It is easy to assume financial incumbents will be around forever, as many have shown their resilience for hundreds of years; however, a new series of presentations from Nucoro show the threat to them is real.
The two-part presentation titled “The Future of Money” explores the financial environment and the pressures incumbents are facing from challenger banks and more digitally-led businesses.
In the first document, Nucoro, which helps financial institutions incorporate digital services, it explains, “Unfavourable macro environmental factors, increased competition from challengers and technology legacies are all weighing heavily on incumbents. While some of these developments are presented as problems of the future, the industry is already undergoing a transformation of seismic proportions.” So what is this threat they face?
It comes down to three core aspects, incumbents are losing market share to challengers, they have limited capacity to diversify revenue streams and they are under pressure from monetary policy influences.
Nucoro explains that low, zero, or negative central bank interest rates are making it costly to maintain bloated balance sheets. This affecting the financial bottom line with thin margins, all culminating in negative effects on return on equity and difficulty generating revenue.
Furthermore, challengers and tech platforms are revolutionising customer experiences. Consumers now have free access to services that were previously charged and transparency on fees and costs have been boosted by comparison sites and regulation. These shifts have changed how consumers expect to do business, causing a loss of market share for incumbents, Nucoro explains.
Finally, the increasing layers of regulation continue to add headcount and divert resources from client-servicing to compliance-adherence. “Legacy-heavy infrastructures and prolonged underinvestment into technology stand in the way of cost-reducing innovation.” These constraints limit the capacity to streamline and modernise business models.
With all of these problems highlighting the extent of the threat on incumbents, Nucoro explains there are three key ways to succeed in the space.
These are reacting to macro environmental stressors that effect the bottom line and revenue generation, adapting to evolving client needs to stop market loss and undoing internal efficiency blockers that prevent substantial innovation.
One of the easiest ways to approach this is by brining technology to the forethought of everything. Within digital-first businesses, technology and business models are intrinsically linked and built to grow in sync.
There is also a sense of re-education needed with the approach to customers. It said, “Instead of thinking about products, digital-first banks are focussing on being helpful to their customers. Based on a strong technology foundation, a digital business model puts the client at the centre of attention and breaks up legacy silos.” This goes one step further, with banks needing to think like a consumer.
Nucoro stated that within banks departments for different products are all siloed and separate functions. For example, the part of the bank involved with saving for a house is separate from the one around investing into a house. They are kept apart because they are regulated and administered differently with independent revenue streams. However, the customer does not care about how they are dissimilar and only cares about the house.
Consumers see banks as a means to an end and this is what challengers capitalise on. “To draw customers from incumbents, digital banks differentiate themselves on identifying clients’ needs and making them their experience’s prime focus.”
While these are easy steps financial institutions can follow to reduce the threat, Nucoro does explain that somethings that need more work.
“Technology plays an integral part in improving existing processes and enabling new business activity. However, often organisations tend to apply fixes to what are essentially unreformable systems. In legacy-heavy IT infrastructures, applying piecemeal patches can only extend the lifetime of assets for so long. Eventually, a transformational shift in the operating and business models and the underlying technology is inescapable. Financial services organisations have to be prepared to build and launch new propositions, with new commercial models, based on new technology if they want to succeed.”
The size of the opportunity for incumbents is huge. Nucoro explains that consumers are switching from their existing banking providers and turning towards challengers that offer them better experiences. As retail banks already have these individuals as customers, if they can offer them the digitally-led products, they would not lose the customers.
Click here to read the full document.
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