Interview with Olivier de Groote, Kasper Peters
[Banking Boulevard]: In a recent Deloitte publication devoted to the banking industry challenges (*), your firm took it upon itself to reimagine the future of banking and the capital markets in the next five to ten years based on an analysis of various disruptive trends as artificial intelligence, blockchain technology, demographics and customer experience.
[Deloitte]: That’s right, as you know, many areas within banking are experiencing serious existential threats. As the industry is being transformed, there is tremendous uncertainty around what the future of banking will look like over the next decade.
Many aspects of banking are being attacked by new competitors, whose chief weapon is an ardent belief in the power of technology to upend conventional wisdom and transform banking.
[Banking Boulevard]: In the publication, Deloitte takes the customer’s point of view and focuses on the brand value of banks. While many institutions are still struggling with the damages their brand incurred during the 2008 financial crisis, you argue a new approach is necessary. Could you please elaborate on that?
[Deloitte]: Sure, brands in the banking industry seem to be facing a crisis.
In a world where digital experiences often dominate, banks have difficulties to convey their distinctiveness and influence customer behaviour.
We believe brand experience will become increasingly fragmented and idiosyncratic, with customers in greater control of how and when they want to engage with banks.
As consumers witness more on-demand services in other industries, they will expect the same in banking as well.
In this environment, conveying a consistent brand experience will become more challenging. Banks will be forced to be more creative in the design of service experiences. While banks may have less control over how customers experience the brand, they will, however, have access to more detailed and real-time information at an individual customer level.
These new data will vastly expand the ability to tailor offerings and experiences.
Yet this explosion in data is a double-edged sword for banks, as it will also demand that banks increase the transparency of their marketing actions. Customers will demand a higher level of pricing transparency, making comparison shopping easier, and forcing banks to articulate their value more effectively.
Banks that are able to anticipate the emerging needs of the post-Millennials (“Generation Z”) as they come of age will have an upper hand. Now is the time to think through what customer experience model will work best for them, as the oldest members of this generation are just about to enter college or become full-time workers.
[Banking Boulevard]: Major innovations can also be observed in the world of payments. These will not only impact the retail banking business but also the commercial banking arena.
[Deloitte]: Yes indeed. Trusted intermediaries have been fundamentally necessary to facilitating payment transactions in modern times. As transactions became more complex, so did the importance of intermediaries in the payments world. New regulation, the growth of mobile payments and real-time payments are forcing traditional players to re-examine their role in the payment ecosystem. The threat of disintermediation in the payments industry is both real and imminent.
The payments industry has three characteristics that are attractive to potential disrupters. First, it is a massive industry, with $26 trillion in global transactions and billions of dollars in fees for the payment networks, processors, issuers, and other intermediaries.
Second, inefficiencies abound in almost every step of the process—legacy architecture and decades-old protocols create delays, risks, and headaches for all concerned, in both consumer and corporate payments. Third, customers cherish convenience, so any solution enhancing this attribute without much additional cost will be favorably received.
It’s no wonder that the payments world has attracted countless potential disrupters, with so many that the space “is increasingly crowded, even noisy.” Innovations have been unleashed across the payments spectrum: Online, mobile, contactless, peer-to-peer, cryptocurrencies, etc.
[Banking Boulevard]: Which innovation can be the most disruptive in the payments world?
[Deloitte]: It is undoubtedly the blockchain technology. A distributed ledger concept, conceived originally for Bitcoin but now applied beyond the cryptocurrency world, blockchain has been called “remarkable,” “a foundational technology,” and “a key technological innovation,” much “like the Internet.” We are of course in an enormous hype cycle today, but its impact will in the long term be very significant, including and probably even more outside banking. We will likely see a number of real-life applications of blockchain applied to payments, beyond digital currencies, in the next five years.
Private, permissioned chains among a finite set of counterparties and clients could become common, with payment processors and the large banks owning and operating possibly multiple private chains to facilitate a range of payments. An uber-private chain (a blockchain – of - blockchains) much like The Automated Clearing House (ACH) network is a likely scenario, but one perhaps further down the road, given the complexity of establishing such an infrastructure.
But the transition to a blockchain-dominant payment system will depend mainly on interoperability—the ability to which blockchains (whether private or otherwise) can interface with each other. In this context, more cross-industry collaboration, and proactive regulatory guidance can help propel innovations forward with industry-wide standards and protocols.
Then, perhaps the least surprising development in payments will be the continuing growth of mobile payments and wearables. Internet of Things (IoT)-enabled mobile wallets may finally reach critical proportion before 2020, transforming customer experience further and making many forms of consumer payments seamless, nonintrusive, and hassle-free. But the risk from these innovations is that financial institutions will lose control over the customer experience, as payments become more integrated into digital solutions controlled by technology firms. This will pose a particular challenge from a branding perspective.
[Banking Boulevard]: How will this transformation (in the payments domain) impact the competitive landscape?
[Deloitte]: We believe that incumbent payments firms, both processors and issuers, will remain dominant even though the threat of disintermediation is real. Banks are themselves driving a big part of the payments innovation agenda. The “credit” component of credit cards will most likely continue to remain central to payments, ensuring banks’ and issuers’ roles.
But the net effect of increased digitization and blockchaining of payments is that margins will continue to erode in traditional product sets, much like the spread compression we have seen in other markets that have been digitized, forcing market players to rethink the value-exchange with both merchants and consumers in retail, and businesses and counterparties in the corporate arena. For instance, credit card processors could expand their product suite to include all types of payments, not just cards but also digital currencies, although that may not be easy.
[Banking Boulevard]: Are banks prepared to face these new challenges? How will their organization change?
[Deloitte]: The internal organization of banks will need to adapt to the concept of extended partnerships. This means there is an increasing reliance on a network of partners, service providers, and industry utilities, to become more common across the industry over the next decade.
Agile operating models will become more important in managing constant change and dealing with impermanence.
Banks are also likely to find different ways to engage with infrastructure providers. In many instances, the large institutions will want their own proprietary infrastructure—a “private cloud,” for example—for more control, while others may opt for public systems.
[Banking Boulevard]: What are your conclusions?
[Deloitte]: For the decade ahead, we envision an industry with a vastly different competitive landscape: New entrants with digital prowess will gain prominence, while many incumbent firms will be forced to alter their strategies to compete. As a result, there will be greater industry fragmentation and blurring of industry boundaries, with financial services increasingly offered by an emerging breed of nonbanks.
There will be greater efficiencies across the board as a result of greater automation. Customer experience overall will improve with each passing year, but traditional firms face the prospect of losing control as these digital experiences become the norm.
We also see greater competition between incumbent firms and the fintech disruptors. Institutions that develop expertise in collaborating with their extended network of suppliers, partners, external talent, and regulators will have more control over their destiny.
No matter how various disruptive forces come together to transform banking, we believe that the changes will be a net positive for the stronger incumbents. While there will be a number of challenges from multiple directions, we believe adaptive and agile organizations will thrive. Our belief is that this metamorphosis will create a more dynamic, healthier, and more competitive banking industry in the decade ahead.
Olivier de Groote
Managing Partner Clients & Markets
Email : email@example.com
Tel: + 32 2 749 57 12
Tel: + 32 2 749 56 18
(*) Banking reimagined. How disruptive forces will radically transform the industry in the decade ahead. Deloitte Center for Financial Services. 2016.