Historically, incumbent retail banks in Europe have benefitted by low competition from new market entrants.
High market entry barriers and economies of scale have given large banks significant competitive advantages over new market entrants.
Competition has mostly come from other large banks competing with the same type of traditional banking products.
As a result, the perceived need for digital product innovation in banking has been relatively low, and digital initiatives have generally not been seen as crucial for business success.
Product bundles (e.g mortgage, insurance, consumer loans, etc.) have represented the bulk of retail profits, and customers have enjoyed the convenience of collecting all banking services with the same bank.
Customers have traditionally either visited physical branches or phoned to conduct bank errands, and this has been the primary contact points for up-selling and bundling cash cow products.
For sure, many European large retail banks have enjoyed status-quo for a long time.
However, only during the last two decades, several major macro trends have completely changed the playing field, and they have begun to disrupt the traditional retail banking model.
A recent PWC survey suggests that 80% of banking experts believe that consumer banking will be disrupted in three to five years.
According to PWC, global banking executives fear that up to a quarter of revenues could be at risk within three years due increased to competition from Fintech companies.
Specifically, there are three interlinked macro changes that have contributed to a different playing field in consumer banking; new technologies, consumer behavior, and open banking regulations.
Macro trend #1: New technologies
A prerequisite for the imminent disruption in baking has been a technological evolution.
Increased access to the internet, improved computing power, and subsequently better software have paved the way for better and cheaper computers and smartphones.
25 years ago, the internet was still new, and some even referred to it as a fad. In hindsight, they could not have been more wrong.
As of 2018, staggering 81% of the developed world was connected to the internet.
Perhaps equally spectacular is how many people now use their mobile phone to access the internet.
Back in 2006, basically no one used their phone to access the internet. By 2017, only a decade later, more than 50% of global web pages were served to smartphones and tablets.
Without a doubt, new technologies have completely changed how we live and how we see the world. Naturally, this has also had implications for what consumers expect from banking services.
Macro trend #2: Changed consumer behavior
Even though new technologies have made connectivity widely available, it is the digital experiences (or the service design) that have affected how consumers behave.
Tech companies, most of them born after the internet, have been leading the evolution and basically invented modern programming languages and UX design systems.
Companies such as Amazon, Facebook, Google, Uber, and Apple have mastered the art of agile product development resulting in engaging digital experiences that are so good that people become addicted to them.
Naturally, as billions of consumers (yes, billions) have gotten used to these digital services, they judge all other digital experiences by the same standards (including digital banking).
The diagram below illustrates the explosive growth of Facebook.
Since consumer banks have not considered digital innovation crucial for business survival, their digital experiences have not been even close to the same quality as those developed by leading tech companies.
The failure of incumbent banks to create cutting edge digital experiences has given birth to an entire industry of motivated FinTech startups who are convinced they can bring superior banking services to consumers.
Macro trend #3: Open banking regulations
For European incumbents, weak digital banking experiences and increased competition from FinTechs was not seen as urgent business threats five years ago.
Mostly because incumbents have been shielded by high market entry barriers and economies of scale, and that profits have been continually increasing.
However, this changed when the European Commission decided to actualize the PSD2 directive.
PSD2 (or the Payment Services Directive) is an EU directive designed to level out the playing field by giving third-party providers (such as FinTechs) permission to retrieve customers bank transaction data via APIs upon request.
The European Commission’s primary objective is to “ensure transparency and fair competition, and break down the entry barriers for new services that will benefit EU consumers”.
With PSD2, European banks have lost their monopoly of customer data, which constituted a major competitive advantage.
As the barriers for competing with large banks have decreased, many investor-backed FinTechs have set off to build niche bank products on top of existing customer data.
Only during 2018, FinTechs raised a record $39.6 billion from investors globally, up 120% from 2017.
Banks risk losing their profits
As open banking regulations have accelerated the number of new FinTech services offering innovative and engaging banking experiences, many bank customers will consider using these instead of the services provided by their incumbent bank.
What’s worse is that open banking APIs will reduce much of the friction for the consumer associated with changing service provider, hence making it effortless to move historical transaction data from one service to another.
Consequently, banks face the risk of customer service unbundling. For every service that bank customers stop using, banks lose an important contact point for relationship building and up-selling.
Eventually, banks may end up in a situation where they can’t compete with any digital product, thus leading to pressured margins, loss of market share and customer churn.
Why the customer experience must be a top priority
In order to avoid customer disintermediation, consumer banks need to make the digital customer experience a top business priority.
If banks are expected to compete with best FinTech companies on digital experiences, thus mitigate the risk of service unbundling, they must commit to making digital banking better than the FinTechs.
Building great digital products will require banks to obsess about customer behavior, and fulfill their needs in a beautiful, engaging and relevant way by using agile and data-driven methodologies.
In the video below, BBVA’s Head of Client Solutions Derek elegantly explains what banks need to focus on.
For a deeper understanding of what customers expect from the digital banking experience, read our white paper ´Opportunities for Retail Banks in the Subscription Economy´.