On the surface, at least, it’s a conundrum. How do banks face profound industry changes driven by rapidly evolving customer expectations, emerging technology and new digital challengers when millions of dollars are invested in inflexible, though robust, legacy systems that served them in the past but are not fit for future needs? Given the dominant market share of incumbent banks and the relatively small inroads made by digital challengers, how quickly do traditional banks need do move? Should changes be piecemeal, transformational or totally greenfield?
To companies in the banking industry, the story is a familiar one. Customers with connectivity at their fingertips are demanding cheaper, faster, and better banking experiences. A plethora of challenger banks and new market entrants are emerging to meet these demands — armed with innovative technologies and unencumbered by the legacy infrastructure that restricts traditional financial institutions. Yet, traditional banks still have the lion’s share of the business, enviably strong brands, large customer bases and high visibility. In the face of this many banks are investing heavily to drive innovation, enhance agility, and become more customer centric. For the majority, these investments comprise patchwork upgrades to legacy systems and incremental change. Organizations are reluctant, indeed, to walk completely from these systems owing to substantial investments in them, concerns for reliability, and the simple fact that these systems have been so central to past successes. Other financial institutions are taking different paths to reposition themselves.
One thing is clear. Traditional banks cannot afford to apply patchwork upgrades to their legacy systems. Nor can they assume that system upgrades, even bold and ambitious ones, will translate to a sustainable competitive advantage over the long term. While the pace of technology change in financial services has been more gradual than in other industries, in part due to regulatory restrictions on new market entrants in many jurisdictions, the ability of companies to rapidly adapt will only become more critical over time.
The degree of industry change is such that banks need to think more radically about what they want to become and how they want to get there if they expect to thrive.
What will the banking industry look like in 2030? Business models, just like the industry as a whole, will be transformed by technology. New models will emerge in the years ahead putting a halt to the band-aid approach to legacy systems. Banks will look to new architecture that is digital to the core, and, more chose to build and migrate to new systems.
Under pressure: digital banks making inroads
Challenger banks — such as Starling Bank, Atom Bank and Tandem — have existed in the UK for a number of years. Fidor and N26 were the first of the European digital banks. The model is now emerging in other parts of the world. Indeed, there are approximately 100 challenger banks worldwide, including:
— SolarisBank and N26 in Germany
— MyBank, WeBank and Kakao in Asia
— Nubank in Brazil
— Chime in the US
—86400, Volt and Xinja in Australia.
In March, 2019 the Hong Kong Monetary Authority announced that banking licenses had been granted to no less than three digital banks in the territory. These entities are expected to go live later this year.
Though still dwarfed by their traditional counterparts, digital banks are growing fast, leveraging their adaptability, customer-focus, and ability to make data driven decisions. While they might not, as yet, have customer bases to rival traditional players, they are starting to make inroads. Traditional financial institutions should not overlook the growth potential of new digital challengers who could, over time, win share of market segments, in particular the growing cohort millennials.