Why Innovation Is A Blessing And A Curse For Legacy Banks

Judy Cubiss and Ginger Shimp

The financial services industry has typically moved at a glacial pace. The simple act of taking money out of an ATM or visiting a bank hasn’t changed in decades.

Yet even the most traditional industries aren’t immune to technology. Digital innovations in the banking field are coming at a furious rate. Blockchains, mobile payments and other newer technologies are creating tremendous opportunities in finance.

It’s no exaggeration to say that banking—once considered among the most staid and conventional of industries—is being roiled by innovation.

Recently, Brian Fanzo and Daniel Newman, co-hosts of the popular S.M.A.C. Talk (social, mobile, analytics, cloud) Technology Podcast, caught up with Falk Rieker, global vice president, Banking Industry Business Unit at SAP SE, on an episode of an extraordinary series entitled Digital Industries, which examines how digital transformation is affecting 16 different industries.

Rieker acknowledged the transformation that is taking place by noting that “innovation in banking is occurring at a rate that hasn’t been seen in decades.”

Banking is being transformed by digital technologies—but where they are coming from?

Like many industries, the impetus for change is not necessarily coming from within the industry. The innovations of financial technology firms and non-banks entering the market have put huge pressure on traditional banks to evolve.

Blockchain technology is one example. By creating a seamless series of tied transactions, banks can realize tremendous time and cost savings. Users, whether they are customers, bankers or auditors, can retrospectively peer into individual transactions without any holds. Thus the amount of tracking or reconciliation required is lowered significantly.

While it may sound counterintuitive, the development of this kind of digital technology often originates in emerging countries rather than developed nations, which just proves the old maxim that necessity is the mother of invention. Listen to a short clip of the podcast:

SMAC podcast

Have you all heard the stat that more people own a mobile device than own a toothbrush?1


Well, in these markets many people may not have a laptop but they do have a cell phone, and this becomes the impetus for mobile innovation. Mind-bogglingly, in places such as the U.S. or the U.K., the pace of innovation often lags places such as China, Brazil or Africa.

Part of this is cultural. The banking industry in developed markets tend toward conservatism. Innovation occurring at a breakneck rate may be viewed as something to avoid. Which may help to explain why Americans are still using ATM cards while Chinese consumers don’t even want to use credit cards, preferring to be mobile. Whole ecosystems, such as Alibaba and WeChat, have grown to support these preferences. These platforms aren’t arising from the traditional banking space, but rather technology firms.

Brian Fanzo, S.M.A.C. Talk host agrees:

Gen Z and millennials in China go through their entire day doing all of their payment, transport, food buying through mobile apps

Ultimately, however, technology and consumer preference will determine how banking services are delivered. So how do banks prepare for this exciting new digital world while still protecting themselves from the effects of disruption?

Why banking is needed—but banks are not

The structure of banks as we know it is a relic. Were we to devise a banking system from scratch today, it would no doubt look very different.

banking is needed banks are not it is that simple

Rieker goes on to point out that retail banking services, wealth management, and corporate banking can all be delivered outside the traditional banking system. It’s simply a matter of how long it takes the transformation to occur.

The finance industry has been insulated from innovative competition due in part to regulatory and legal compliance, an ongoing struggle for organizations in the industry.

The protective regulatory walls of the finance industry have been breached: technology firms that provide banking services are often not regulated to the same degree, allowing them the flexibility to innovate while forcing banks to keep pace.

This doesn’t mean that banks are doomed. They still have two very large advantages: market share and data. Data is absolutely critical in terms of targeting and retaining customers. Banks with the best data can derive the most actionable insights into what people need.

Banks have an enormous amount of financial and personal data that they can use to discern the best way to earn and retain the loyalty of consumers. They are making massive investments in leveraging this data in a vast array of means, though it should be noted that non-bank challengers aren’t at a total disadvantage. In the U.K., open banking laws require banks to share customer data with third parties, providing the customer agrees. Should this idea find global traction, it could have profound consequences.  “This will bring a totally different game,” Rieker opines. “And it will be on a level playing field, unlike in the past when banking was an industry nobody could enter.”

Market share, of course, is a critical advantage in any business. Armed with millions of customers and billions in resources, banks have the cachet and capital to take the best innovations from smaller competitors and tweak them to fit their own aims. With these kinds of inherent advantages, it would take more than innovative new services to topple the existing banking structure.

 share of digital banking interactions exceeds 85 percent for most advance countries and is heading to more than 95% in the near future Ultimately, banks that use digital tools to expand their offerings beyond what we consider the traditional purview of banking will be positioned to prosper. The possibility of integrating banking services with energy or telco accounts is an idea that consumers will find appealing, for example.

Banks of the future will also need to focus on improving the customer experience. Banking should be a pleasant experience. It should be integrated with other relevant industries. The digital end-user experience should be compelling.

Banks that get this right will win the future. Those that don’t are almost certain to struggle.

“Banks have no choice,” Rieker said. “Either they adapt or they die.”

The takeaway

Banks have long operated in a traditional, conservative industry that has been protected to some degree from innovation. Today, however, innovations from outside industries and the developing world are occurring at a furious rate due to digitalization. Banks can no longer rely on regulatory protection.

The banks of the future should focus on a few key areas. First, an improved customer experience augmented by stellar digital offerings and services, rooted in a strong digital core. Second, tighter integration with other industries and providers. Third, leveraging the use of data to generate key insights about consumers.

By employing these strategies and keeping pace with the speed of innovation, legacy banks can ensure continued relevance in the digital world.

To listen to this episode of Digital Industries for the banking industry, co-produced by SAP and S.M.A.C. Talk Technology Podcast, click here.

Transforming into a truly digital business is so much more than just implementing new technology to meet the demands of a digital age. It’s more than keeping up with the deluge of transformation happening all around us. Digital transformation is about understanding how to harness these changes and incorporate them into your business strategy. It’s about driving agility, connectivity, analytics, and collaboration to run a Live Business. A digital core empowers you with real-time visibility into all mission critical business processes inside your four walls, and in your interactions with customers, suppliers, workforce, Big Data and the Internet of Things.

For more on how SAP can help you drive your own digital transformation in the banking industry, visit us online.

1Are there Really More Mobile Phone Owners than Toothbrush Owners? https://www.linkedin.com/pulse/really-more-mobile-phone-owners-than-toothbrush-jamie-turner

2Bain Retail Bank of the Future Benchmarking 2013 http://www.bain.com/publications/articles/building-the-retail-bank-of-the-future.aspx

Judy Cubiss

About Judy Cubiss

Judy Cubiss is Global Marketing Lead for Industrial Machinery and Components and Automotive at SAP. She has worked in the software industry for over 20 years in a variety of roles, including consulting, product management, solution management, and content marketing in both Europe and the United States.

About Ginger Shimp

With more than 20 years’ experience in marketing, Ginger Shimp has been with SAP since 2004. She has won numerous awards and honors at SAP, including being designated “Top Talent” for two consecutive years. Not only is she a Professional Certified Marketer with the American Marketing Association, but she's also earned her Connoisseur's Certificate in California Reds from the Chicago Wine School. She holds a bachelor's degree in journalism from the University of San Francisco, and an MBA in marketing and managerial economics from the Kellogg Graduate School of Management at Northwestern University. Personally, Ginger is the proud mother of a precocious son and happy wife of one of YouTube's 10 EDU Gurus, Ed Shimp.