Internet access, mobile phones, and social media have fundamentally changed the way people interact with businesses. Banking is no exception. How people conduct banking has changed fundamentally in the last decade.
Unprecedented connectivity and access to information has put the consumer in the control and not the bank. Consumers are able to seek a better deal and service providers have to work hard to get their business. If a bank does not offer ‘right’ mortgage, with a mouse click consumers can go to another bank. Consumers routinely expect control, efficiency, and choice.
Brett King, bestselling author and banking futurist of Bank 2.0, has recently published Bank 3.0. Here are some themes explored in Bank 3.0.
Four waves of digital disruption
In June 2011, the UN declared Internet access to be a basic human right. Today there are more people with mobile phones than bank accounts. It is expected that by 2016 more than half the planet will own a Smartphone with Internet access. More people are accessing Internet via mobile phones than on PCs. Pervasive Internet access (via mobiles) is becoming an everyday experience for millions of people.
Major waves of digital disruption are hitting the banking business since the arrival of the Internet. Each wave is potentially a game-changer:
The advent of the Internet has fundamentally changed many businesses. Stockbroking, music, and book selling are obvious examples. Similarly, the Internet has changed banking. Consumers have now begun to choose where, when, and how they access their money. The need to visit a branch has diminished. Within 10 years, we have gone from over 50% transactions being performed at the branch to over 95% of the transactions being performed online.
Smartphones (and tablets)
Smartphones are driving a revolution in portable banking. Many countries like the US and Australia have near 100% penetration of mobile phones. China has more than 950 million mobile phones and this number has been growing by 20% annually. An increasingly large proportion of these mobile phones are smart devices with Internet access. Consumers are regularly using mobile phones for day to day transactions such as balance checking, transfers, and bill payments. Consumers can do almost everything (except cash withdrawals) on a mobile that they could do at an ATM.
Mobile wallets and NFC (Near Field Communication) capabilities are already here. Many banks have recently launched mobile (person-to-person) payments. This sets the stage for the third wave of disruption.
Convergence of credit/debit cards and phones
In the UK, two thirds of payments are done on credit / debit cards. With wider acceptance of NFC and mobile wallets, it is conceivable that within a few years these payments would be done by a mobile with a built in card. With this wave the phone will become the everyday bank account.
Prepaid debit cards were the fastest growing form of payments in the US in 2012. The prepaid debit card business has grown from $2.7bn in 2005 to $202bn in 2012. This includes general purpose reloadable cards, payroll cards, and Internet based payday lending cards. In 2011, the prepaid card business was worth $250bn in China.
With pre-paid and stored value cards, many non-banking institutions (e.g. telecom or transport providers) are providing accounts. Technology is making it possible to de-link everyday transaction accounts from the banks.
Story of M-Pesa
Kenya has millions of people without access to banking services. M-Pesa is a low-cost mobile payments system launched by a local mobile phone company. It started off to support repayment of microfinance loans using air-time credit as a payment. With its popularity it was relaunched as a way to send remittances across Kenya, and to make payments. Today, millions of Kenyans use M-Pesa, including many without bank accounts. It is simple, low cost and has a vast distribution network. Mobile money transfers exceeded $1 trillion shillings in 2011. For many Kenyans, the mobile has become their everyday bank account.
In the near future, any major provider will be able to provide everyday banking with mobile phone/ wallet and mobile payments. This has a potential to create a major disruption to the financial services industry.
Banking as a utility
Soon banking will become something we do, rather than somewhere we go.
Banking products will be available whenever and wherever a consumer needs the utility of a bank. Banking will become embedded into financial products. For example, home buying would include a mortgage, and car purchases would have a car lease bundled in, eliminating the need to see a banker or make a separate application. This wave threatens to split banking distribution apart from product manufacturing in a fundamental way.
“Banking is necessary but banks are not”. Bill Gates, 1994.
While we all need the services provided by the banks (e.g. payment systems, access to money/ credit) increasing number of people are obtaining these services from non-bank service providers such as PayPal or mobile telephony companies.
Challenges for the banks
In order to survive these waves of disruption, banks will need to change their technology strategies. There are several challenges they would need to address. These are:
- Customer service via technology;
- Usability and ease of on-boarding;
- Mobile Presence; and
- Power of Crowds
Customer Service depends on Technology
Increasingly, most of our interactions with a bank take place via the Internet, mobiles, or the ATM. A customer may do several hundred online interactions, but visit a branch or use a call-centre only a handful of times. Hence, customer experience is defined by Internet banking support, ease of use, the ease of signing up for new products and services, and day-to-day problem resolution. The branch is no longer central to this experience, but technology investment is.
Customers interact with the bank in multiple ways (online, mobile, ATM, and Twitter). However, the information regarding these interactions is often stored in multiple places and departments. As a result, customer service suffers. Providing a seamless customer experience across channels remains a challenge.
Usability and Ease of On-boarding
Poor usability remains a primary reason why customers leave a website and go to a competitor’s website. Very few banks have a dedicated usability or customer experience team to design critical customer interactions and online processes. Brett King believes that the overall utilisation of the web-channel in retail banks is appalling. The problem is further compounded by cumbersome customer identification and on-boarding processes. Consumers research, make transactions and buy non-banking goods and services on the web, but they generally don’t purchase new banking products on the internet. This remains a huge opportunity and challenge for the banks.
The potential for the mobile network in the sphere of banking is huge. It provides convenient access to money anytime and anywhere. With smartphone adoption rates exceeding 50%, mobile banking has become a must for the banks. As seen from the M-Pesa case, non-bank mobile payments are quickly gaining traction in many developing countries.
Power of Crowds
With the advent of social media, consumers are expecting to be engaged in a dialogue with other consumers and brands. Consumers are increasingly relying on the voice of crowds for advice and recommendations. This means that the power of the brands to influence customers via traditional advertising is diminishing. For strong brand advocacy, the whole organisation needs to be in tune with what consumers are saying, and engage in a dialogue. Most banks don’t even have a social media executive and appear to be underprepared for this challenge. Talking to their customers and solving their problems in an open and transparent way without making the customers jump through the hoops, will remain a challenge for the banks.
The growth in technology and the digital economy will disrupt the way banking will be done from now on. The banks will need to leverage technology more effectively to improve service, the usability and product purchase experience, and accessibility via mobile devices.