The Davids are setting the agenda for banking transformation

There has been a bumper crop of news headlines in the banking world in the last few weeks which point to some interesting trends in digital transformation, and innovation more widely. In the ten years since the financial crisis much talk has happened about innovation in banking. And yet its progress has been grindingly slow. Could that be about to change?

Buying your way to scale

Despite measures to encourage competition and challenger brands, new entrants are yet to reach anything like the size of the big four.

The next mooted shake up could be a merged Virgin Money and CYBG the owner of Clydesdale Bank and Yorkshire Bank. If CYBG’s bid is successful the resulting bank would overtake troubled TSB in size. But it will still be a way behind RBS/NatWest, Barclays, HSBC UK and Lloyds. We’re seeing consolidation amongst the off- and online challenger banks because scale in banking still seems to come from M&A activity, not organic growth.

Digital transformation – an opportunity or a curse?

Those Goliaths remain powerful but with the momentum of their traditional business to propel them, digital transformation isn’t always at the heart of positive innovation. It’s also a negative driver – it’s behind RBS’ decision to close 162 branches throughout the UK.

That grappling with digital is hard for the full service big players is a big part of why their response to PSD2 has been so low key. No doubt with TSB’s IT woes, and general fears around data security and privacy, banks will be wary of trying to land the benefits of Open Banking with consumers right now.

Nonetheless yesterday HSBC announced Connected Money, the first standalone open banking product in the UK. Quietly. Out of the blocks first, but slowly. It’s not a groundbreaking app in its functionality – Connected Money will allow users to see all their banking accounts from up to 21 banks in one app. Much of the utility it will offer the consumer is already available through services like the Cleo chatbot, which sprang out of the blocks two years ago at speed and claims 200k customers in the UK and US. With trust in banks apparently on the rise, when it comes to Open Banking, who will consumers choose – the incumbents or the challengers?

UK’s first digital banking unicorn

So what of the Davids?

At the other end of the industry, while we were all watching Tandem, Monzo, Atom and Starling, Revolut became the UK’s first digital only unicorn bank. Revolut was launched in 2015 and in its latest round of funding has been valued at $1.7bn. These digital only banks are running at speed at the significant barriers to market success. There is agility and rapid innovation happening at this end of the market. Will they take on the big full service players or are they acquisitions waiting to happen?

What are we to take from this?

Banking is still ripe for disruption. Its pace is much slower than other industries but there’s no room for complacency or distraction. The TSBs and RBSs of this world could soon find themselves playing catch up.

Even while the pace of innovation is slow, and achieving scale is hard for new entrants, challengers are still setting the agenda for the industry. Cleo is two years old and growing – HSBC’s app only launched this week. Revolut has gone from idea to unicorn in just three years.

Open Banking may be getting off to a slow start but this is just the beginning of a new wave of innovation and disruption. Industry watchers expect the first offers to be clunky, but sophistication will follow. The applications that will succeed will be the ones that blend the opportunities of the open banking directive, the right tech and essential consumer needs and wants.

Why does Decidedly care?

Because we believe true, effective innovation has to come from and be driven by real customer insight. And we have a passion for helping our clients to get a deeper understanding of their core customers.

Our Customer Closeness toolkit gets under the skin of consumer behaviour to expose the unmet needs, frustrations and compromises that point to opportunities. Innovation platforms that help clients design the product, the service, the communications. Putting insight at the heart of development means that innovation resonates with customers – which is essential for brands, products and services to succeed.