Digital disruption in banking is coming

In July of this year, the Chinese ecommerce company Alibaba announced that its one year old mutual fund Yu’e Bao had over 100 million investors and held RMB 574 billion (US$92 billion) in assets. On that basis, Yu’e Bao is the fourth largest money-market fund in the world. This is only the beginning of what will likely be a continued challenge to the financial services and banking industry from the technology sector.

A small selection of other examples:

• US mobile phone giants AT&T, Verizon and T-Mobile partnered to launch a mobile wallet called ISIS
• Twitter founder Jack Dorsey is reinventing payments with the startup Square
• Vodafone launched M-Pesa as a microfinance service
• PayPal, with over 148 million members in 143 countries, has been clawing its way into the finance and payment sector with great success since its launch in 1998, and, perhaps most famously,
• Bitcoin provides a platform for people to conduct financial transactions and bypass the banking system completely.

With e-wallet and mobile transaction values forecast to grow to US$1.75 trillion by 2017, the prize for these companies is clear. And the banking industry’s historically slow pace of change—and its negative reputation with consumers—makes the prize particularly appealing to technology companies and to startups more adept at innovation and transformation.

In fact, these companies have started a new trend in business transformation and disruption. Where new market entrants in any industry would traditionally break in through either superior products or more competitive costs, today’s disruptive startups are breaking into industries by re-imagining and re-inventing the industry as a whole.

Through their re-imagination of leisure travel and vacation rentals, Airbnb has grown to a market valuation of $10 billion in just six years, which makes it more valuable than Hyatt Hotels. The five-year-old mobile app company Uber, which recently launched in Hong Kong, Singapore and other cities around Asia, has disrupted the taxi and transportation industry to achieve valuations of over $18 billion.

Banks have long thought that steep barriers to entry into the banking industry would protect them from the same fate suffered by the music and print media industries at the hands of digital challengers. But when long-term infrastructure businesses such as hotels and transportation can be disrupted by a shift in perspective and an app that enables behavior change, it is clear that no industry is safe from digital disruption. In fact, according to the Millenial Disruption Index, the banking industry has the highest likelihood of disruption, with 33 per cent of millenials believing they won’t need a bank at all in five years and 73 per cent saying they would be more excited about financial service offerings from Google, Amazon, Apple or other technology innovators than from their current bank.

I say all this, but banks are by no means doomed. The banking industry has continued to grow organically in its own right. But that growth is slow, and remains focused on improving margins or other old-world methods of business optimization.

The challenge to transform themselves is on. To meet that challenge, the banking industry must adopt a new customer-centric approach, where the focus is on creating relevant and meaningful experiences that drive brand preference by making tasks simpler and delivering perceived consumer benefit with every engagement—not just driving product sales and increasing margin.

And there are already examples from today’s financial service industry which prove that when this is done successfully, benefits follow.

For example, recognising that only 16 per cent of British consumers trusted banks, but 46 per cent said they would bank with Apple, Barclays launched the mobile payment app Pingit as a free-to-use money transfer app in February 2012. By making the app available and free for even non-Barclays customers to use, this viral proposition is now delivering more new customers than its other digital channels.

American Express has also been busy using digital to reposition itself as a friend to both consumers and merchants. Through its SYNC proposition, AMEX uses customer data to target customers with truly relevant offers while simultaneously promoting local vendors who offer that product or service. The service uses data from social-media channels to drive relevance while simultaneously removing the need for coupons and vouchers by simply applying any discounts or rebates in the back-end. These innovative efforts on their part have helped AMEX become the most-liked financial-services brand in social media.

As a final example, Bank of America is using its diversity of product to help consumers effortlessly reach their financial savings goals. the banks' 'Keep the change' program automatically transfers small amounts of change from a current account to a savings account each time a consumer buys anything with their debit card. So if a consumer buys something for $12.17, 83 cents is automatically transferred to their savings account, which while it sounds small, quickly adds up.

The above are a few examples of how some banks are starting to change their approach to innovation. But to succeed in the new digital landscape, change and innovation must become part of culture instead of only being part of a project. Transformative thinking is what is required to keep banks ahead of the coming generation of financial innovators and help them survive in the era of digital disruption.

Justin Peyton is chief strategy officer Asia-Pacific at DigitasLBi