The upside down of financial institutions

Once upon a time not that long ago, banks looked very different from what they do now. My first bank was chosen because it was the bank of my employer, and as I became a customer, I got an actual banking book. My parents kept the book safe, and they handed it out to me with great awe, when I needed to deposit or withdraw money. But that personal connection and relation to a bank has changed today, because of our need for convenience and new IT solutions. The question is how will this change the financial landscape?

By Kenneth Brandborg, Associate Partner | 12 July 2016

Although, not older than 13 years old, I got a relatively close relationship with my bank. I went there at least 3-4 times a month either to get money or to make a deposit. I went there to withdraw money for Christmas or birthday presents, and to deposit money I got from my aunt for my birthday. The bank was a part of my everyday life, and the bankers represented the highest integrity, and to me they were the bank. When I moved away from the suburbs I kept – not only the bank – but that specific branch. I knew the advisor and he knew me. He could help me as my economy developed. By now, my point should be relatively clear: the bankers facing the clients created the bank’s value. Together with a solid credit department, the value of the bank depended on the bankers. The best banks had the best advisors facing the customers.

The shift in value perception from personal relations to convenience and IT solutions

There was probably IT involved somewhere. It was obviously some kind of machine that wrote in my banking book. As I remember, the advisors had computers. At least at some point, computers where introduced, but only to the advisors, not to me. All IT was made to help the bankers with the administration. Keep track on appointments, documents and regulatory processes for the advisors. For the banks, IT systems helped settle trades, transfer money, and so on. All banks basically needed the same tasks solved by IT, and in the same manner. There was no advantage in developing unique systems for a single bank. Focus was solely on cost reduction. As a natural consequence, the IT-centrals emerged. The basic idea was to share the costs for developing the IT-systems. All banks had the same needs, so the model introduced was ‘one size fits all’.

Well, time has passed – and at some point I managed to change bank. Actually a couple of times. Why? I used the local branch less and less. Convenience became paramount to me. With the introduction of web banking a new agenda emerged. IT solutions became the arena where the banks fought for success. One bank sent all documents to me printed out with ordinary mail. I had to sign all the papers, mail them back to the bank, and keep a copy for myself. The other bank offered a solution, where everything was handled electronically. The choice was easy for me. I changed bank. Of course, the pricing of the services mattered, but the bank with the better service can charge a higher fee.

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IT has become a driving factor for delivering good customer experiences

Suddenly the banker has no influence, when we are assessing which is the better bank. I had been a customer at my current bank for 1,5 years before I visited a branch. And I still haven’t met my advisor. I have written to him and talked to him, but I have never actually met him.

Even requiring to visit a branch seems annoying. It forces us to plan our day under consideration of the bank. It should be the other way around – I am the client.

This is a major shift. Bankers do not create value – IT does. Not because it is IT, but because we as consumers are used to a convenient and seamless experience, when we handle our financial transactions. IT provides the fundament for delivering this experience to the customers, not the bankers. Even requiring to visit a branch seems annoying. It forces us to plan our day under consideration of the bank. It should be the other way around – I am the client.

We often read about CEO’s from smaller banks claiming that their business has not changed. But they miss one significant point. Their client base is old. Their current client base will disappear and new clients will only join, if the bank is convenient and offers a good experience. My guess is that banks with an old-fashioned view will not offer the sufficient experience to attract new customers.

The role of the IT-centrals and the survival of the mid-sized banks

For the IT-centrals the new regime offers a particular challenge. Their very DNA is IT-solutions that apply for all. But now the game has changed. All banks need IT-solutions that can bring that specific bank in the lead. The IT-centrals have transformed from delivering cost reduction into delivering value driving solutions. On top of that, the solutions are no longer for all clients, but just for some. In my view, the IT-centrals hold the key to the long-term survival of the mid-sized banks. If the IT-centrals succeed in delivering unique solutions to the single banks, the banks will survive. If not, the mid-sized banks will perish. Not only in competitions with larger banks, but also in competition with new fin-techs, and with current software giants like Facebook, Google, and so on.

The battlefield of the banks has moved from the branches fought by the bankers to the virtual world fought by the IT-developers.

The PSDII will accelerate this. Currently, Danish legislation seems to put a brake on the liberalization, but this will not persist. As a leading nation within electronic banking, we cannot have legislation that sets us back in the development of a seamless banking experience. Let me give a simple example of why Danish rules are obsolete. If you have money to invest, banks will offer a variety of investment products. As part of their offering, they have to score the customers risk aversion, investment horizon and liquidity needs. Currently, this is done by questionnaires of varying sophistication. This has a lot of build in flaws. Amongst other the customer gives his view on his own risk aversion. It is not the actual risk aversion that is measured. The obvious solution is to analyze the customer’s data. How does he consume, when does he use cash, when does he save, what expenses does he have, how much money does he use for birthdays and how does his financial consumption change in times of a crisis? With this data, it is possible to make a much more sophisticated profiling of the customer, and thereby a much better investment advice.

The battlefield of the banks has moved from the branches fought by the bankers to the virtual world fought by the IT-developers. The battle is swift and the prize has increased. If the banks are not prepared for the battle, the tech giants will take over a lot of traditional banking business leaving credit assessment to the traditional banks – for now at least. It will be interesting to take a peek into the future and see how the financial landscape looks in just 5 years from now. My guess is that there will be fewer bankers, and new major players and services, making my banking experience better and even more seamless.