Digital Levers in Banking & Financial Services
On November 13, Google announced that it will partner with Citigroup and a credit union at Stanford University to launch a checking account that will be linked to Google Pay.
Citi and the credit union will be taking care of the financial and compliance aspects, while Google will ensure that customers can access their accounts via the Google Pay app. This partnership is similar to others – like Apple’s co-branded credit cards with Goldman Sachs, and Uber and BBVA joining hands to launch banking accounts on the Uber app for drivers – wherein big technology companies make inroads into the financial services sector by front-ending the program while the bank manages the finer aspects of regulations and compliance.
This partnership is yet another sign that the future of banking is slowly changing as BigTechs enter into the financial services industry. Indeed, tech firms’ ability to consume the APIs that are exposed from the banks’ core systems is rendering banking a plug-and-play service. Banks are now providing an as-a-service platform to help third parties integrate with them. The focus is on enhancing the customer experience and bringing in a single view of the customer. This is turning banks into ecosystem enablers, while the technology companies are entering and embedding themselves in this ecosystem.
Even though banks are rich data houses, they struggle with analyzing and gaining insights from data. Because of their demand for digital experiences, customers are increasingly embracing the financial services offered by technology companies. Banks understand the need to partner with these companies to remain in the ecosystem and retain their customers. Indeed, the Stanford credit union defined its recent partnership with Google as “critical to remaining relevant and meeting consumer expectations.”
By their very nature and design, the BigTechs have built a comprehensive ecosystem that gives them access to data on their customers’ behavior, choices, and habits. However, the data on customers’ finances still eludes them. As strict regulations and managing compliance prove to be barriers, collaboration is the only way they can get a foot in the door.
The partnership trend will continue, because both the banks and the tech firms stand to gain so much from them. But the tech firm side of things is a bit troubling. Getting access to the goldmine of banking customers’ financial data will make them nearly invincible. They’ve targeted the front-end of banks’ target operating model, where customer-facing applications, and thus customer stickiness, live.
Further, what is stopping technology players from offering other allied banking services like issuing loans and providing interest payments? Even though lawmakers and regulatory bodies would meticulously scrutinize such models, we are fast-moving to a world where alliances between technology firms and banks will become more frequent.
The next wave of change in the banking ecosystem will be when banks move to an as-a-lifestyle model. In that model, banks will define an IT strategy with customers at the center, and integrate with allied businesses. But to be successful, banks would need to ensure that they are able to influence the customer experience over all channels…theirs and third parties’. With technology players entering the financial services space, the banking IT landscape is already undergoing a shift. To remain relevant, banks will have to move upstream and coordinate the entire ecosystem while getting integrated into everyday transactions.
Financial services organizations have made significant strides in adopting automation, but they have a long way to go to maximize the opportunity because they tend to face adoption challenges.
To reverse their precipitous loss of competitive advantage and market share, traditional banks are increasingly transforming themselves from financial products/services providers into customer lifestyle experience orchestrators. One of the key levers they’re pushing to bring about this innovation turnaround is expansion of their ecosystem to include academics, regulators, FinTechs, telecom firms, and technology vendors.
Everest Group’s recently-released report, Guide to Building and Managing the Banking Innovation Ecosystem – Case Study and Examples from 40 Global Banks, revealed four distinct ways in which banks are working with the ecosystem to drive their innovation strategy.
This is all about exploiting the symbiotic relationship between banks and FinTechs. Serving as “enablers,” FinTechs are helping banks provide more choices to customers and expand the set of services and features in their current offering. For example, Royal Bank of Canada (RBC) collaborated with WaveApps to integrate invoicing, accounting and business financial insights into its online business banking platform. This enables RBC’s small business clients to seamlessly manage their full business financial services’ needs — from banking and bookkeeping to invoicing — in a single place with a single sign-on.
Taking on the “enabler” role, banks allow FinTechs to gain access to their customers, data, capital, experience, and platform. This collaboration helps FinTechs avoid the challenges they face in scaling their services independently.
Banks and FinTechs are also combining their unique strengths to solve specific business/customer issues in co-branded partnerships. As the banking industry moves towards lifestyle orchestration services, banks need to launch products that cut across industries such as travel & hospitality, manufacturing, and retail & CPG. This can be achieved by meaningful cross-industry collaborations like the one between Citi and Lazada Group, an e-Commerce site in Southeast Asia. The partnership allows Citi card holders to enjoy a discount of up to 15 percent on selected days when shopping on Lazada, while shoppers who sign up for a new Citi credit card receive additional discounts on Lazada. The move drives growth in Citi’s cards business via increased customer loyalty.
To build their internal innovation ecosystem, banks are conducting hackathons and establishing digital R&D hubs that help them retain talent and bridge the digital skills gap. For instance, Bank of America launched its Global Technology and Operations Development Program – which is called GT&O University – to train workers for new and evolving roles related to artificial intelligence (AI) and machine learning. This has helped the bank not only upskill its workforce but also enhance its retention-oriented employee value proposition. And banks, including ING, are tapping open banking by providing external developers, industry innovators, and clients with access to their APIs. This helps them expand their offerings, provide new channels to serve customers, build new experiences for clients, and enable open collaboration.
Banks are closely tracking the innovation ecosystem through multiple programs such as investments, incubation support, and partnerships to avoid threats of disruption and competitive disadvantage. This includes investments across academic institutions, startups, and service providers. Interestingly, our research suggests that banks are likely to continue investing in startups via acquisitions or venture capital financing to accelerate their transformation efforts. This is evident from TD Bank’s recent acquisition of Layer 6, a Canada-based AI startup, which adds new capabilities to TD’s growing base of innovation talent and know-how.
Through co-innovation partnerships with startups, consortiums, academic institutions, and technology giants, banks are jointly developing innovative solutions and technology. Leading banks are forming consortiums with other banks, technology firms, and other participants across industries to solve industry-wide issues such as cybersecurity, API security, and regulatory technology, building platforms and standards for the industry. For instance, TD Bank joined the Canadian Institute for Cybersecurity to co-develop new cyber risk management technologies. And HSBC is working with IBM to jointly establish a cognitive intelligence solution combining optical character recognition with robotics to make global trade safer and more efficient.
To learn more about banks’ leverage of the extended ecosystem to drive competitive advantage, and details on the “why’s” and “where’s” banks are focusing their innovation efforts, please see our report titled “Guide to Building and Managing the Banking Innovation Ecosystem – Case Study and Examples from 40 Global Banks.”