The Real Threats to Banking From Outside the Banking Arena: PayPal, Oyster Cards and iTunes.

By Global and Banking Finance Review
September 9, 2014

Vishal Amin and Emma Allen, lead inventors at strategic innovation consultancy ? What If! explore how banks are no longer in competition with each other, but with all companies with which people entrust their money.

Financial Services is no longer a safe haven for inertia, and change is knocking on the door. Banking consumers used to be broadly static. The old challenge for marketeers was how to disturb the inertia. But, coming out of recession, something has changed. Category by category, we see that consumers are getting used to exploding their own habits and driving the change.

The internet is buzzing with articles highlighting that retail banking’s recovery from the economic downturn has been hindered by non-banking players entering their market. A whole host of start-ups, together with the Silicon Valley behemoths, are using technological advancements to introduce consumers to alternative, consumer-driven solutions to the typical current/savings account model, changing the way people save, share and spend their money.

In fact, in many cases, consumers are not even aware that they are shifting their mindsets and developing new behaviors. Take the gift card market as a prime example: it currently accounts for £5 billion a year in sales in the UK and is growing at 10 per cent a year, yet many consumers do not even acknowledge this product as competition to their high street bank account. These new technologies and behaviors will, over time, circumvent three basic banking functions; payment, storing money and transferring funds between consumers.

The bigger threat looms from players that are also competing for deposits. The risk is heightened by the fact some of the players have every day, meaningful relationships with consumers. Take Transport for London’s Oyster Card – reports recently surfaced outlining how £100 million was stored on ‘dormant’ Oyster cards, indicating that consumers are adapting new behaviors that could directly impact deposits.

Even retailers like Starbucks, who now process one third of their sales in the US through their own loyalty card platform, are thinking differently about their payment strategy, bringing to the forefront the reality that banks maybe losing the payment battle. Payments typically account for a quarter of a bank’s revenue, but the market is becoming increasingly competitive with $1.2 billion invested through the venture capital community in 2013 alone. iTunes, which has its own payment platform, recently reported estimated revenue of $16billion, with growth expected at 20 per cent year-on-year, and that is not even taken into consideration the potential impact of the new Passbook features which further revolutionize payments.

Even the more financially-focused players who were once considered niche are becoming bigger than most banks: PayPal now has over 150 million ‘accounts’, and growth was reported to be 20 per cent in Q2 this year. Take the behaviors of the next wave of SMEs, emerging from the 70 per cent of millennials who have a side ‘gig’ to earn some pocket money. The majority are leveraging online payment solutions like PayPal, instead of opening traditional business banking accounts, which seem more flexible and suited to their needs.

More far out, future challenges may well come from consumers themselves who increasingly rely on the ‘Bank of Mum and Dad’. Young consumers are more often turning to their families to provide loans to cover day-to-day spending, educational costs, even deposits for new homes. In turn, parents are having to review their financial situations with a huge market growing in ‘equity release’. This issue is further heightened by an increasingly common financial need to support elderly parents through care as our population ages these are all areas where banks were traditionally the first port of call… New businesses that support this behavior are likely to come out on top, especially given that the most recent innovation in mortgages, the offset mortgage, was introduced decades ago.

These risks have been recognised by leaders across the industry with three quarters (77 per cent according to ?What If!’s recent report, Eyes Wide Shut: Leading for innovation in post-recession Britain) of them admitting their business model rests too heavily on fading revenue streams and half (47 per cent) believing they need to fundamentally rethink their business model. However, only 17 per cent rank innovation as their top business priority. The lack of focus on innovation as the solution raises concerns, especially given that the majority of new entrants to the market are approaching the target in a radically different way: using fresh thinking and not being held back by legacy infrastructure, regulatory mindsets and crippling overheads.

Many senior leaders believe regulation will slow disruption in this market and as a result believe time is on their side, but players like Atom and Osper have different ideas. They are targeting consumers with a new tailored vision which they have paired with a supporting portfolio of digital banking services. P2P lending, which was also seen as a niche player, has continued to grow and now has been seen as a vehicle to support investment in small businesses from the UK government with Funding Circle recently receiving another £40 million. These new innovative businesses are not letting regulation limit them and rightfully so. We seem to be entering a new world where regulation will evolve and shift to fit a new consumer need and environment: the impact of taxi disrupter Uber is testament to that.

Banks have responded by developing consumer-focused marketing campaigns, becoming more ‘digital’ and realigning their infrastructure for survival. Often however, these digital movements are shallow-cutting innovations, that although act as a successful acquisition strategy, do not ignite loyal users that drive value, for example Barclay’s Ping It. This is because is not part of a joined up innovation strategy, or underlain by any iconic actions that make customers take note of an overall strategic redirection. Instead the truth is a digital offering seems often to be used as a tool to reduce branch services and, as a result, staff, rather than a real growth mechanism. The result is in fact the opposite of the objective of growth innovation. It serves to alienate those customers who are more resistant to change, and doesn’t deliver for those who are more innovation and tech-savvy.

If banks are to survive in this new age they need to fundamentally reassess their ecosystem and broaden their view of their ‘competitive set’. This will help them identify a genuine customer-centric solution that allows them to make the most of their current strengths and identify their key weaknesses. Whether this involves extending their relationship with consumers beyond the point of payments and deposits, enabling some of the workarounds that exist in the market today or maximising on the use of the vast amounts of current and historical data they own, they need to each find their edge and a reason to exist. This also needs to be overlain by a truly cut through and simplistic proposition. Simplicity is what banking consumers and crying out for. This is illustrated by the success of Santander’s 1,2,3 account with it’s easy to understand offer – Santander posted a 48 per cent increase in profits in the first quarter, 2014, which it for the most part attributed to 63,000 customers switching to this current account (Santander Press Release).

All this points to the fact it’s time to take off those blinkers that are created by old mindsets, constrained by existing infrastructures or leaning on historical competitive plays. Otherwise they will suffer the same fate as players from other related markets whose business model was turned upside down through the digital age.

Vishal Amin and Emma Allen, lead inventors at strategic innovation consultancy ?What If!

FROM the greenhouse