Fending Off Tech Giants Through Digital Transformation

Tech titans like Google, Amazon, Facebook and Apple are setting their sights on the financial services sector, blurring the lines between industries and rolling out financial services that offer consumers increasingly competitive banking experiences. These tech companies are becoming a disruptive force in the banking industry as they grab market share in payments, consumer loans and even small business loans.

Tech companies challenging industry status quo

Banks are starting to feel the impact of tech companies challenging the status quo in financial services as these more agile companies rapidly innovate to meet the needs of a more digital customer base. Consumers are responding by migrating to companies that offer more personalized digital financial services experiences. An example of how this trend is playing out in the marketplace is evidenced by Quicken Loans recently surpassing Wells Fargo to become the nation’s largest mortgage provider. This trend is further highlighted in a recent report by Accenture that found 78 percent of respondents would bank with a tech firm like Amazon or Google and concluded that “banks unwilling or unable to adopt digitally-based services may lose customers to non-bank competitors.”

The competitive threat posed by tech companies actively encroaching in the financial services sector presents a challenge for banks to defend their market share by transforming their digital capabilities to deliver superior digital services that meet evolving customer needs. Banks are recognizing the critical need for digitization as evidenced by the recent $66 billion merger deal between BB&T and SunTrust which was architected in part so these banks could remain competitive in today's digital landscape.

Open Banking initiatives accelerate digital transformation

Open Banking initiatives present an opportunity for banks to accelerate their digital transformation to retain and attract customers and grow wallet share. These initiatives provide a framework, regulatory or informal, that can help banks in their digital transformation journeys, driving product innovation, either directly or through partnerships to fill the gaps in their financial offerings.

Open Banking will allow banks to offer advanced features to meet consumers’ ever-evolving needs. Through pricing and bundling features, banks can utilize data to differentiate themselves. Specifically, banks can go further by offering non-financial products. Rather than simply offering an auto loan, banks can offer the entire value chain to help customers buy a car. Connecting customers’ financial data with the offerings of a dealership will allow banks to form partnerships that drive purchases outside of their typical scope.

Leveraging partnerships can also help commercial banks become more innovative and agile, digitizing their processing, systems and customer experiences to open up new channels designed to meet the demands of their customers and create new revenue streams. Under Open Banking, this collaboration with fintech partners and other third-party providers (TPPs) is fueling technology innovation to help traditional banks excel in today’s digitally-oriented world. An example of this is the partnership between UK-based Starling Bank and BBVA via its US operations, to offer Banking-as-a-Service (BaaS) platforms, using APIs, to let other firms develop and offer financial products and services to their customers.

New banking models increase growth and customer satisfaction

According to Boston Consulting Group all financial institutions “must consider how they can reshape their distribution models, improve their value propositions and develop end-to-end consumer-centric journeys to increase growth and customer satisfaction.” As banks jump into the digital revolution to hold onto market share and grab a stake in the digital economy, the industry will reinvent itself and see the creation of new digital banking models including:

• Bank-centric API-driven Open Banking in which banks meet the minimum requirements prescribed by Open Banking to develop their digital propositions, but effectively remain very traditional in their outlook, leaving opportunities to TPPs and other players.
• Bank as a Financial Services Marketplace where banks seek to take greater ownership of the digital ecosystem by operating Bank-as-a-Service (BaaS) platforms, opening more of their APIs to selected TPPs, to develop additional products and services specifically for their customers.
• Bank as a Digital Holistic Services Marketplace which sees truly progressive banks extending the Financial Services Marketplace to invite suppliers of non-financial products and services to join their digital ecosystem to provide a one-touch option for customers banking and other needs.

All three of these models can improve customer experience, driving the creation of more customer oriented, hyper-personalized services. The evolution of these models will see the transformation of the financial services marketplace by digital-leading banks servicing customers better through options like direct and third-party financial products and services augmented by non-financial services.

Digital transformation delivers connected customer experiences

A paradigm-shift in the financial services sector is occurring as banks begin implementing strategies to become more competitive and customer-centric. Financial institutions are making digitization a priority, transforming their digital ecosystems by developing and selecting the right technological building blocks as part of their digital architecture and adapting business models to achieve maximum efficiency and to deliver connected customer experiences. Open Banking is accelerating this paradigm shift, making banking truly digital by establishing an interconnectedness that is currently the hallmark of the ecommerce industry.

The rise of the tech giants will continue to impact the financial services industry as these companies leverage their large customer bases, analytics capabilities, and revenue models to gain a foothold in payments, consumer lending, insurance, and wealth management. Now, more than ever, it is critical for financial institutions keep pace with tech firms by focusing on digital capabilities that can serve the needs of an increasingly digital customer base. The encroachment of tech giants into the financial services industry is not going away any time soon and financial institutions that prioritize digital transformation and innovation to deliver customer-centric services will not only thrive in this market environment, but will increase customer loyalty, attract new business and generate operational savings.

Al Karim Somji, is Founder and CEO of Zafin. In addition to his role as CEO, he is the chief visionary at Zafin, successfully leading a team focused on delivering innovations and sustainable revenue growth in banking.