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From banking to tech, and beyond

When banks start to think like tech businesses, and tech businesses start to look like banks, what does it mean for the future of financial services?

Why don’t consumers love banks?

The relationship between customer and bank is normally a very loyal one, but you don’t often hear people putting traditional financial services institutions at the top of their most loved or most respected brand lists. In fact, banks are rarely warmly regarded by consumers, and even when everyday banking is free, they are often seen as poor value for money too.

When compared to other industries, in terms of reputation, banking performs badly, with only telecoms trailing in the top 10 of the Brand Finance Banking 500 report for 2020. If you look at the tech industry, the story is very different. It comes in second overall, behind only the automotive industry, is the highest scorer in innovation and loyalty, and is the leader in overall stakeholder equity. Consumer trust in banks continues to decline, with Accenture finding that 29% of survey respondents trust their banks to look after their long-term financial wellbeing, compared with 43% two years ago.

It’s no surprise, then, that so many traditional financial service providers are facing massive pressure from a new breed of fintechs and disruptors, competing for the hearts, minds and dollars of consumers with best-in-class digital experiences and innovative, tech-driven business models. And as the financial marketplace continues to become more fragmented, it’s also no surprise to find many of those traditional providers attempting to transform themselves into tech companies, adopting customer-centric models, product-led growth strategies, and agile methodologies in an effort to stay ahead of the competition.

At the same time, tech businesses are increasingly identifying new opportunities to provide financial services to their audience, building on existing digital platforms and loyal customer bases to develop new revenue streams. In the past few years alone, we’ve seen the announcement of Google Plex, a digital banking platform, Facebook Novi, a digital wallet for cryptocurrency, and Apple Pay grow to account for 5% of global card transactions. “Financial services of all kinds,” explains Richard Waters for the Financial Times, “are being reimagined for a younger generation brought up on smartphones.” And those younger generations increasingly show more affinity with big tech than the big banks – according to CB Insights, “73% of millennials say they would be more excited about a new financial offering from a tech company like Google, Amazon, or Apple than from their nationwide bank.”

Advantage, big tech?

There’s a clear advantage for tech companies over financial institutions when it comes to customer experience and digital platforms. As market research platform GlobalWebIndex explains, big tech players, “have the advantage of a bigger foothold in consumers’ day-to-day, and rich datasets to build out their financial offerings and gain market share.” Tech giants set the standards by which digital experiences are measured, and consumer expectations are high as a result; users expect their banking apps to be as easy and intuitive to use as Instagram or Spotify.

These are organisations that embody a product mindset, with customer feedback, data and insight deeply embedded throughout their vision, strategy and roadmap, and a focus on outcomes over outputs. This is combined with an agile, iterative approach to continuous improvement that lends itself far more easily to innovation than the traditional structures and practices of many financial institutions.

"Tech giants set the standards by which digital experiences are measured, and consumer expectations are high as a result."

The new breed of challenger banks, on the other hand, have the benefit of building their operating models and digital platforms from scratch, taking advantage of best practices from the world of tech without the baggage and technical debt of legacy infrastructure.

Whilst it’s fair to say that brands such as Monzo and Starling have shaken up the incumbents, their promise to ‘revolutionise’ banking remains to be fulfilled – and their ability to generate profit unproven.

Does this mean existing ‘legacy’ banks are destined for a life of only providing back end financial services through banking-as-a-service (BaaS), banking-as-a-platform (BaaP), and open banking APIs, whilst tech companies define the customer experience? This is one possible scenario and perhaps the destiny for some, but the recent levels of innovation in response to the Covid-19 pandemic have shown that the giants of the financial services sector can bring new services and channels to market when they absolutely have to.

2020 will be seen as the tipping point for when such institutions put trust in their ability to innovate and be more agile – at speed. In a recent survey conducted by Appian and FT Focus, 78% of senior banking executives in the UK said they had proven more agile than previously thought, 72% had grown more innovative in 2020, and 60% expected to increase technology spending to meet the challenges of digitalisation.

It’s banking, Jim, but not as we know it

Let’s take a glance at the new operating models shaping the world of fintech and financial services.

Banking-as-a-service (BaaS)

BaaS models allow businesses to integrate digital banking and payment services from licensed banks into their products via APIs. The benefits include more consistent and frictionless customer journeys, greater customer insight and intelligence, and new potential revenue streams through commissions and additional products, without the burden and expense of acquiring a banking license and ensuring regulatory compliance.

Banking-as-a-platform (BaaP)

The BaaP model is the inverse of the above, where banks and financial institutions integrate products and services from other businesses, often tech companies, through the use of APIs. The benefits include being able to offer new platforms and services without having to develop systems and interfaces from scratch, helping banks to retain customers within their ecosystem rather than losing them to competitors.

Open banking

Open banking models allow non-banks – third party service providers, or TPPs – to access customer data in their products and platforms through an API, often provided by another, middle-man party. This data can be used to offer account information and insights, or to initiate payments. Unlike in BaaS models, TPPs do not actually provide banking services to the customer, but are able to access and repurpose their banking data. The benefits include the ability to offer more targeted and relevant products and services, based on customer data.

Keeping up with the Zuckerbergs

For established providers, there’s still much to play for, and playing catch-up isn’t necessarily a bad strategy. McKinsey research into digital strategies identified that, “Incumbents moving boldly command a 20% share, on average, of digitising markets.

"That compares with only 5% for digital natives on the prowl… Revved-up incumbents create as much risk to the revenues of traditional players as digital attackers do. And it’s often incumbents’ moves that push an industry to the tipping point. That’s when the ranks of slow movers get exposed to life-threatening competition."

Bughin, Catlin, Hirt & Willmott for McKinsey, Why digital strategies fail, 2018

This requires more than just a digital facelift, however, and a fancy website in front of dangerously outdated legacy back end systems is unlikely to cut it, as TSB discovered in 2018. Financial services firms need a strategy to nurture their internal tech and product teams, adopting a product mindset and aligning to a strong product vision. By creating a culture that supports agility and innovation, legacy organisations. can learn from the mistakes and successes experienced by the challengers.

Roadmaps that span years will no longer be tolerated when the market can move so rapidly and consumers demand new services overnight. The financial services sector needs to see the recent levels of transformation and drive for innovation as the new normal. The disruption of 2020 needs to be the starting gun and benchmark for new levels of agility if incumbents are to keep the tech giants and disruptors from nipping at their heels.

And whilst consumer trust in banks may be declining, it’s still much greater than trust in tech; just 8% of people surveyed said they trusted tech and online service providers to look after their long-term financial wellbeing, dropping further to 6% for social network providers.

"The disruption of 2020 needs to be the starting gun and benchmark for new levels of agility if incumbents are to keep the tech giants and disruptors from nipping at their heels."

So, will the banks of the future still be banks? The reality is that the big banks are unlikely to disappear – research from Trustpilot indicates that three quarters of consumers still rely on an established bank for their main account. However, they may look very different from the financial institutions we are used to, and will inevitably have to learn to play nicely with big tech along the way.

Similarly, it’s unlikely that Facebook or Google will one day take the place of HSBC, but we should expect to see much closer relationships between the worlds of tech and finance, with connected ecosystems of products and platforms that play to the strengths of all parties. Strategic partnerships will allow tech companies to develop new platforms and interfaces for their extensive customer bases, whilst financial institutions deliver the services, in a hybrid model that promises to unlock new revenue streams for both.

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