People have always used the latest technology to make their financial lives easier and banks have been at the forefront of the innovations that make this possible. The first cheque books were pioneered by commercial banks, as were cash cards, online banking, chip and pin technology and contactless payments, writes Jamie Risso-Gill
Given this rich history, the industry might expect to be behind all further landmarks but – in the payments sector in particular – the future is also being moulded from outside. Apple has just launched Apple Pay in the UK, allowing customers to use their Apple hardware like payment cards, and more developments taking payment functions further away from the banks are likely to follow.
The advantages of having a coherent approach to digital technology are not limited to preserving transaction commissions and market share. The rise of digital confers many opportunities to banks, not least from a compliance perspective: automation offers them great protection against accusations of mis-selling.
Everyone is familiar with the terms and conditions box that has to be ticked in online forms. Banks can do something very similar when customers are applying for products pharmacy online. Of course this requires frequent and careful evaluation to ensure that systems are working properly, again taking us back to the critical importance of thinking digitally.
To their credit, banks are aware of this changing backdrop to their markets. Barclays has recently partnered with technology firm Zapp to improve its digital payments capabilities and a number of banks have turned to the tech industry to find senior staff able to develop their digital strategy. A symptom of this approach is the emergence of a new senior role, that of the Chief Digital Officer.
The premise behind this impressive new job title is perfectly sound at first glance. Digital technology is changing the banking industry, exposing it to new competition from outside and enabling challengers from within to win market share from the current dominant firms. A senior functionary should therefore be appointed to ensure that these new commercial headwinds are turned to banks’ advantage.
On examination, though, this approach is the wrong one.
Its poverty of ambition is perhaps the biggest problem: the firms likely to benefit most from digital are those that encourage all their staff to think in terms of the technology at the industry’s disposal. A Chief Digital Officer cannot be a panacea to transforming the culture of a large institution.
Entrusting digital strategy with just one person, no matter how senior, also risks a dangerous narrowing of a firm’s vision. Understandably, banks look to proven success stories in the digital arena for their Chief Digital Officers, which usually means they source them from the biggest technology firms.
The problem with this is that, in terms of both management and operational structure, as well as the two very different market environments, the technology and banking industries have few obvious synergies. Someone who’s made it in tech is not an obvious fit for the banking world.
A senior banker, even – perhaps especially – one tasked with devising a digital strategy, still has to have the traditional technical skillsets demanded by that industry. Skills in areas such as financial analysis and risk management, especially in today’s heavily regulated markets, do not necessarily marry well with the entrepreneurship and start-up mentality that define much of the digital world.
Banks need to think carefully, more carefully than some are doing, before hiring senior staff from the technology arena. They must also stop thinking that one big, senior hire will ensure that they make the most of the opportunities digital offers.
But what should they be doing? There are three non-negotiables for a firm looking to put digital distance between itself and its rivals:
Invest in technology: this is a necessary evil for large institutions whose systems are 30 or 40 years old, and the only way they will compete with the challenger banks that are able to build their systems from scratch.
Decide on your strategy: banks need to make a choice between one of two approaches. For some, digital is the future – the whole future. Proponents of a branch-free approach believe that physical branches are an anachronism. Others see digital as a critical part of the mix, alongside the traditional branch approach. Banks need to decide which camp they sit in.
Consider customer service: whether a firm goes for the digital-only approach or continues to operate branches, it must still recognise the customer services challenge represented by the impersonal online customer experience. The successful firms will of course be those that make banking digitally safe and dependable but the customer experience is just as critical.
There is one absolutely critical final maxim that should be adopted. Ultimately, the above tenets are useless unless they are deployed by digitally savvy senior executives and rubberstamped by digitally aware Non-Executive Directors. A bank cannot hope to compete in today’s – not to mention tomorrow’s – retail banking market without a ‘digital executive team’ and banks need to reinvent their upper echelons’ if this is currently lacking, as Atom Bank and Apple Pay are merely the start of an avalanche of a new era of digital disrupters, looking to steal the lunch from traditional high street banks. Banks, rather than just investing in new digital technology, now need to reinvest in their bankers too.