By Jonathan Power, RVP Northern Europe, Backbase
Not many of us get a real second chance in life. But UK prime minister Rishi Sunak is one. Having initially lost the game of high-stakes politics to self-described disruptor, Liz Truss, he is now the latest occupant of Number 10, and enjoying a bounce in the polls.
His elevation follows a short but extremely intense period of economic turmoil. So, it feels a little rich to suggest that banks could learn something from politics right now. But credit where it is due: Sunak has seized his chance to boost his profile, meet the demands of his stakeholders (MPs, in his case) and restate his claim to political dominance. There is a lesson for all of us here.
An education in disruption
To understand that lesson, we need to go back to a previous period of financial turmoil. Following the crisis of 2008, the precarious financial position caused innovation to stall at many traditional banks. Meanwhile technological developments enabled new players to enter the market.
As Andy Haldane, Chief Economist at the Bank of England put it a few years later: “Banking may be on the cusp of an industrial revolution. This is being propelled by technology on the supply side, and the financial crisis on the demand side.”
That reconfiguration saw significant cracks emerge in traditional institutions’ monopoly, as challenger banks, fintechs and even the big-tech companies themselves find ways to satisfy customers’ needs for basic banking services. Since then, these digital-first, customer-orientated challengers continue to lure business away from the high-street incumbents.
Traditional banks are now just but one player in a competitive payments market, in which Apple, Google, and Amazon are also major players alongside PayPal, Stripe, and Klarna, as well as various other P2P options.
And now they could be in danger of losing another core activity: lending. Banks need to stage a Sunak-style comeback to take on the disruptors.
Even in period of economic slow-down, the global lending market remains huge, with an estimated value of more than $7 trillion, and a compound annual growth rate of around 11 percent.
However, banks are playing a role that is not vastly different from the one they played in the 13th Century – that of centralised intermediary between those who have funds and those who want them, with a monopoly on information exchange.
But while banks still play a major role in this market, it’s no longer an exclusive one. Customers are beginning to grow increasingly weary of the lengthy, inefficient and often-delayed decision-making processes. Overwhelming paperwork, inconvenient branch visits, and too long to ‘yes’ (with resulting delays in fund disbursement) are creating a palpable sense of frustration among potential and actual clients who no longer have to deal with this kind of bureaucracy in other areas of their lives.
Small businesses in particular find it difficult to get the funds they need, when they need them – and are increasingly turning to neo-banks and digital-first challengers who are seeing and seizing the opportunity.
Banks no longer have the monopoly on information. Digital challengers have in fact built their businesses around data, analytics, and the deep business insights they provide. They use artificial intelligence to gain a 360-degree picture of their customers across credit cards, personal, auto and other loans. They can make the rapid decisions with a level of precision that minimises their own exposure to bad loans and subsequent write-offs.
Meanwhile, traditional banks are trying to compete while relying on legacy systems designed for an earlier era. They are designed to treat each product line and each channel as a distinct business entity. Inevitably, there is no consistency with regards to the customer journey, and no real ability to share and compare data about each customer touch point.
With no single view of their customers, sparse and insufficient data, and far too many manual approvals, 30 percent of their lending teams’ effort is consequently spent on non-core and automatable tasks. That has produced a 40 percent cost gap between traditional and digital lending.
Second chance to engage
For more than a decade, banks have been looking for a solution to the seemingly intractable problem presented by the presence of old-school, monolithic technology. But most solutions have never been really satisfactory – certainly not for the smaller banks who have built their business on being as close as possible to a loyal client base and now see it under threat.
The truly cost-effective, quick-to-market solution is not to rip out existing systems or to digitise existing processes. It is to build digital loan experiences by deploying an engagement banking platform that can architect banking entirely around the customer from pre-qualification to approval, offer, funding, and repayments.
It gives traditional, incumbent banks a way to build on their strengths – resilience, trust, longevity and financial stability – while giving them the agility to focus on customers and their very precise needs.
This kind of engagement banking, enabled by digital technology, gives smart, trusted financial institutions the opportunity to fight back against the digital disruptors. A second chance at securing the win. But those banks should be aware: a second chance is all they get. There will not be a third.