expected to grow four per cent per year to reach $300bn by 2021. But how they spend that investment must evolve.
Much of the digital investment to date has focussed on migrating and consolidating existing IT systems to address legacy issues. The nature of consumer-facing banking services has not meaningfully evolved.
The next phase of digital investment will need to focus on driving genuine innovation that reshapes the customer experience – else banks risk losing this business for a slicker operation.
Preserving institutional trust in the age of digital finance will also be key.
Banks are still recovering a decade on from the financial crisis, but the tech giants are starting to feel the pinch from changing public opinion. The trend of celebrating all things Silicon Valley has given way to a growing array of concerns, from data privacy to competition to “fake news”.
Avoiding damage is fundamental to preserving trust. But as UK financial firms saw a five-fold increase in the number of cyber breaches in 2018, this is by no means a given.
Financial institutions face an increasingly complex threat landscape and risks associated with their own digital innovations. This calls for operational resilience to be viewed as no less important than financial resilience.
Regulatory excellence in digital finance is the last piece of the jigsaw.
Financial regulators are playing catch-up in evolving supervisory and conduct rules to accommodate new technology providers. Level playing field concerns are natural when the new entrants are startup fintechs, but the pendulum may need to shift to focusing on regulatory parity if the tech giants make a meaningful play for banking market share.
Banks still have the track record of enabling consumers, businesses and economies to growth on their side – but only for the time being.
To move on from turnaround to transformation, banks must now use digital investment to enable customers to bank in a way that tech firms will no doubt be itching to do themselves.
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