What do financial industry consumers really want and how are these demands met by the industry?
The e-journal is a must read – a fantastic collection of thoughts on the future of financial services from the likes of Rohan Silva (former senior policy adviser to David Cameron), Edward Lucas (The Economist, International Editor), Dr Christopher Sier (Director of The Financial Services Knowledge Transfer Network (FSKTN)) and Gavin Cleary (COO for the Financial Services Investment Organisation) amongst others.
How does the technological evolution shape demand for financial products?
Technology is becoming a core component of our habits and behaviours and therefore a driver of our needs. Looking forward, the young are growing up in a world that is ruled by iPads, smartphones and other touchscreen devices, Facebook, Twitter and other social media are an important part of their every day. My own two children are constantly on a screen of some sort. Their lives, our lives, are increasingly ruled by technology and it is hard to imagine a world going forward where the services we engage with, such as financial services, are not delivered through digital channels.
However, we are still only at the dawn of financial services digitization; mass market adoption of digital financial services will take time. I often hear the calls of Financial Services disruptors who say that the branch is dead, I disagree – branches will exist for quite some time yet; the “normal” level of acceptance and use of technology innovations in the mass market has not shifted far enough yet. Too many people still want to have a relationship, to go into a bank, talk to people and manage their financial requirements. Perhaps it is the physical branch that is the substance for the trust between the customer and service provider.
Things are changing, and rapidly, but we still have a way to go and need to be constantly looking at changes in consumer behaviour and habits along the way. I doubt we can even imagine the way we will engage with Financial Services in 15-20 years time, the major industry participants nor the role financial services will play in our lives.
I’d argue that in smaller societies, like Estonia, the traditional branch banking model is closer to expiration than in countries like the UK and USA. The crux is in REALLY understanding market segments – Estonia has a relatively small and concentrated population thus there is more correlation in behaviours and habits among that population and therefore more homogeneity in needs. In the UK there are approximately 46 million people with at least 1 bank account.
London has become a beehive for disruptive financial services, both those types that compete with banks and those that seek to service and enhance the traditional participants in the industry. With the former, I feel there is some level of myopia that results from their peer group – a bias to technophiles they cross paths with in London’s exhilarating tech community. Hearing that your service is innovative and cool from peers may be a danger sign that you are too advanced for mass adoption now or in the near future. Fine if you can build a business targeting a technologically savvy market, not so great if you need massive scale, as is often the case to be successful with financial services.
If you go outside London there is much more diversity around digital acceptance. From a financial institution perspective, the big consumer revenue generators have been found to be less accepting of tech than the norm, they still want to engage with the physical bank. Virgin have launched their bank in the UK – Virgin Money. They chose a strategy that involves an extensive branch network when they could have sought to build a digital-only bank, a pitch I myself made to them a few years ago. Virgin is a very smart company, they have a lot of people who worked really hard on analyzing the market and constructing the strategy to enter the industry and they concluded that branches were needed.
Small steps in banking evolution are occurring in the branch, slowly shifting the norm of technology acceptance along the right path. HSBC has rolled out some very high tech features within branches focusing on less interaction, reducing waiting times and generally engaging more efficiently with their customer. Personally, I do not see branches disappearing from the UK within the next ten years, potentially considerably longer. Yes there will be reductions in numbers as more people accept and use online/mobile services and engage less with the branch, but branches are still a core requirement.
Do consumers know what they expect from the industry and what are those expectations?
That is an interesting question because the word “expect“ is very different to “require” and the expectation, at the moment, is very low and is largely moulded by the current state of the banking industry. People’s expectations of banking are not high because the service delivery has been really poor. The gap between what people need and should be getting out of the banking industry, and what banks are delivering has widened significantly, particularly in the past five years as banks have focused inwardly. I think that will change, the requirement is a lot higher.
So expectations are very low but requirements are high; this has created the opportunity for a lot FinTech innovators – there was really nobody looking to challenge the banks 5 years ago, the “new finance“ industry has exploded since 2009. The banks are simply not providing the service consumers deserve.
Will telecoms companies participate in the financial industry more significantly in the coming years?
I don’t believe that large telecom companies, such as the mobile operators, have the core capabilities/skillset to enter the financial services market. Rather I see partnerships being the strategy of choice for telecoms to successfully enter financial services in developed markets and, perhaps more interestingly, servicing developing markets.
Developing markets, such as in Africa, are embracing innovation and technology in mobile banking beyond countries such as the UK as they do not have to battle with existing infrastructure. They can take a step change approach to solutions to meet market needs.
I see mobile becoming increasingly useful in terms of managing finances. My personal belief however is that, in the UK, mobile payments will not take off in the near future. I don’t think there is a strong enough proposition yet relative to the lack of trust in mobile devices and the mobile wallet. I see innovations coming in areas that offer marginal benefits over what we have today and require less behavioural change. For example, The Touch2pay Card is taking off but people are not really ready to do that with their mobile.
In what areas do you believe old economies and financial centers are still strong?
Ultimately the old economies (London, New York and I would add Singapore, Hong Kong and Tokyo into that batch as well) are very difficult to compete with in terms of accessibility to the capital markets’ core infrastructure, the pipes and connectivity on which banking is facilitated. London is a powerhouse of finance; we have a concentration of skill, resources and knowledge. New economies don’t have that.
New financial centres do benefit from not being burdened by existing infrastructure and by “shadow of the past” thinking – I cringe when I too often hear the phrase “this is the way we have always done it”. Agility is another key advantage in new centres.
I do feel that new centres could benefit by bringing in the right management and leadership expertise from traditional centres. For example, one of the big problems China has is the lack of highly trained and skilled white-collar workers of a senior management level; their development around management skills has only occurred over the past 10-12 years. They are learning fast, and this education is coming from senior managers brought in from Western economies where the management skillset is significantly more developed.
One of the highlights of rising economies is their ability to come up with creative ideas and actually implement these ideas with agility and success. Reiterating what I said previously, the mobile payment/mobile money revolution in Kenya is phenomenal – a leap in terms of innovation beyond the UK and US. For us in the UK to go from a fairly effective and efficient chip and pin card payment system to mobile payments is going to be extremely costly and the incremental benefit, as I say, is not quite enough to motivate consumers and merchants to adopt yet.
Do you think that Africa will skip some stages of development in the financial industry that the older economies went through, especially due to the fact that they are very heavy users of mobile?
Absolutely. African nations have the benefit of looking around to see what has and has not worked in the past and use this knowledge to help create the right solutions for their market based on current habits and behaviours and the likely path of change. They are essentially starting with a clean slate. Given that a lot of the population is under banked, the solution that they have come up with is targeted to, and facilitates the needs of, that market.
Where do you see that emerging economies could excel in terms of financial services?
I think there are a lot of shining lights in the emerging economies. If you look at Africa, Russia, Eastern European countries and what is coming out of these countries, there is a lot more creativity around solutions. They are almost becoming case studies for ‘this is what banking can become’. What comes to mind from Poland is mBank who are delivering a fantastic online user experience. Fidor Bank in Germany have a virtual online wallet that allows their customers to manage multiple real and virtual currencies from a single portal. They also have a very innovative approach to marketing, wherein the more Facebook likes they receive the higher the savings rate on their current accounts. They have the ability to create and implement at relatively low cost compared to large, traditionally bureaucratic banks in the UK.
The market here in the UK unique, we have five banks controlling 85% of banking. It is very hard to make inroads against the oligopoly. What is interesting and right is that the new finance world is focused on very niche products and on specific elements of the financial services value chain. There has been relatively rapid adoption of new services however ,one of the issues that may be a stumbling block in the growth of banking alternatives is that easy access is core to consumer needs. It is not pricing that matters to UK consumers in financial services (as long as it is in the ballpark), it is all about access to make it easy.
Banking utopia would be that banking services are invisible, consumers choose when to engage and we would not need to do so often. Although individually all new finance services coming to market are easy to use and access, they are each just a part of our overall requirement and therefore making the act of engaging with financial services on the whole more complex. We want something which looks after our money, can facilitate payments, do foreign exchange, lending, help with our investments, etc – having to engage with a different provider for each part is far from ideal. The less friction the more popular services will be, the people who can deliver that are the people who will win. Perhaps we will soon see a consolidation of multiple new finance services through single access points, a virtual bank. That will be VERY interesting.