Raising the Bar

by Amber Seitz
Wisconsin Bankers
December 21, 2017

We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.
— Bill Gates

“Disruption” is one of the biggest buzzwords in banking today. Many within the industry associate it with various technological developments and the fintech companies selling them. True disruption, however, goes much deeper. Even more importantly: traditional banks are not doomed to watch helplessly as the industry they know disappears. In fact, by focusing on their customers’ wants and needs—something Wisconsin’s banks have always excelled at—community banks can continue to thrive in a disruptive world.
 

Defining “Disruption”

According to JP Nicols, managing director of FinTech Forge, disruption in banking occurs on three layers. The first is the experiential layer, which includes everything that directly impacts consumers, such as mobile banking and P2P payments. Second is the tactical layer, which is the digital connective tissue between customer experience and the bank’s core operations. Disruption in this layer includes technologies like open API and process reengineering. Finally, the strategic layer of disruption is home to developments such as artificial intelligence and blockchain. “Most of the disruption we have experienced so far has been in the experience layer,” Nicols said, but noted that the other layers will have more impact in the future.

Despite its pervasiveness, disruption can be difficult to define. “It doesn’t mean something new is launched and all the current players disappear,” Nicols explained. “In this day and age, no industry is invulnerable to disruption,” he continued. “Our customers’ expectations are being reshaped by technology.” Ultimately, disruption can be defined as change driven by customer expectations.
 

Setting New Standards

Perhaps the biggest challenge disruption presents to the banking industry is that banks are no longer only competing against other financial institutions. Instead, non-bank retailers and fintech companies are transforming their customers’ expectations, particularly in mobile banking. “The digital products are the most discussed disruptors in the banking industry,” said Kyle Manny, CPA, CGMA, senior manager, financial services at Plante Moran. “Consumers are demanding well-developed mobile banking applications as a qualification for who they’re going to bank with.” Fintech companies have been quick to develop mobile applications to meet that demand, but while they are attractive to consumers, haven’t been able to achieve scale on their own in many cases. “Fintech companies are reimagining how banking should work in a mobile world,” said David DeFazio, partner at StrategyCorps. “When you pull back the curtain, among the most successful are the ones who have partnered with banks.” DeFazio will demonstrate some of that during his presentation at the upcoming WBA Bank Executives Conference.

Even more disruptive than the fintech companies that tend to attract the most attention from the industry, giant non-bank retailers are the true impetus behind rising standards for digital services. “Where we haven’t paid enough attention is to well-funded players from other industries, such as Amazon, Walmart, and Facebook,” said Nicols. “Financial services used to exist in a unique middle zone where all competitors looked the same, and we only competed with one another. Every single line on the balance sheet now has one or more non-bank competitors.” Again, this is particularly noticeable within consumers’ expectations for the mobile experience. “Companies like Facebook, Apple, Amazon, and Starbucks are changing the way that customers expect things to work in the mobile world,” DeFazio explained. “Looking outside of our industry to see how these non-bank retailers are setting new standards for mobile payments is very important.”

Disintermediation—another buzzword—is the ultimate side-effect of this non-bank disruption. “Banks have been a trusted third party in the middle of a value network for a long time, and if we don’t need that third party anymore, for example because Amazon now offers its own financing, that’s true disintermediation,” Nicols explained. In the days before mobile wallets, PayPal, Venmo, and other digital payments disruptors, banks could count on the fact that with every purchase, their customers would reach into their wallets and pull out a debit or credit card (or checkbook) with the bank’s name and logo on it. “We were always there,” said DeFazio. “Today, that is disappearing. Sometimes consumers even forget which credit cards are attached to their mobile wallets. These companies that are outside of banking are stealing the experience from banks.”

In today’s highly digital, interconnected world, consumers also cause disruption directly. “Customers these days are far more researched than they’ve ever been before,” Manny explained. “Even within small communities, they’re walking into a business having already done research. Many have made their purchase decision before they walk in.” That includes for financial products and services, such as mortgage loans, which reduces the banking industry’s monopoly on customer relationships. For example, rather than automatically going with the bank and product recommended by their realtor, a potential customer may shop around and get a lower rate with Rocket Mortgage from QuickenLoans.

Finally, today’s regulatory environment is also capable of disrupting bank operations. “People don’t think of the regulatory environment as being a disruptor,” said Manny, explaining that some banks have chosen to exit small lines of business because of the perception of the regulatory compliance risks they present. “People who specialize in compliance and consumer protection are very difficult to attract or retain,” he said. “Companies may need to invest significant resources in employees or consultants to ensure they remain compliant, and it might not be cost-beneficial to do it.”

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