Intro: Infosys Finacle and Efma have jointly come out with a report based on the seventh annual study of innovation in retail banking. The key points in the study:
Banks perceive that the threat of industry disruption in retail banking is growing and 72% regard the threat as high or very high from at least one group of potential competitors (tech companies, start-ups, retailers, insurers and telcos), says a study jointly done by Infosys Finnacle and Efma.
The study, the seventh annual one on innovation in retail banking, focused on industry disruption and how banks can effectively work with start-ups to boost their innovation performance.
“The highest perceived threat is from tech companies like Google and Apple, seen as high or very high by 45% of banks. The next highest perceived threat is from start-ups, rated high or very high by 41% of banks. Much less of a concern is the threat from telcos, retailers and insurers,” says the study.
The study is based on interviews with senior executives at six financial services companies – Commerzbank, Sberbank, Barclays, Axis Bank, Number26 and Stratos.
TELCOS, RETAILERS
The banks also perceive threats, though less significant, from telcos and retailers, and even less of a concern is the threat from insurance companies. Telcos are important players in mobile money around the world and hence they will be competing with the banks in many markets, says the study:
One of the responses of banks to these threats is that the proportion of banks increasing their innovation investment over the previous year is 84% in 2015, the same as in 2014, but an increase from just 15% in 2009, according to the findings.
The study found that the most important of the new technologies that have emerged in recent years, which are starting to have a dramatic impact on the banking industry is mobility. It said: “59% of banks expect the impact to be high or very high, followed by advanced analytics/big data (57%), open APIs (53%) and the internet of things (47%). The most notable disruptive business model which has impacted banking is Peer-to-Peer (P2P), already affecting product areas like personal and small business lending, and money transfers. 40% of respondents in the survey believed that P2P will have a high or very high impact on the industry.”
START-UPS
Similarly, among the disruptive technologies the proportion of banks expecting start-ups to have a high or very high impact is 65% for mobility, 57% for open APIs and 48% for advanced analytics/big data. In the area of advanced analytics the proportion of banks expecting start-ups to have a high or very high impact is 58% for customer intelligence, 58% for social intelligence, and 56% for realtime analytics. In products and services, banks expect that start-ups will have the most impact on payments (where they could be competitors, partners or suppliers) and on digital marketing (where they are most likely to be suppliers). In payments the impact of start-ups is predicted to be highest in P2P payments.
According to the study, only around 40% of banks have a positive or very positive attitude to working with start-ups which highlights there are some reservations. However, 69% of banks believe that start-ups can have a high or very high impact on innovation by helping them to develop more innovative solutions, and 57% say that start-ups have a high or very high impact on their ability to get innovations to market faster.
The study concludes that since the global financial crisis which began in 2009, there has been a strong increase in the importance of innovation at banks around the world:
The proportion of banks with an innovation strategy (where we define an innovation strategy as having clear objectives, processes and measures of success for innovation) has increased from 37% in 2009 to 73% in 2015
INNOVATION INVESTMENT
The proportion of banks increasing their innovation investment over the previous year was 15% in 2009, but this has risen to 84% in 2015. It is clear that the big change occurred in the period 2009 to 2011 but since 2011 there has been a steady increase in this measure.
The study also found that only 45% of banks are aiming to be innovation leaders and 36% are aiming to be a fast follower. Being a fast follower is not necessarily a bad strategy as the first to market is not always the most successful in the long term and you can learn from the mistakes of others. When asked if they felt they were becoming more innovative, 68% of the banks said that they were. Only 9% said that they were becoming less innovative although this is an increase from last year.
In disruptive technologies, mobility, advanced analytics, open APIs, IOT are considered as the most disruptive, but they did not expect cryptocurrencies to be as disruptive as other technologies although there are many banks which believe that the underlying technology of bitcoin, which is the blockchain, could be very disruptive.
In addition to disruptive technologies there are disruptive business models to consider. The most notable of these business models in recent years which has impacted banking is Peer-to-Peer (P2P). Interestingly, only 40% of respondents to the survey believe that P2P will have a high or very high impact on the industry, with most expecting only a modest impact.
The study said the impact of start-ups is being felt across the whole range of traditional services provided by banks including for example current accounts, cards, payments, lending, savings and investments, and insurance. For example, the core business of most banks is providing a current account with associated payment services, and on the back of this cross-selling is used for a range of other products. It is more challenging for a start-up to target the core current account business of banks than other product areas, and hence the number of cases we see in this space is relatively small.
There are numerous ways in which banks can work with or partner with innovative start-ups (who may also be competitors), apart from through accelerators/incubators or through corporate venturing. The study pointed out to the tie-up between State Bank of India and Ezecash (India) to launch ‘Chota ATM’, which is an ATM device that can be bought by a local store and also a POS terminal for collecting electronic payments from a debit or credit card.
Axis Bank and its PingPay
Among the innovation case studies done, there is one on Axis Bank – about its PingPay.
In May 2015, Axis Bank launched ‘Ping Pay’, a unique multi-social payment solution to enable customers, especially the youth and smart phone users, to transfer money and mobile recharge, person-to-person, including to non-Axis Bank account holders, using social and messaging channels like WhatsApp, Facebook, Twitter, email and phone contact lists. The person-to-person fund transfers through PingPay happen via NPCI’s Immediate Payment Service (IMPS) and currently the transaction limit is at Rs50,000 per day (approximately US$750).
Ping Pay has been developed in association with Fastacash, a Singapore based startup. According to Sohini Rajota, head of the Electronic Banking Group at Axis, the bank is always on the lookout for new and innovative solutions to enhance customer experience, and working with start-ups like Fastacash can support this objective. Fastacash is a venture capital backed company, which has received around US$20m of funding since it was founded in 2012. The company provides a global platform, which allows users to transfer value (money, airtime, other tokens of value, etc.) along with digital content (photos, videos, audio, messages) through social networks and messaging platforms, enabling secure and cost-effective transactions domestically and internationally.
Sohini Rajota believes that merging the spirit of start-ups with the deep customer understanding that banks have is a winning combination for coming up with innovative solutions very quickly for the customer. Both parties have unique strengths and the key is to harness them together. Start-ups may have a product centric approach and what’s required is a holistic customer centric approach along with speed of delivery and best in class user experience.
The technologies, which are likely to be the most disruptive for banks are mobile-based technologies in Rajota’s opinion. In the upcoming decade, mobile internet technology will generate tremendous economic gains through its impact on productivity, delivery of services, and from the addition of new users to the online world. With the technology becoming increasingly affordable, a significant proportion of economic growth will be attributable to it. Hence it is imperative for banks to adopt these technologies to stay ahead of the curve and be more relevant to their customers. Start-ups will have a big impact on the mobile eco-system and especially apps as they help reach out to a large set of users with focus on e-commerce and payments.
