Owning the banking customer relationship: an obstacle race

One of my key observations from participating in FinTech panels and roundtables, the most recent one being on AI and machine learning run by the FCA, is that both new entrants (broadly referred to as challengers) and incumbents have realised that consumers’ relationships with retail financial services is in the early stages of the data and technology revolution. The race is now on to own the relationship with the end consumer, but it is not without obstacles. Both start-ups and incumbents want to create a platform through which consumers will interact with financial services, and both face challenges (some common, some unique) in getting there.

In this blog we’re going to explore the race, the obstacles, the prize and the unknown competitors.

The runners
So far, we have seen two serious runners in the race to own the customer – the incumbent banks and the challengers. We’ll focus on the consumer facing technology giants later.

The runners’ strengths
Both incumbents and challengers bring important strengths to this race.

Incumbents have spent decades building trust with customers. They are heavily regulated, which provides assurance to both the market and customers. Despite many reputational hits along the way, customers still appear to be loyal to them for major financial transactions. However, their killer advantage in the race is their access to large swathes of historical customer transaction data, unavailable to challengers.

Challengers, on the other hand, have the perfect culture for innovation. Despite their relatively small size, their systems and data are set up to innovate and technologists play a key role in delivering the business model. This gives them speed and agility to respond quickly to consumer and market trends. They also have a relatively lower cost base, as they aren’t burdened by legacy system maintenance costs and large risk and compliance teams.

When new technology is developed, or new regulation is announced, challengers can be quick and nimble in their response. Challengers might also find it easier to recruit tech talent, through the award of equity or equity options, but also through a relatively informal business culture that appeals to the tech community.

The obstacles
For incumbents, the obstacles are often internal. Their competitive drag comes from legacy systems, cultural inertia and the real and perceived barrier of regulatory compliance with respect to innovation.

Incumbents’ own technology will need upgrading, and that is a significant task fraught with risk of damaging the customer relationships they’re ultimately competing for. In order for incumbents to take advantage of their data, it needs to be of a good enough quality to draw meaningful insights. They then need to follow through with tailored customer solutions before market and customer preferences evolve.

Incumbents are also trying hard to shift their existing culture and operating model to help foster innovation. The role of compliance in decision making in most incumbent banks has grown over recent years, and their natural caution, rightly developed over many years of bearing regulatory penalties, can slow innovation. Equally, the governance and product development lifecycle and operating model are designed to support longer product development lead times and are not designed for frequent and fast or “agile” technological change.

For challengers, the obstacles are usually external.

Without customers and their data, there is no opportunity to offer a tailored, personalised experience. Building a customer base in financial services is hard and takes investment. Customer acquisition costs are significant.

Internal challenges such as culture, where the technologists resist compliance, or fail to understand the importance of documentation, governance and controls that come with being regulated, can also create conflict.

Despite the different obstacles incumbents and challengers face, there are also some common problems.

While at one level the CEO and Chair are ultimately responsible in any regulated firm, there is very little clarity on how practically accountability will be delivered in a highly connected ecosystem that would support AI-driven financial products and services. For example, it is unclear how a provider of an AI-driven service might be held accountable for the accuracy and security of data accessed through a third party. There are also no well-established industry standards on AI testing, controls and governance.

Secondly, the huge changes in data privacy and protection regulation in GDPR can seem at odds with regulations prescribing better data portability and access through PSD2.

Thirdly, no ethical standards around the commercial applications of AI are currently in place.

Clearing the path
The UK Government has made clear its ambition for the country to be a global leader in FinTech. That means regulators have the tricky task of trying to help incumbents and challengers to clear this obstacle race as fast as possible, without favouring one over the other.

The common obstacles are a clear place to focus.

Regulators – steered by Government – have the task of providing clarity over the regulatory future for financial services, with a specific focus on AI in financial services.

Setting out prescriptive regulation may not necessarily be the answer. One option may be to mandate industry to set out standards or best practices in specific areas such as AI testing, governance and controls.

Incumbents and challengers can innovate faster if they’re given a strong sense of how the new world will be regulated. What will data privacy and protection requirements look like in a world where data is ported from customer accounts to third parties or where multiple parties collaborate to create and deliver products? Who will be responsible if something goes wrong? And what will the spirit of AI regulation be geared towards?

But of course, it is not all down to the regulator. Industry can proactively play a role in designing and signing up to an ethical framework or specific standards.

The prize
The coveted prize in this race is owning the customer relationship. And this relationship may be facilitated through a smart solution that will gather and interpret customers’ financial data, show current financial status, list historical transactions, and be the hub from which the end consumer uses other financial products and services. But, as outlined in our Open Banking report, this smart solution need not be run by a bank. The company behind the smart solution won’t even need to offer any financial products.

There is clear value in being the company providing the smart solution, especially if you start building an aggregated view of a customer’s financial profile and preferences. If you become the distributer of financial products and services, you can generate revenue by driving increasing footprint. Some believe that this “platform model” – where a firm aggregates data and offers multiple products and services – is the future of banking. Some incumbents and challengers are already exploring this model.

The unknown competitor
And of course, there is an important unknown in all of this. The competitor field does not solely consist of incumbent banks and challengers.

Consumer-facing tech giants are something of an unknown quantity in the financial services space – both in terms of their real financial services ambitions but also their ability to “mine” customer data, especially in the post GDPR world. However, their presence in the race is daunting, as they can exceed both the scale of an incumbent and the agility of a start-up to respond to customer needs quickly.

Whilst their moves into financial services have so far been limited, a clearer regulatory landscape might encourage them to enter the race, or stay away! They are also not immune to the challenge of customer trust in a financial services context but have a head start in terms of owning established customer retail relationships.

For now, financial services incumbents and challengers have plenty to deal with in overcoming both their distinct and their shared obstacles. But all the while, they will be conscious of the tech giants that may come from behind and overtake them just before the finishing line.

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