Challenger banks: evolution vs revolution
Shrinking margins, changing customer needs, growing complexity, new ecosystems: the challenges facing Swiss financial institutions are fundamentally the same as those facing their international counterparts. Can the existing infrastructures be adapted? Or is a radical new approach needed?
Insight in brief
- The global financial industry is facing enormous challenges like shrinking margins and growing complexity
- The ability to collaborate with other businesses and organisations will be decisive for banks in the future
- A greenfield approach that creates new and efficient structures can be useful
The global financial industry is facing enormous challenges. In a recently published paper, our colleagues at Zühlke UK drew parallels to the situation in the US automotive industry during the 1970s. They suggested that banks might benefit more from starting a separate digital bank from the ground up, rather than digitalising their existing processes, interfaces, and infrastructures. What is the current situation in Switzerland?
Customer-centricity and ecosystems
In Switzerland, shrinking margins in the mortgage business are posing a threat to retail banks in particular, as the interest margin business still accounts for the lion’s share of their income. At the same time, customer-centricity is becoming increasingly important in the services industry. Consumers have realised that other industries, such as retail, have been meeting their needs for years, so they are now demanding the same from their banks and other financial institutions.
Closer collaboration and links with third-party providers through open banking and ecosystems are becoming increasingly important if banks are to offer their customers the widest possible range of products and services. The partner companies also benefit from being associated with a trusted bank. And the level of trust is still high: for example, in a survey conducted by the Institute of Financial Services Zug (IFZ), 64% of respondents could envisage obtaining insurance services through a bank – but only 15% would obtain banking services from an insurance provider. Furthermore, concepts such as co-creation – i.e. the direct involvement of customers in an agile development process – could also help providers to meet the changing needs of their customers.
The multichannel burden
Like many other industries, the financial services sector is also seeing a greater shift towards digital. Customers want to get as much done online as possible, and they expect a top experience at all touchpoints of the journey. At the same time, however, banks are feeling the squeeze on their margins. Though automation is essential, it is also expensive. Digitalisation is evolving into ever more complex areas of application, such as artificial intelligence. Major savings from automation are therefore no longer a given.
What’s more, banks with many branches have to invest in three areas at once: in their existing branch network, in their online sales channels, and in the complex integration of the two. In comparison to online-only providers, multichannel banks are therefore burdened by their structures. Brick-and-mortar retailers faced the same situation a few years ago with the emergence of online-only retailers. And not long before that, the travel industry was shaken up by online booking portals. Investments must be considered carefully, and must support the positioning of the business.
Pandemic as a driver of disruption
All of these challenges have been around for a while. However, the coronavirus crisis has triggered a massive surge in digitalisation and has led to a change in preferences on the demand side (i.e. among customers) in particular. The online-first approach is now also penetrating customer segments that have traditionally been characterised by more physical channels.
Challenger banks take greenfield approach
The ability to collaborate with other businesses and organisations and thereby secure a place in an ecosystem will be decisive for banks in the future. But creating the right conditions for this within the existing organisation is easier said than done: the structural, cultural, and technological deficits that exist in many areas would require enormous amounts of time and money to overcome.
That’s where a greenfield approach can make sense, as it provides an opportunity to create new and efficient structures and to foster an agile culture that is constantly questioning itself and looking to improve. Wide-scale, radical change within an existing organisation would require an enormous amount of time, effort, and expense. It is doubtful whether it would even be possible within the small amount of time that traditional Swiss banks still have left before the pressure from new market participants becomes too great to bear.