Incumbent banks have just a short window of opportunity to fight back against fintech challengers, says Nikolai Hack, head of strategy at Nucoro, before they find themselves in real trouble.
“People still trust them more with their money but banks need to make the most of that advantage now. In 10 years the situation could look very different,” says Hack. “I would love to know how many 18 and 19-year-olds big mainstream banks are onboarding right now.”
You need a highly automated technical structure in place, otherwise you always run the risk that a tech-based competitor could undercut you.
Some erosion is already happening — conventional banks now only account for 72% of the total market value of the global banking and payments industry, down from 96% a decade ago, according to calculations by The Economist.
But banks have an opportunity to fight back by offering their customers new services. “Fintechs are showing people that there are different ways of doing things with savings, investment and trading and people like them,” says Hack.
One of the easiest moves would be offering existing customers more investment and savings products, according to Nucoro’s recent Future of Money Management report. Only 18% of retail banking customers are actively investing anywhere. But some 78% of retail customers would be interested in receiving investment advice from their bank.
This is low-hanging fruit. But, says Hack, to compete with fintech challengers banks will need to position these products differently. They need to take lessons from car dealerships, online supermarkets and psychologists.
This is why:
1. Car dealerships
“If you go to a big bank’s web page and search for savings products you will see a list of junior ISAs, investment ISAs and 15 other acronyms. These are built by people in finance who find financial instruments interesting but who are not in touch with what normal people want,” says Hack.
It is like going into a car dealership and seeing only engines and exhaust pipes on display. Car dealerships don’t do that — the car salesman asks you about what you need the car for — commuting, taking the children to school, family holidays — and recommends a car based on your needs and desires.
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“We don’t sell financial products that way. Banks need to think client-first — people don’t want banking products, they want houses and holidays,” Hack adds.
It shouldn’t be left up to the customer to figure out the best way to reach these financial goals — whether it is a savings account or investments. It should be the banks figuring this out and funnelling people into the right product.
“People are not wired to think about long-term financial planning,” says Hack. “We are far more motivated by short term rewards. You need to trick yourself into doing things that are not as exciting but good in the long term — we know this from behavioural psychology.”
Internet companies — with their clickbait and quick dopamine hits — have long understood this. If there is one thing this sector has mastered it is catching and holding people’s attention.
Fintech companies come from this same tradition. Big banks, on the other hand, sometimes lack even the vocabulary to talk about UX design. Banks could do a lot more to design better engagement levers.
They could, for example, be visual.
“One of the simplest ideas we saw in a prototype was attaching a picture of their dream destination to the goal on the account of someone saving for a holiday. As the holiday savings pot grows the picture becomes clearer. It shows the progress towards the goal. This taps into the reward mechanism in our brains,” explains Hack.
3. Online supermarkets
The only way for banks to offer customers new services efficiently is with a good technical underpinning.
People still trust them more with their money but banks need to make the most of that advantage now.
“You can launch new offers based on humans and more branches but it is hard to scale these to 10m+ customers,” says Hack. “You need a highly automated technical structure in place, otherwise you always run the risk that a tech-based competitor could undercut you because they have lower operating costs.”
It is a little like online supermarkets. Up to a certain point you can offer home deliveries simply by getting staff to pick and pack the groceries from the store shelves. But to get real economies of scale you need to move to automated warehouses like Ocado.
Every company is now a technology company. Someone will always be looking to apply tech to automate your business — if you are not keeping up, you will lose out.