There is a lot of talk about digital transformation by banks, but the reality is that – despite what they say – they are not doing it. What the vast majority of banks is actually doing is digital enablement. They are simply using digital technologies to do what they are doing today, only slightly better. There is nothing transformational about what they are doing.
Fundamentally, the products and the services that banks are offering are no different than those they have been offering for the last 50 years, if not longer. They may be offered through different channels, like mobile, tablet, and webchat, but they are still fundamentally the same as those offered to your parents when they were your age.
It is not only the big banks that are guilty of digital enablement, but also the majority of the so-called challenger banks. For most of them, the term “challenger” is not even appropriate. What is challenging about providing free dog biscuits in branches?!? Their impact on the market share of the big banks is negligible and not growing at a sufficient rate to be a significant threat anywhere in the short term.
The reality is that the majority of the challenger banks are simply competitors offering a subset of the products and services that the big banks provide. However, the emergence of a large number of competitors into the market is to be welcomed, as individuals’ and small businesses’ have an expanding realm of choice about where they get their bank services.
When you take the UK market as an example, the competitors break down into several categories:
1. Existing competitors
These are the likes of Co-op Bank, Nationwide Building Society, Clydesdale, and Yorkshire banks, that have been around for many years with a fairly consistent market share. All of the big four – in different ways and at different speeds – are enabling their businesses with digital technology. Some are being more ambitious about growing market share of current accounts than others.
2. The clones
These banks are the ones that have been spawned from previously existing organisations, been re-sprayed with a new or revived brand, and trade on the fact that they are not one of the big four banks. The main players in this category are Santander (Abbey National), Virgin Money (Northern Rock), TSB (Banco Sabadell), and Halifax (Banco Sabadell). Of course the latter is still owned by one of the big four, but is positioned as their “challenger” brand.
The clones’ offerings differ from each other. Santander has expanded the range of products that Abbey National offers with a push into current accounts and SME banking. While the Santander 123 account has shown some innovation, it is still fundamentally a vanilla current account. Virgin Money has expanded the Northern Rock offering into balance transfer credit cards, but despite previous announcements, it is holding back from entering either the current account or SME banking markets for the moment.
None of the clones are leading in their application of digital technologies and, at best, are enabling some of their processes with digital.
3. The new traditionals
Into this group fall the likes of Metro Bank, Shawbrook, Aldermore, Oaknorth, Handelsbanken, and OneSavings Bank. These new banks are offering an alternative to the big four banks but have a small market share and, while growing quickly, will take years on their current trajectory to be of serious concern to the large banks. Like the clones, they position themselves as not being one of the big four and differentiate themselves on offering superior, personalized service. They have not invested heavily in digital – Metro Bank has only just (in August 2016) launched its customer website. Metro Bank, Handelsbanken, and Aldermore have made their branches and face-to-face service a key point of their differentiation.
4. The mobile banks
These are the banks that are being designed with mobile in mind for the millennials – the likes of Mondo, Atom, Tandem, Starling, and Monese. While a number of these have been granted their banking licenses, and a number are in beta testing, these banks have not really been launched yet. We have some indication of how they will operate; however, until they move to full launch, it is difficult to judge how transformational in terms of their digital offering they will be.
So if today’s banks are only undertaking digital enablement, what would they need to do to undertake digital transformation?
Re-imagining the business models for banking
Transformation is about fundamental change – something that the banking industry has not seen since the Medicis created the first bank. This is about changing the business models for banking to reflect what customers want and also the way industry boundaries are blurring.
Banks that are truly undertaking digital transformation are reimagining the business models for banking.
Customers do not want to do business with banks. Customers do not fundamentally want a mortgage – they want a home. Customers do not want a loan – they want a car. Banks are a means to an end. Banks that get this are recognizing that they need to be offering services beyond the banking product. For example, some banks are forming agreements with online real estate agents so that when a customer is looking at a property online, the bank is aware and can tell the customer both if they can afford it and whether the bank is prepared in principle to offer them a mortgage.
Banks have lots of SME customers; many have offers that are of interest to other SMEs or individuals. The banks know how well those SME businesses are performing, so banks are in an ideal position to create an SME marketplace where their customers can do business with other bank customers, knowing that the supplier is backed by the bank. Equally, the supplier will know that the customer is backed by the bank. In this model, the bank operates as the introducer, adding value to both the seller and the customer.
Banks that have invested in building a modern banking IT infrastructure recognize that this is a highly valuable asset and that there are opportunities to offer banking as a service to either businesses outside the banking industry, such as retailers that want to offer banking services to their customers, or to banks in other countries. Two good examples of organisations that already do this, both German, are SolarisBank and WireCard.
The three examples of different business models above are just illustrative of what banks and other organizations are doing to use digital as an enabler to fundamentally change the banking industry.
This is true digital transformation. For those organizations that embrace it, the future is positive and full of hope; for those who don’t, the future is a slow decline into obscurity.
For more on the readiness of European banks for digital, see the results of the recent SAP-sponsored survey conducted by IDC, “How Ready Are European Banks for a Digital World?“