The banking industry is undergoing a tremendous wave of innovation, prompted by necessity.Experts agree that banks who fail to make major changes in the next few years will become the laggards in the industry. Industry leaders create each new development to meet the challenges presented by new digital markets. What happens next determines what the entire space looks like moving forward.
There are seven new ideas in particular which are disrupting the banking industry right now and offering opportunities for banking and fintech companies to innovate. What follows are some of our examples which are at the forefront of this trend.
1. Open Source Culture and Collaboration
Open source culture is more than just accessible code and software; it is a mindset and expectation that collaboration leads to more creativity and better technology solutions. The challenge to embrace open source culture is one the entire banking industry faces, as evidenced by various strategies now popping up to deal with the problem. For example, the Open Bank Projectpromotes banking transparency as it increases security, makes better use of innovation and new technologies, appeals more to customers, and keeps banks relevant by attracting new talent.
Historically, banks and other traditional financial services providers have limited their partnerships to others within their industry, but this approach is outdated. To provide financial services, especially “non-core” services outside the classic boundaries of the bank, it will be essential to embrace the open source culture and collaborate with innovators in different industries. According to JP Nicols, founder and CEO of Clientific, Bank Solutions Group and co-founder of Bank Innovators Council, this is among the best and most cost-effective ways to generate value in innovative ways.
For example, three of the world’s banks recognized as the most innovative in the industry by The Financial Brand share open source cultural traits. CaixaBank of Spain is an inter-industry FinTech collaborator and has been for many years. Turkey’s DenizBank cites innovation as one of the company’s core values and discusses the need for constant change to meet the new needs of customers within the digital age. And Bank of Poland was the world’s first totally online bank and is considered to be a European banking “laboratory.”
Crowdfunding (the practice of funding a project by raising money in many small amounts contributed by a large number of people) has actually existed as a traditional offline practicearound the world for years, although it feels new in the US. It was the rise of the Western banking industry and its more rigid approach to funding and credit worthiness that changed lending practices for so many people, prompting them to use crowdfunding to help raise money for their business or idea.
Now as crowdfunding gains new life online, traditional banks have the opportunity to revisit what it means to be worthy of credit as consumers and small businesses turn to each other for funding. Some banks may try to force innovative new companies to function within their existing banking parameters, but ultimately collaborative adaptation like crowdfunding is more likely to succeed.
For example, Santander Bank in the UK refers some customers to Funding Circle. It’s an online lending marketplace focused on small businesses that don’t meet traditional funding criteria. The program has been very successful and if Funding Circle recipients show low default rates, it will spur the bank to change its own lending criteria in response.
3. The Omnichannel Experience
Various technological and cultural factors are changing the demands that both banks and FinTech services are poised to meet and create a millennial customer base that thinks differently about money and finance. For example, research shows that millennials are more likely to travel than they are to invest in pensions, in part due to a lack of trust in the financial services industry, and in part due to their tendency to place more value on and pay for experiences. Some of these include cloud and mobile computing, new payment technologies, powerful data analytics, and decentralized networks. In essence, new technologies and consumer demand are creating a more powerful, holistic omnichannel interface for “one stop” financial services shopping—and this omnichannel is rendering the traditional brick-and-mortar bank to irrelevance.
For example, wearable technologies like the Apple Watch let users pay for anything they need seamlessly using Apple Pay, and Android Pay will soon make this possible for Android devices and wearables. These technologies are omnichannel in that they are designed to allow wearers to use them in brick and mortar stores, online or anywhere else, regardless of the channel.
4. Consumer-Oriented Financial Solutions
Creative solutions from the banking sector are lagging far behind those produced by competitors who originated online and focus on creating consumer-oriented products. Online retail behemoths like Amazon are moving toward offering retail financial services that they believe their already fiercely loyal customer base will jump onto. This means banks will be competing with huge, well-funded companies instead of smaller startups.
Univest Bank and Trust has apparently already started to take on the Amazon Prime membership model in banking. Using a “Bank Prime” model, banks could be creative and pay attention to what their customers really want from them and provide it; it would real value like escrow services, estate planning, financial advisory help, insurance help, investment services all for one annual, fixed price.
5. UX-informed Financial Services
User experience is and always has been everything. This constant focus on better user experience is something we’ve all come to expect from our favorite brands, especially those we reward with our diehard loyalty—including banks. Banks have historically worked to create customer loyalty by fostering personalized experiences within particular channels of loyalty. This has resulted in the overly complex banking experience of today which is unsustainable and contrary to the simple, real-time banking experience consumers want.
For example, customers want the real-time results on their smart phones– including for their banking –and they expect to see the same balance on every device simultaneously. According to Forbes, the existing banking system works using batch payment systems which take time. The result is that traditional banks face major technical challenges and design problems as the majority of customers demand more security and better speed.
For example, using the PEx system created by Hong Leong Bank (HLB) users can transfer money with their smartphones by sending a secret code to the recipient; this way, even if the recipient isn’t another HLB customer, they can use the code they received at an ATM. This system for initiating mobile payments is completely new and focused on convenience and user experience.
6. Digital Pay and Peer-to-peer Options
Online and brick-and-mortar banks serve as secure hubs that transfer value securely. However, digital pay options like Bitcoin do the same thing at a lower cost. Peer-to-peer payment options like PayPal are also exploding worldwide, and they are serving the same purpose: secure transfer of value without the costs of the middle man.
For example, according to CBS insights, certain banks such as Citi Ventures are investing in Chain, an enterprise blockchain startup. (Blockchain is a data structure that is encoded and secure, allowing things like money to be sent and traded online from user to user safely; Bitcoin is an example of an application based on a blockchain structure.) Citibank is also working on a digital currency of its own. These new digital currencies will (what will be the impact on banks and users with this technology? Less banking transfers?)
7. Ownership of Customer Interface
One of the most significant disruptions to the economy in recent years companies that own thecustomer interface are the latest masters of the universe. User interface refers to software and input devices that allow users to interact with computers, whereas customer interface is more specific and implies that the user is a consumer with money to spend as part of the use transaction. Airbnb, Alibaba, Facebook, Google, Instacart, Seamless, Twitter, Uber, and WhatsApp all own a fine mesh of ideas and connections between people who use those ideas to connect. It costs money to connect the people, but it is notable that the largest providers of taxis, accommodations, and media neither own nor produce any of those things. What they do focus on is engagement with their users and data and are models that are now wildly successful in defining customer expectations.
One example of a bank who is focusing on innovation and mastering the customer interface is USAA. According to ZootBlog, the bank is using remote technology and online and mobile interfaces to serve military families overseas who can’t visit branches, younger customers in the US who don’t care to, and even retirees in their 80s and 90s who prefer the convenience of biometrics over branch visits.
These new seven banking trends point to one thing: the banking industry is changing–and fast. The real question is how the thought leaders in banking will respond, and when and how fast innovation will take a central role in the remodeling of the industry. Open source culture and collaboration, crowdsourcing, the omnichannel experience, comprehensive and consumer-oriented financial solutions, UX-informed services, digital pay and peer-to peer options, and focus on customer interface are all innovations that improve customer-facing products, draw on the masses as resources, and improve online payment processes. For all of these reasons, these massive changes are already leading to improved access to services that are more convenient, more useful, and more accurately tailored for users.