Future visions

FST. The financial services market is becoming increasingly competitive and is opening up to organisations from outside the traditional banking sphere. What do banks need to do to hang on to customers and preserve their profits?

PF. For many years banks, particularly UK banks, talked about customer retention rates of 80-90 percent. The Internet changed that by providing much greater access to choice. What this proved to the banks is that they had customer apathy, not customer loyalty. Once people were able to move easily, they did so.

This has led to a reassessment of where banks should be investing in technology to improve the kinds of services they are delivering to their customers. Perhaps a bit too late customer focus has now become the focal point of a lot of marketing efforts, investment efforts, and technology development. Technology has played a role in making it very easy to quickly copy products. Therefore, your competitive edge lasts a minimal amount of time. In order to win the hearts, minds, and wallet share of customers, banks have to build up a relationship with them.

They’ve also realized that other industries have been far better at than banking at building customer relationships, customer loyalty, and consequently brands. I think that banking put itself on a pedestal for many years and felt that it was a special case and had to be treated as such by suppliers like the technology industry. It’s now understanding it can learn a lot more from other industries, be they the automotive industry in terms of just-in-time type manufacturing, or the retail industry in terms of brand loyalty and understanding what the customer needs and wants. Banks are now trying to roll this out into a whole range of customer service initiatives where they are using technology to give it a competitive edge over their industry peers.

FST. So has banking become too institutionalised? Does the industry now need to break free of old ways of working and become more agile?

PF. They certainly need to become more agile enterprises. But I think there are constraints in terms of security and pure infrastructure because of the size of their IT operations. That makes it very difficult for them to be flexible and agile and all those great things which technology can deliver.

That said, they have been caught napping a couple of times, particularly with newcomers in Internet banking. UK competitors like Smile and Egg and so forth, have caught the traditional high-street banks on the hop, and so have retailers who are now providing financial services. To a certain extent, they’ve protected themselves against that competition by white-labeling certain services through some of these retail organisations.
But more recently the evolution of services like PayPal which aren’t provided by traditional banks have caught much of the industry by surprise. They are looking very closely now at where the next banking competitor is going to come from because the technology capability of some organisations is such that a number could actually provide banking services. Is there going to be a Google bank? It’s an important question because they’ve already proven they can disintermediate in the areas they’re operating.

In order to be more prepared for that, banks have to understand their customers better – why they prefer a Google over a Yahoo, or vice versa. These services are treated more as commodities and that’s the way that banks are increasingly being viewed. A young person is unlikely to brag about which bank they use. It’s not necessarily a cool thing.
Banks have a great problem being ‘cool’. They are now starting to look at very close demographic issues to try and understand these young people who are coming into the marketplace a lot earlier.

This isn’t only in terms of customers but of employees as well. Banking has been one of the slowest industries to adopt innovative practices. It’s only recently we’ve seen titles like Directors of Innovation appearing in the major banking groups. Those that I’ve spoken to in places like Deutsche Bank and Royal Bank of Scotland are unanimous in the view that their prime task is to change the bank’s culture to enable innovation to take place.

Banks are very structured and controlled organisations. They are not workplaces where you would see very innovative young technologists thinking laterally and experimenting with technology to the benefit of customer services, They take one look and say, “Well, I don’t do that sort of thing. I don’t wear a suit. I don’t work nine to five. You’ve got to integrate me into your system – not integrate your system into me.”

There’s this great difficulty in embracing collaborative cultures around things like Enterprise 2.0. Banks are looking at Facebook and MySpace that have become engrained very quickly into the day-to-day activities of so many young people. They’re thinking about how they can get involved.

Banks are very defensive about criticism. But at least they now acknowledge that it’s going to happen and that there are plenty of public platforms where customers can voice it. Word of mouth travels much faster than it used to and banks understand the damage that it can do. In order to try and anticipate some of that potential damage, they want to actually be in a position where they can encourage that kind of debate and show that they are willing participants. They want to demonstrate that they are open to change and prepared to be more transparent in the way they do business.

It gets back to the cultural issue. There’s huge resistance at the technology level to actually buy into this in any sort of rapid way. All the research that we’ve done shows that there’s still quite a serious disconnect between the people that run banks – the board and the CEO – and the technology groups, the CIO, and the CTO. The CEO may say that he wants to devote 100 percent of technology resources to develop the business, but by the time you reach the CIO they are closer to 50 percent. That’s because he’s very pragmatic and three quarters of the bank’s IT budget generally goes on keeping the business going. It doesn’t allow a lot of cash to experiment with.

Banks are now recognising that there has to be a much greater integration between the business and the technology groups if they as organisations, are going develop the kind of products and services that customers expect. In particular they need to appeal to younger people who are going to become customers and employees of the future. It’s a challenge they’re wrestling with. Some banks are obviously doing this better than others. But there is a sea change in the culture and the way that banks are now removing their blinkers and looking at how they can learn from other industries.

FST. At the same time there’s the reality that banks are being regulated ever more closely. The introduction of SEPA is just the latest in a list of new regulations. Does this need for oversight present the risk that creativity and innovation will be stifled?

PF. Frankly, I think banks are paranoid about regulation. If anything they are probably under-regulated when you compare them with the airline industry or the pharmaceutical industry. How many mistakes is a drug company allowed to make with putting the wrong kind of pills out into the community? How many mistakes can you make with an airplane? You don’t get too many second chances.

Banks have had plenty of second chances. They’ve made serious mistakes and are now facing the consequences of being regulated. In any case the effects of these regulations are rarely as negative as they are portrayed by the industry. Take Mifid – it’s actually creating more transparency. It’s aimed at empowering the consumer and the investment markets. Those banks that treat it as an opportunity rather than as an imposition are the ones that are going to be winners in the marketplace. These are actions and services that they should be delivering to their customers already, but have resisted because they hadn’t been forced to. It’s the same with SEPA. Banks have been very, very slow to provide certain basic services. We think that’s because something like 40 percent of their non-interest revenue comes from payment fees. We estimate that figure will probably halve over the next three years, so that’s losing a very substantial chunk of revenues.

Banks have to find ways of replacing that income. They’re suddenly realising that they can then win a bigger share of the customer marketplace if they deliver more customer-friendly services and products. If they generate greater volumes then they’ll be able to generate out of that and work off lower margins. But there’s going be a lot of casualties in the meantime. The banking marketplace in Europe is going shrink significantly over the next ten years as banks consolidate by acquisition and merger and others simply get put out of business. There will still be niche providers who have special services for special communities or regions, but we’re about to see a sea change in European banking.

FST. Achieving this change is going to require a strong technology backbone. How do the vendors get involved?

PF. First of all I think that a lot of vendors perhaps don’t understand enough about the processes in banking and insurance. One of the first steps in technology investment is to try and reduce those processes, reduce the human intervention, and therefore lower costs. There has been some encouraging engagement between finance and technology in recent years though. There has been a bit ore dialogue and that partnership is developing.

But I think that there’s a certain cynicism in the financial services industry about the ability of technology companies to deliver what they say they will. Financial services organisations are big spenders on technology – by most measurements, probably the biggest single group of spenders in the world. By our reckoning in some parts of the world, some 25 percent of total spend is by the financial services industry on technology, which is pretty huge. It’s probably bigger than the public sector in all other countries. Therefore, they probably deserve to be taken seriously.

I think there’s a great propensity within the technology industry to overcomplicate things, and consequently overcomplicate their sales process. Because a lot of cynical bank guys will turn around and say, “In five or six years time, you’re going to be calling SOA something else, and you’re going to come back to me and say it’s time to reinvest.” It’s a bit of a generalisation, but I think technology companies sometimes find it very difficult to maintain the confidence of their banking clients.
But they’re looking for more relationship management and understanding, and the technology companies are looking obviously to continue to drive sales. There needs to be a better balance between both of those and I think that it is improving.

FST. We know what banks are planning to do – we don’t know how they’re going to do it. How do you think the vendors are going to change?

PF. Well, I think vendors are changing. For starters, there’s been an increasing awareness among vendors to specialise their teams to focus on specific industries. In most of those, the financial services has been one of the first ones to be verticalized and have a dedicated team looking after the interests of banking and insurance. For many years, the big horizontal suppliers had people who handled generic industries. There are certain companies that still do that. Dell, for example, will not treat any industry differently. You deal with Dell, that’s what they produce, and that’s what you get. Now investment banking is very specialized, and you’ve got to be pretty dedicated to work in that environment. But the likes of the IBMs, the HPs, the Suns, and so forth have developed more sophisticated dedicated vertical specialists. This is filtering down the line, and more of the technology companies are doing that, so that’s a very good step in the right direction.

I think that the banks stepping off their pedestals and talking to technology companies that work across a spectrum of industries is also creating that dialogue. Previously banks didn’t want to know what your IT supplier was doing in the automotive or retail industries, and now they do. They want to know what works there and why these different industries do certain things. I think maybe the vendors were loath to drive that in years gone past, but now they’re taking that initiative and saying, “We do actually have something to offer to the banking industry.”

Financial terminology and what actually goes on behind it, I think, scares a lot of people. That uncertainty puts people off dealing one-to-one with the banking industry because, like any industry, banking has developed it’s own jargon and way of communicating. It’s now demystifying some of that from inside. This allows people on the outside to understand everything better, so it’s a two-way process.