Digitalisation - can banks catch up?

Amazon has become the ultimate retailer with a vast array of goods on a platform serving up its own products and those of other retailers too. A host of online retailers now provide omnichannel services: Spotify offers instant access to the world’s music; Netflix is a portal to thousands of movies and TV shows; Etsy allows seamless access to arts and crafts from an army of artisans.

We’re used to it now, the ease of use, the immediate satisfaction of our needs and desires. But this revolution in retail is spilling over to frame expectations of other services too. According to Jim Dolan, a Partner at Mazars, digital business expert and veteran of the banking sector, account holders have seen the service retailers can offer and want the same from their banks.

“There is,” says Dolan, “a permanent shift underway, an expectation among customers that there will be instant, convenient and frictionless access to the services they want.”

This phenomenon has been amplified by the pandemic. As millions sat at home under lockdown they were left with no choice but to shop through the internet. Want hot food? Your waiter is a website. Need groceries? Browse supermarket aisles from your sofa. Want to finally learn guitar? An instrument is just 48 hours away by courier leaving time to book your Zoom lessons

Significantly, though, what operators like Amazon offer is a gateway not just to their own products but those of other retailers too. In other words, an “ecosystem” provides a single platform to access an almost infinite range of products.

That may leave customers wondering why they can’t find all their banking needs and other financial services in one place. While rushing towards this kind of model may seem like a natural step for banks, it is not without its challenges.

“Realistically, for banks to be successful in the future they will have to become more like marketplaces, a platform for diverse services, some of them coming from other providers,” says Dolan. “But they will have to overcome a range of risks as they adjust to changing customer demands.”

First among them will be a reliance on vast legacy IT systems that have been the foundation for online banking so far. While they provide the bedrock for reliable transactional services, they fall short of the kind of flexibility and ease of use experienced on retail sites.

Banks generally own what experts call “systems of record”, IT designed to maintain the most complete and trustworthy data. And that has been extremely effective. In recent years however, retailers have successfully focused on “systems of action,” IT focused on driving business value through connection to multiple data sources, connecting processes and enriching customer experience.

“To change or replace systems of record can take years. Systems of action can change in months,” says Dolan.  “That places banks at a disadvantage when trying to serve the ever-changing expectations of customers.”

There are ways around it. IT designers can apply “APIs” (application programming interfaces) or “microservices”, software add-ons that interact and extract data from legacy systems for delivery to the kind of smooth retail interface users have become accustomed to.

The only problem is this may not be enough. A significant market or even regulatory event in the near future could prove seismic. “There will come a point where a change will be required and banks will not be able to rely on APIs or microservices to provide a solution. They will need to do something fundamental with legacy systems,” says Dolan.

There are other risks to change too. Data is king in the current world of business but the throne is shared with “trust”. Without trust, Dolan points out, customers will not share their data: “And data is where the value is”.

Trust is a complex equation in business made up of disparate variables such as compliance with regulation, risk management, reputation and previous performance.

Underlying all of that is data security, a factor amplified by lurid headlines of information leaks, cyber crime and a geopolitical conflict in which cyber warfare has become established on a virtual battleground. “Unless you are secure, you could be in breach of regulation, data may be leaked and, as we’ve seen in recent times, that can be catastrophic for market value,” Dolan says.

There is one final risk; artificial intelligence (AI). While machine learning may appear to be an indispensable solution, the process makes tracing how a decision is made, next to impossible. The right controls need to be considered before any AI is introduced to a system.

According to Dolan, the pull of customer expectation and the risks inherent in replicating a retail model places the banking sector at a turning point with opportunities to grasp.

Yet there is much to consider before running with change.  Banks will need to pick a place in the market. Will they become a “marketplace” like Amazon, or a provider of services and products like independent sellers? Dolan believes it will be difficult for banks to be all things to all customers, given the breadth of expectation.

Banks will also need to assess and face up to the state of their current technology. There’s no sense in pretending systems are serviceable because the prospect or expense of change is too daunting. In that approach lays redundancy and a slow demise (perhaps not too slow if competitors move fast).

Lastly, institutions should accept they will need to be “agile” in the new era of banking.  Agility is not just a mindset, Dolan says, it’s a root and branch change of culture likely to affect every aspect of strategy.

“Banking has reached a decisive moment. It used to be the leader in digital business but that is now retail. Banks will have to follow but they will have to negotiate a sensitive set of risks,” says Dolan.

“This is made more complicated by banks operating in a sector where there is little or no tolerance for inaccuracy or downtime.

“But there is no choice. Banks will need to catch up, their customers expect it.”