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The next frontier in banking innovation

(Image credit: Image source: Shutterstock/MaximP)

Traditional banking is experiencing disruption on an unprecedented level. Developments in technology and data regulations, including 5G, cloud, data analytics, Open Banking, PSD2 and GDPR, are creating fresh opportunities and challenges for banks. And now that artificial intelligence (AI), blockchain and the Internet of Things (IoT) are entering into development and operations environments, it is clear that banks’ responses to these advancements will require not just agility in development, but also in culture. A recent survey (opens in new tab) by Gartner Group for example found that 76 per cent of the decision-makers at most large banks do not believe digital requires any change to their business model.

To remain relevant, banks need to go beyond compliance with legislation and a copy-cat offering, to a new frontier where they are considering new business models (opens in new tab), innovating new revenue streams and working with new partners to offer a personalised customer experience. A mindset of test, deploy and learn-fast is required but it does not sit comfortably with banks’ conservative heritage. A recent Accenture analysis (opens in new tab) of big banks’ annual reports found that 94 per cent of their leadership have never had any professional experience of any role in their career that relates to technology. This, coupled with the ever-present threat of cyber-attack and the regulatory restrictions which are a pre-requisite for market participation, means banks lack the agility to capitalise on opportunities that technological developments can bring.

In the report: Interconnection and data at the edge: the next frontier of competitive advantage in financial services (opens in new tab), Equinix and Finextra researched what competition financial services professionals expect to be a threat to their business in the next five years. The report comprised of an online survey of over 100 financial services professionals and a series of one-to-one interviews with senior bankers. Through identifying the upcoming threats to traditional banking models, the whitepaper offers banks guidance on how best to deploy the technological infrastructure needed to both meet these threats and capitalise on upcoming fintech opportunities.

What are the threats?

For most (34 per cent) of the financial services professionals in the report, challenger banks and new entrants to the market such as Atom, Starling and Monzo rank as the highest threat. These new entrants to the financial services market are dedicated to delivering an optimal digital experience through their online or mobile channels. By focusing on customer services - which they believe to be a key weakness in the propositions of traditional banks – they seek to grow market share by passing on their lower costs to customers and deploying technology to enable a digital banking service that is truly personal to each customer.

These challenger banks operate with newer and lighter technology platforms, unencumbered by legacy siloed systems, and this threat will require traditional banks to examine all aspects of their cost bases to see where efficiency savings can be made. Even if the larger banks decide to eradicate the competitive threat posed by the challengers by simply acquiring them – a likely development – the traditional banks will still be faced with IT issues. In order to gain the full benefits from their acquisitions, the new, agile systems of the challengers will need to be integrated with existing systems of the traditional banks. Further, the management focus of traditional banks must shift from one of risk management and lending, to one of business success in a digital economy.

Ranking at second and third on the list of competitive threats to banks is both regulatory competition and new technology-driven forms of competition, scoring 18 per cent. These two can perhaps be seen as cause and effect, with regulatory changes such as PSD2 and Open Banking aimed at increasing competition in retail banking, and causing increased deployment of new digitally-based institutions, propositions and products.

The next competitive threat identified by 10 per cent of senior bankers, is the entrance to the financial services market of Google, Apple, Facebook, Amazon (GAFA). There are various reasons why GAFA can be expected to enter the banking market either directly or through a partnership, the primary reason being that banking services provide an opportunity for them to monetise their huge customer bases and in doing so cannibalise banks’ business.

Younger customers have faith in these titan technology brands, more-so than they do traditional banks, so enticing existing customers to financial service offerings should not be a hard sell. And GAFA platforms are well suited to real-time delivery, rich content, and processing big data, which are all critical elements demanded in the new world of banking. The highly disruptive influence of new digitally based entrants on traditional markets was illustrated by the effect of Uber on taxi services. Traditional banking models have reason to be nervous.

Rising to the challenge

If traditional banks are to meet the challenges posed by competition, they must adopt new strategies that enable the fast development and delivery of innovative customer-centred offerings that meet rising consumer expectations and contest the offerings of newer entries in the market. Serving the customer in the fast-changing world is tricky and there is not much room for error. So, banking services now need to be flawless, secure and available everywhere. Competitive edge comes from anticipating and solving for the basic requirements of convenience and customer service.

To do this, these services need to be functioning and processing data closer to the consumer than to the core banking infrastructure. The adoption of a strategic approach to interconnection is critical to allowing banks to succeed in this rapidly changing competitive and regulatory environment. Connecting directly to the entire retail banking supply chain on the same interconnection platform at the edge of the network, where the data is as close as possible to the users, securely and at lower operating cost, is a large step towards the new frontier of competitive advantage in financial services.

By utilising an IT infrastructure which is inherently agile, secure and interconnected, banks can put themselves back into the hands of customers; when they want it, where they want it and through whichever device and application they choose to consume the bank’s services. Interconnection and computing at the edge will help banks successfully navigate digital transformation and secure competitive advantage; whatever the future landscape looks like.

Russell Poole, Managing Director UK, Equinix (opens in new tab)
Image source: Shutterstock/MaximP

Russell Poole joined Equinix as Managing Director for the UK in April 2000, bringing with him nine years of experience in the UK telecommunications and Internet industries.