Financial Institutions Need To Start Thinking Digital (If They Want To Keep Up)
"In some ways, the sharing economy is a throwback to the pre-industrial age, when village communities had to share resources to survive. They built up trust through repeated interactions with people they had known all their lives. Modern digital communications allow sharing to happen across a global village of consumers and providers, with trust established through electronic peer reviews." John Hawksworth, Chief Economist, PwC UK, Editor PwC Economic Outlook publications
The collaborative economy -or the sharing economy- is a term we've been hearing and using a lot in the business world. If you've used services such as Uber or Airbnb, you're pretty much part of the buzz. The term collaborative economy refers to a technology-enabled socio-economic system of peer-to-peer (P2P) sharing of resources. The sharing economy is made up of a network of platforms that allows consumers to get whatever product or service they want from each other without going through a third-party organization. This disruptive module offers new opportunities of entrepreneurship, social justice, and environmental solutions. However, its agile and crowdsourced dynamic essence sheds a shadow of threat to industries that lag behind and don't want to play along.
According to a PwC study, collaborative economy will grow from a US$15 billion revenue sector in 2013 to a $335 billion in 2025. Traditional banks still heavily depend on an old-fashioned system that is transaction-centric, where the nature of the transaction itself is the focus of its efforts. Despite the disruptions happening today in online banking, the industry has evolved very little when it comes to its business modules and services offered. The bank still makes money from lending it at a higher interest rate than they pay depositors or than what they borrowed it for. On the other hand, currency itself evolved from being gold-based, cash-based, card-based, and then to what it is today, a point-based digital algorithm, similar to any corporate loyalty program.
The current agility of currency opens up the gates of possibility for what is now being coined "collaborative finance,' which is considered as the financial section of collaborative economy. According to Collaborative Lab, collaborative finance is divided into seven main parts:
1. Social Lending A group of platforms that enable users to take real estate, small business or personal loans from the public. Lenders invest in each person or project in smaller increments, and that in turn minimizes risk.
2. Crowdfunding We're familiar with platforms such as Kickstarter and Indiegogo for creative projects, but crowdfunding is also expanding to cover small businesses, civic and personal.
3. P2P Currency Transfer Utilizing a trusted agent network (TAN) enables users to send and receive mobile payments securely, conveniently and cost-effectively.
4. P2P Insurance Startups Companies like Friendsurance are working to make insurance a well-optimized social experience instead of the inefficient burden it is today.
5. P2P Digital Currency Bitcoin is not the only contender in this arena; decentralized virtual currencies are becoming an integral part of the online ecosystem.
6. P2P Payment Platforms A standard of unified tools is being set up that enables businesses and individuals to accept and manage online payments.
7. P2P Payment Networks For mobile payment security, these third party payment networks are becoming the preferred method of payment of choice for online transactions.
If you consider the aforementioned seven options, we realize that a lot of the variables that control collaborative finance are also services provided by traditional banks. The convenience of these user-oriented services are leading more people to abandon old fashioned brick-and-mortar bank services, and swipe their way into digital monetary management and manipulation. Traditional media couldn't fight online media, so instead they became part of the trend and in some cases, were even early adopters. Similarly, we're at the dawn of a new era of banking- financial institutions don't have a choice but to accept these new factors and build on top of it. The main setback of traditional banking is the sturdiness of its services in comparison to the agility of digital services. As we restructure these banking business modules in the digital universe, flexibility must be the dominant gene of the new systems put into place.
The process of revamping a traditional bank into the digital landscape would consist of leveraging its current services to meet the fast-paced agile digital world. According to an A.T Kearney analysis, the success of digital transformation for traditional banking relies mainly on three basic concepts: client centricity, open innovation, and organizational flexibility.
1. Client Centricity Banks face a huge challenge when it comes to shifting its culture away from the complex transactional systems, and focusing more on creating a seamless and enjoyable customer experience. Customers today want to understand the transactions they are engaging in, interact with them visually and use them in a self-service manner at their own convenience and pace.
- Customer Experience Focus In order to make that shift in focus, and not only move closer to customer expectations but also anticipate them, molding everyone in the bank to think "client first' is a must. This can be achieved by setting up the concept spaces for processes like reshaping services and offers. These efforts are guided by intensive training sessions, CEO discussions and debates over feasibility of suggested solutions.
Another crucial step towards a seamless customer experience is thoroughly listening to the actual customers on all touch-points available: social media, web, mobile, call center, branch surveys, and closer live client interaction. Amassing data is the most important part of building the right solutions. Every piece of information available provides deeper insights on what direction to avoid and which direction to take. The ability to capture the full potential of new technologies starts with agile data-mining IT systems and cross-functional teams studying customer desires.
- New Branch Roles The digital transformation is mostly a cultural shift of mindsets and behaviors, with new skills required to meet the demands of the new connected self-service customer that renders a transaction service venue useless. The future of the branch functionality is to change from a space in which transactions take place into a space in which banks deliver high value advice offered by financial experts. The face-to-face customer interaction would still be the basis on which big financial decisions are made, and the bank's role is to create that environment of comfort and trust to channel that level of communication.
2. Open Innovation
With the exponential acceleration at which the collaborative digital economy is advancing, traditional banks should develop (and maintain) spaces in which innovation is nourished. This battle is fought on two main frontiers: internal and external. Internally, implementing inclusive digital teams, integrating IT and marketing is the essence of the digital age, where services and solutions are created based on quantified information harvested from multiple touch-points into user-friendly everyday products. A digital board committee should be formed to champion innovation, planning, monitoring and execution of new ideas. On the external frontier, an open innovation ecosystem should be created. The bank has the advantage of its wide network of partners that provide most of the services in the market. This network should be expanded to include "fin-tech' startups that are offering easy direct financial solutions and will become major competitors this upcoming year if not brought into the fold.
3. Organizational Flexibility
The flexibility gene needs to be implemented technologically and organizationally for it to take effect. The exponential acceleration of new technologies and the shrinking time-to-market dictate the necessity of having an agile IT platform at the center of the digital banking operating model, with flexible teams working around it to create personalized customer solutions. An agile IT platform is a priority here with challenges such as the exponential growth in traffic and data and the rise of real-time data across channels. The need for systems with real-time information processing and enhanced data management capabilities increases. Not only the IT platform is a critical choice at this phase, but the team structure around it and the goals it's being used for. Ideally, the team should be working on analyzing operational processes, customer behavior and using them to find ways to optimize and evolve banking operations to make it more customer centric.
- Long-term vision and short-term execution The digital transformation happens with a studied planning of a long-term roadmap that ceases all the quick-wins along its way. Traditional banks have two main ways of generating sales: one would be cross selling and up selling to its existing client base, the other is attraction of new customers. To achieve the former in the digital age, the efforts should focus on personalizing the services and being relevant to each customer's needs. As for the latter, it is achieved by expanding and optimizing all channels, branches, ATMs, call centers and most importantly the digital frontier, which should be treated as the biggest branch for each bank. This is the short-term vision of execution.
As for the long-term roadmap, the bank should work its way to expanding its services beyond the moment of transaction to cover its pre and post phases. The pre-transaction phase is by offering solutions for everyday problems through its vast partnership network and acting as a financial advisor to the customer. For example, they might offer you home equipment that is within your budget. The transaction phase is offering the technology needed for the user to browse these added value solutions through their banking touch-points such as a mobile application. As an example, they'll browse the application for all kinds of products in an m-commerce kind of setup that offers added value for costumers benefiting from the bank's partnership network. As for the post-transaction phase, it can be by providing easy payment installment, updates on your financial situation and advice for future purchases.
There's a rumor flying around the digital sphere that the sharing economy of resources will someday replace our old-fashioned buggy monetary system. It's too early to determine the validity of this, but one thing we know is that it is does rival the banking services. Therefore, banks should move digital from being just another project into being its core value, while striking a balance between "business as usual' and digital disruption.