A Level Playing Field in Digital Banking?
Industry scenarios that could challenge the majors’ competitive position
By Matthew Rogozinski
The fintechs attacking Australia’s biggest banks head-on are going after essentially the same revenue pools, albeit in innovative, differentiated ways. However, they’re not well placed to make a dent in the majors’ armour, as we observed in The Pathway to Digital Through the Lens of Competitive Advantage.
So, does this mean the big banks’ competitive position is safe from digital disruption? We believe not. Consider, for example, the following industry scenarios:
My new bank: A second-tier bank looking to build on its deposit and customer data security forms an alliance with both a strong local consumer brand that enjoys consumer trust and has a large customer base, and a data analysis firm capable of generating customer and segment insight;
Banking app store: A global tech firm extends its platform or ecosystem to include digital financial services sourced from participating banks and a range of specialist fintechs, and introduces price transparency supported by its customer knowledge and insight; and
My needs met without a bank: A specialist fintech partners with other businesses with large, established user bases (e.g., in retail, real-estate advertising, travel, tourism or transport) to make financial services a seamless, almost invisible companion in meeting underlying user needs, with existing financial services products replaced by completely new value propositions.
These scenarios are non-exclusive and have some common aspects. First, they all exploit the current dip in the community trust in financial institutions, exacerbated by the Financial Services Royal Commission. Second, they leverage access to significant customer numbers to accelerate growth and reduce an important source of advantage for the majors—their very large customer bases. Third, they all make effective use of the open banking regime that becomes operational in mid 2019.
Any and all of the scenarios could present a challenge to the majors (see the figure below for our assessment of relative advantage against a range of important metrics). While the majors would still enjoy some advantage, the playing field would be more level than it is today.
How likely is it that these scenarios will play out in practice? The recent deal between the Clydesdale Bank and Virgin Money could serve as an example of the first scenario, given an open banking regime is already operational in the UK. We think scenario two is feasible, but global tech is more likely to maintain a focus on core business, with financial services limited to a supportive role in the near to medium term. In addition, local financial services regulations limit scale benefits and with that the attractiveness of financial services to global tech. Lastly, we think the third scenario could be attractive to many players but the impact on the majors would not be material for a long time, given the complexity of the task.
Ultimately, the ability of new types of banking players to drive differentiation and prevent the commoditisation of banking services will depend on their ability to access relevant, robust customer data, derive useful insight and deliver compelling customer propositions. Good data and analysis will be vital but so will the ability to convert insight into new products, services and customisation. And a lot will depend on customers’ willingness to make relevant data available to third parties under the open banking regime.
What are the implications for the majors? While remaining vertically integrated and distributing mostly proprietary products, we believe they’ll need to invest in rebuilding customer trust; developing advanced data capability; speeding up time-to-market for innovation (including through partnerships with selected fintechs); and driving productivity while maintaining margins through end-to-end process automation.
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It’s no secret that the major banks aren’t the only incumbent businesses facing digital disruption and the possible erosion of well-established advantage. If you would like to discuss potential scenarios in your sector, please contact Inhance Partners.