In the battle to offer innovative products to retail banking customers, German banks should raise the white flag and offer to surrender. After all, they have already lost that fight.
Market giants such as Google, Apple, Facebook and Amazon, as well as numerous new fintech companies, have launched game-changing, billion-dollar finance apps and payments businesses, while the retail banks have come late to the fight. While German banks are now taking their digital competition seriously, and are yet to concede defeat, in truth they have offered too little to date.
The innovation challenge
The good news is that German banks do still have scope to successfully shape their future. They just have to take advantage of the opportunities before them—something that they are not yet doing.
They first need to admit that they are failing to innovate either quickly or successfully; and secondly recognise there are other areas where they can not only fight, but also win. Before we assess those, however, it is important to consider the current status quo in the German retail banking space.
Traditional retail banks currently invest a great deal of money, time, and energy into maintaining their businesses; at the same time, their operating budgets are being squeezed. An estimated 80 percent of their investment budgets are spent on ‘run the bank’ activities, such as IT system maintenance and complying with new regulations.
However, their new competitors – unencumbered by legacy systems and process - are pouring billions into just research and development. As a result, while Google and Apple are well positioned to dominate the mobile payment market, the online payment service developed by a coalition of several German banks has already failed.
Traditional retail banks also have trouble securing and holding on to top talent. Young, creative thinkers are no longer as attracted to careers in financial services as they were in the past. An industry that triggered a global economic collapse and continues to veer from one legal or regulatory breach to the next is unattractive for technologically brilliant, idealistic Millennials.
At the same time, as customers Generations Y and Z are not impressed by their parents’ banks' old-fashioned propositions. You don't have to be a digital native to understand that a 25-year-old might not find it exciting to be informed of their investment options via advertising banners at an ATM. No wonder, then, that younger customers are choosing to open accounts at digital-only banks, which offer a user experience that is at once faster, simpler, more fluid and more personalized.
The news is not all bad for retail banks, however. While they are not yet tapping into it effectively, they are nonetheless sitting on a gold mine of data. They know you more intimately than your closest friends and family. An account holder may travel to Mallorca every year in May, move house, or buy groceries at the same supermarket three times each week. Banks have oversight of all of this information, and more – and therein lies their biggest untapped opportunity.
Data has become the most important currency in the war for domestic and international dominance. For banks, data is nothing less than the tool of the future – yet currently the retail banks are not tapping the vast reservoirs of data that they hold. If they are to take full advantage of the myriad opportunities data offers, banks must completely redesign their offerings.
What might this look like? Retail banks should refocus their efforts and resources on investing in forward-looking, data-driven models. They should evolve into digital marketplaces, where they make their know-how and the customer data they hold available to more nimble, innovative providers. Those customers would then get to choose between a range of smart products that match their lifestyle. Thanks to the PSD2 payment services directive, cooperation with third-party providers would be easy - for the first time, PSD2 allows banks to share their customer data with potential partners, opening doors that were previously locked.
German bank customers are still generally sceptical about the way that their data is handled and managed, so it is now up to banks to convince them that privacy and contemporary banking are indeed compatible. If banks manage to evolve into modern ‘data banks’, everyone will benefit. For example, a customer who recently bought a home is likely to be interested in products that protect their property. This new approach would allow far greater personalization around the products that banks and their partners offer to their customers.
All to play for
Now is the time for banks to transform their thinking, to begin to think of their competitors as new potential partners. The fact that powerful new players are threatening to disrupt the payments market does not mean that traditional banks are out of the picture. Quite the opposite. Rather, traditional financial institutions will act as the backbone of the financial sector and fulfil a role that none of the digital competitors will ever want to take on. Customers generally trust traditional banks to protect their data, which is a good start. Customers also expect innovation and adaptability from their banks, so it is important that banks leverage this trust and focus their energies where they are most needed.
To discover how we can help you navigate an ever-changing financial landscape, contact Bodo Schaefer.