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Where Next? Evolving Financial Services Through Customer Understanding

Originally published in the FinanceEstonia International Forum 2014 E-Journal in June 2014. As last year, this publication is a treasure trove of insight on the future of the financial services industry from leading industry practitioners. 

Sharing ideas


Prior to the FinanceEstonia International Forum, Aare Tammemäe, Chairman of FinanceEstonia spoke with Nasir Zubairi, Founder and Principal of New Buckland. The discussion considered financial industry consumers and what they really want,  the newest disruptions in the FinTech industry and how the “old” and “new” in FinTech can play together.

Aare: Considering the financial industry, what does the consumer really need? Do we even know?

Nasir: That is a big question and there are a broad set of requirements because the mass market is so heterogeneous, both in a big population such as the UK (a core financial market) and within the small population of Estonia.

One conclusion I have reached is that the mass market does not want a fragmented set of services, nor do they want something particularly “disruptive”. To affect the most people I believe the service has to look, feel and behave like a bank – we are not ready to accept a drastically different model for financial services but we are ready for improvements in the quality of service we receive.

We want our money to be stored safely, we want to use our money to pay for goods, we want ways to access credit and investments to increase our purchasing power, we want to perform transactions both domestically and inter- nationally with the least amount of friction and cost possible. And we want it all through a single channel – banking as an enabler of transactions today and trans- actions tomorrow, not a set of products in their own right. That is how we need to frame the business strategy to come up with the right solutions.

Today we have a very fragmented system. Though FinTech firms are doing the right thing by focusing and building core capability in specific niches, the overall friction for customers is arguably getting worse and acting as a barrier to wholesale adoption of the new services. For example, I access TransferWise to perform international payments; I separately access Zopa to make investments and, if needed, borrow money; I access my bank to deposit money and use my card to make payments. Each service has its own access channel and sign-up process; it is too much.

Banks are sticky, the top 5 UK banks still share 85% of business banking and 90% of retail banking. The reason? Even though they are more expensive than the set of FinTech challengers and their user experience is still far behind, they are a one-stop shop for services. Easy, simple, frictionless access is absolutely critical to winning. We have all these brilliant FinTech projects but they need to be homogenised, delivered as a single service to customers.

What might be the concept of financial services in the future? Do you think these new banking-like ventures will be more TransferWise type initiatives or will they merge into this complete service package?

TransferWise has done fantastically well, but is there really any competitive advantage and uniqueness in their technology product? Not really, what they have is great marketing. A number of the new FinTech challengers to traditional banking are not really delivering anything more than innovation in process and some innovation in business model.

If you want to go large and change the game in a mature market such as the UK then something more creative is needed, something which changes the basis for competition in the industry and delivers product and business model innovation that is defensible. I don’t think the current wave of FinTech firms have quite the right model for sustainability, I doubt they are the firms that we will be talking about in 5 or 10 years time.

I think it is still early days in the evolution of financial services. Great things are happening and will continue to hap- pen. I think we will see greater collaboration in the future between financial services firms to deliver better access to customers and reduce friction. I believe we will have more clarity on the industry’s development within the next 3 years.

Are there any other technological ideas around which might change the way we interact with the financial industry?

I believe the insurance and asset management/pension fund sectors are in need of a hack. The insurance sector in the UK is essentially a peer-to-peer network, it works, but in an almost hysterically inefficient manner. The UK asset management and pension fund sector makes billions in profit each year but there is cataclysmic crisis brewing in people not having enough funds for retirement. Obviously there is also still a lot going on in the e-money and payments sectors. I’ve been reading about Facebook’s potential entry into e-money and international payments; that would be an interesting move.

Can you elaborate a bit more on asset management and insurance please? What could the possible disruptions and their impact be on today’s financial industry be? 

The overarching problem is that there is a complete lack of transparency in both sectors. I don’t really know why am I paying X amount of money to insure my house, the only thing I know is that it seems like a lot and the price goes up each year. The average man on the street has no idea how it actually works and why the costs are what they are. Likewise in the pension fund sector, no one really understands what is being done with their money.

Transparency sounds very simple, but it’s always quite difficult to achieve. How could it work in reality?

It doesn’t matter if customers actually delve into how each business works, what is being done and why the costs are what they are, but it’s important that customers can easily find out if they want to. It’s about a company’s willingness to show and explain to us how it’s done.

Take the pension fund industry, I’ve had a fund for many years and even I, as an ex-banker, trader and finance professional, get very confused. Why does my pension fund go down at times when there are portfolio management techniques to protect the capital invested and provide a minimum return each year? Why am I charged a 2% administration fee?

Once in a while I receive a written report about what’s been happening with my pension. I don’t understand why I can’t access this information online in real time at my leisure and why it can’t be written in simple English? A rule of thumb for all this financial literature should be that an 11 year old can read and easily understand it (see the Flesch Reading Ease test). My fund has billions under management so I wonder how many customers they have and how many of these glossy reports are being sent out. It is very inefficient and costly in this modern day and guess who pays?

Workplace pensions in the UK are a key channel for retirement savings. People go through multiple jobs during their career and each new employer will undoubtedly utilise a different fund manager for their pension provision. Most people I am sure, as I, would like to consolidate their pension funds at each step to the pension provider of our newest employer. However, transferring funds from one pension fund provider to another is a ridiculously opaque process and the fees charged for consolidation are staggering. I understand there are costs involved in fund redemptions but, again, there is little transparency on why the costs are so high.

Many pension funds, such as mine, invest in overseas assets to spread risk. Each time they purchase or sell these overseas assets they require foreign currency. The funds, due to lack of diligence and specialism, are often charged up to 10bps on the currency exchange by their custodian (Russell Research report 2012) – think about that, it’s crazy! I am certain there are other areas where costs can be significantly stripped out to benefit the customer. Saving 1% in costs and increasing performance by 1% in the UK pension fund sector as a whole would lead to a 25% increase in the total value of pensions, that’s something worth striving for!

Should we wait for the insurance companies and pension fund providers to figure it out and make changes themselves?

Just as in banking, large firms in the insurance and fund sectors have stopped caring about the customer. They have delivered innovation but the value of these innovations has been captured internally and boosted profits. Innovating for profit is fine, but you should always share the profit of innovation equitably with customers to protect market share for the long-term. No business is ever safe.

There needs be an incentive for change to occur. The government in the UK is pushing for some reform and this could be a catalyst for innovation and improved service. New entrants also pro- vide an incentive for change by providing more competition, pushing existing participants to deliver more accountability and transform their practices. However the barriers to entry into the insurance and investment sectors are significant – can any new entrant make a dent big enough to start a wave of change within the industry?

I believe in starting small. Resolving any large problem starts from focusing on a small piece, fixing that piece and moving onto another piece, eventually you solve the whole problem. Like a big jigsaw puzzle – start with one corner, solve the corner, move onto the next corner, etc.

It’s an open opportunity for FinTech then, there is no one battling this cause.

As most people, I just want to see my pension fund go up and have confidence that I will have enough money to enjoy my retirement. The service providers’ job is to fulfil this need.

I am sure there are ways to better fulfil this need. The Government needs to be more actively involved in fuelling new innovation and ideas in the sector. We are sitting on a ticking time bomb – what will happen to society and the economy in 20 years when people cannot afford to retire? The problem is actually even more acute in the US, the average American only has $10,000 saved towards retirement.

Is there an opportunity for the “old” and “new” players to work together? As you said, the newcomers’ impact today is still very small.

They will absolutely work together. Spanish banks are doing some interesting things with innovative FinTech firms; Morgan Stanley is actively looking to partner with best in breed FinTech firms to enhance their capabilities and State Street partner with FinTech firms to broaden the range of services they offer clients. HSBC have just set aside £200m to invest in new innovation projects and partnerships.

Traditional firms will not disappear as long as they adapt and embrace new ways. I can see a world where a number of banks focus on being the “smart pipes, the plumbing of financial services” providing a foundation for other industry participants to sit on top, in turn allow- ing them to focus more on servicing customers.

If banks decide to innovate in their business then shouldn’t they find the companies out there which are already solving these problems?

They need to develop a capability regard- less of whether they build in-house or look for partners outside, they need a skill set in innovation. Experts need to be brought in to build the capability. All banks need to be investing in new talent that understands and can implement innovation processes. I have no doubt that we are nearing a fundamental change in the way customer’s use and access financial services, nobody really knows the entirety of what that change is yet, but it is coming. Banks need to be prepared to respond to the new threats, to have agility in process and, ideally, be the ones driving the change. Those that do will be the businesses of tomorrow.

In relation to Estonia, could that possibly be a small Estonian bank with good marketing and other tactical skills? Could such a bank become successful in Europe if it had the right offering?

Of course! With an aggressive and well thought through strategy there is no reason why an Estonian Bank couldn’t be the next generation leader in financial services across the world. In this day of technology businesses can scale so rapidly it is shocking. There are many examples from other industries where small firms, largely ignored initially, have quickly risen to lead.

Honda is one of my own favourite case studies. Though they had quickly become a large domestic producer of motorcycles nobody outside of Japan had heard of them. In the early 1960’s they began mass producing the Super Club, a 50cc moped now considered the “Model T” of motorcycles and the biggest selling motorcycle in history. They exported this model to the US, a country dominated by big bikes and by a big manufacturer, Harley Davidson. American Honda Motorcycle Company took control of the US motorcycle market by the end of that decade by really understanding their customers and using that knowledge to drive innovation in product, process and business model that blazed them past incumbent industry participants.

Banks must prioritse technology now


I read a good article on Forbes Online yesterday by Chris Skinner, titled: Fixing “The Gothic House Of Horror” In Bank Back Offices.

To summarise, the article talks to the lack of investment by banks into back office IT infrastructure. Given the very public issues with payment networks of recent months (lloyds, RBS to name but a few) the article is timely and points to a concerning issue – although the big banks have (finally) realised that they need to invest in technology driven user experience, they are still lagging, critically so, in upgrading their core banking infrastructure, which may have devastating consequences to their customers and, ultimately, to their own competitiveness.

The article echoes some of the issues I addressed in a piece I wrote for Entrepreneur Country magazine several years ago when I was beginning my entrepreneurial journey within financial services. My concern is that the bigger issue of incentives within banking still need to be addressed before we see the major banks put the right emphasis on IT strategy as a core driver of overarching business strategy and competitive advantage.

The analogy of “spaghetti” used to describe the state of bank systems within Chris’s article is one I have myself used in presentations describing bank IT and is appropriate. The front office (revenue generators) in a bank rule – they are the decision makers and define business strategy and tactics. IT managers are expected to implement what the front office says – the faster they do it, the more praise they will receive and the more likely and faster they are to progress  in their own careers. Bolting on/fudging code to deliver new IT services yesterday becomes the norm as the IT leaders respond to the incentives put in front of them. Dare they suggest to do things properly? No, as it will lead to them being sidelined and suffering significant barriers to career progression until they conform.

The front office managers have no desire to suggest an overhaul of IT systems for the greater good of the firm. Although the cycle of promotion has lengthened since 2007 and managers are staying in their posts for longer, the average is still 3 to 4 years before a manager moves on. Do they want to be the ones seen to suggest and preside over massive capital investment in IT, in the 10’s of $millions (given the still prominent waterfall project methodology), without clear and tangible uptick in revenues? Unlikely, if they want to keep going on their trajectory of pay rises and increasing responsibility.

Pressure to conform and address the issues must come from the business leaders on the board. IT strategy must come to the fore and their team must be made to feel that they will be rewarded, not penalised, in their careers by making the right investments in technology. Changes in approach –  agile, lean, experimentation – to ensure failure is fast and cheap, should be gradually cascaded through a bank to ensure capital is spent wisely.

The simple fact is this; my kids, our kids, will not want a bank branch, will have higher expectations of the e-services they receive from banks, and will be more likely to penalise a bank for inferior services by changing their provider. We ourselves, as we progress in life and increasingly become the core target market for capital markets, commercial and retail banking, will have moved along the line of normalcy in terms of the technology we accept and use and will demand and expect more from our service providers. Banks will become less sticky; they cannot rely on an apathy to change going forward. There will undoubtedly be more competition for services; pushing for change now, acquiring new knowledge and experience in best practice for technology design, development and delivery, investing in building a true competitive advantage and core capability in technology will ensure the  longevity of a bank and its future competitiveness.

What do financial industry consumers really want and how are these demands met by the industry?

The following is a reprint of an interview for Finance Estonia/UKTI as a preliminary for their Disruptive Technology in Financial Services Conference. The Interview was published in an e-journal.

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.

5 core principles for successful innovation


There are a plethora of lists citing the most innovative companies in the world; all differ in their membership, but there are common  principles of innovation that can be drawn from the companies that are expertly surfing ahead on the wave of creativity.

It was interesting to read the Fastcompany’s “Most Innovative Companies of 2013” article published last week. Avoiding the debate of who should be in and isn’t and who is in who shouldn’t be, there are some great insights into the approach these companies take to innovation and why they are good at it.


1) Understanding what Innovation is.

You have to get this right. Inventing is not innovation without the invention adding significant value.  Clearly captured in Rube Goldberg’s cartoons that became well known for depicting complex devices that performed simple tasks, creating something new or doing something differently does not automatically mean it is innovative.  It has to tangibly or intangibly provide greater utility for the user and/or customer.

Innovation can occur at 4 broad levels:

a) Process innovation – doing something differently that makes it easier/cheaper to complete a task/fulfil a need.

b) Product/service innovation – delivering something new to customers that significantly surpasses the value of substitute products/services.

c) Business model innovation – Changing the way your business works in a way that is different to competitors to enable scale, lower costs, greater profitability, more customer value.

d) Industry innovation – changing the way the industry competes, price focus to quality of service focus, premium pricing to freemium.


2) Understanding the customer.

So often we think we know what the customer wants without really asking them, or, better still, watching them and understanding them. Our own pain points may be representative of a certain demographic, but we must verify our hypothesis with the wider market, with other experts, with stakeholders. The most innovative companies really “get” their customers and innovate to improve their lives in the right way with the technology that they are ready for. Spending time in discovering needs and opportunities, analysing scenarios, modelling benefits and customer journeys and outcomes will save time and money in the longer-term development process.


3) Experimentation.

Call it what you will, Rapid Application Development (RAD), Lean Development…..the idea is pretty much the same. Prototype, build a low cost demonstration of your product or service and test it with the market. Do it frequently and do it early on. Don’t waste money thinking your idea is right, going all out in development only to find no one really wants it.


4) Managing failure and learning from it.

It is not about eradicating failure; failure is actually crucially important to the innovation process as it provides even more insight into customer behaviour. No, it is about ensuring that failure, when it occurs (and it will), occurs early on the process of innovation, within the discovery phase as part of experimentation.

In the vein of the Black Swan, a belief that something works/is right for the customer should be validated by proving that other avenues are wrong or not as valuable. That is sound practice. Failure at the end of the process of development is costly both in terms of capital and people’s jobs. Creating an environment that encourages people to perform low cost experimentation that may or not work, without repercussion (as long as they learn from it) is vitally important to building a culture of innovation.


5) Aligning incentives.

Don’t reward risk taking, reward progress. Show that those that get ahead in the company are the ones that follow the right process for coming up with ideas and implementing them, not the ones that may have stumbled on a product that luckily hit the mark and made the business money. Not many are that insightful, not many have the genius to intrinsically understand human behaviour with the ease that most of us ride a bicycle. They are unlikely to be that lucky again.

Demonstrate to your team that it is the richness of sharing and working together to come up with the right solutions that builds the company and their careers. Give credit and rewards where they are due, but equitably, to all the people involved.  Praise and openness contribute a lot to building a sense of ownership and instilling motivation – people like to feel they are contributing to their company’s success, that they are making a difference and that it is recognised.