Hello and welcome to the Future of Business Podcast. I'm Alison McArthur and I'll be your host in the second season.
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and we really appreciate your continued support. The Future of Business.
Future Business. Future business is more global and more decentralised, making sure that enterprises are a lot more responsible.
Smart cities, more collaboration. Consumer driven productivity.
Environmental and social responsibility. Global human centred.
Purposeful individualised. Automation. Big Data.
Climate Change. Space Exploration. Renewable Energy.
Information security. Exciting and digital.
For this episode, we'll be talking about the future of banking, the way in which we bank has significantly changed over the last few years.
Instead of visiting a branch, many people are choosing to check their balances and send payments through their phones.
A new crop of online banks known as Challenger banks have recently entered the marketplace,
promising a superior customer experience with additional services, such as budgeting on an app.
But what does this mean for the traditional banks, HSBC or NatWest?
How will the rise of online banking affect high street branches, the competitive landscape and our experiences with customers?
One of the fastest growing challenges in the banking space right now is Monzo, a digital only bank that's growing rapidly across the UK.
Founded in 2015, the company now has over a million users and is one of the latest tech companies to
reach the so-called unicorn milestone achieving a valuation of over £1 billion.
Monzo is co-founder and CEO Tom Blomfield sat down recently with said business school alumna Hilton de Dahdah, a senior consultant,
product manager with Quantum Black, were pleased to bring you part of that wide ranging conversation organised by Oxford Entrepreneurship Centre.
How do you think traditional banks are responding to the threat of Monzo,
other challenger banks, and how do you rank their offerings and how are they?
How are they responding? Two or three years ago.
They were very dismissive. You're never going to get to a scale, blah, blah, blah, whatever.
We had a million customers and they've stopped saying, saying, you're never gonna get to scale the other thing,
you're not going to make any revenue, and we'll make revenue, and then they'll find some other reason and then they'll be dead.
So I think they all they all are reacting now.
And they're either going to a consultancy called The Lab Affair,
they're going to McKinsey and saying, Can you come and build us a digital bank, please?
And so you've got both. RB Apparently the I will not comment on the name, but that's a sort of standalone digital bank.
Yes, I think HSBC are doing a similar thing, similar thing. So broadly speaking, they're all taking the same strategy,
which is let's create a a challenger brand with new technology and sort of cannibalise ourselves before someone else kind of places us.
The problem that BOE is having and that they all have is they're still under the umbrella of the parents,
and so they're infected by things like their policies. They have to follow the main banks policies which extremely risk averse.
So we end up gold plating a lot of the lot of the rules and just stifling innovation.
So that's how I think they're responding. How would I rank them?
I think Barclays is probably at the top, actually.
If we look at customer satisfaction surveys and and sort of app features, Barclays tend to be at the top,
HSBC and obviously at the other end of the spectrum, I think, and then the rest somewhere in the middle.
If I was a NatWest customer for 17 years, but I finally closed it to go full Monzo about six months ago.
I'm glad you're using your product. So do you ever think they'll be able to close the digital gap?
They often come with like a lot of resources in terms of capital.
And if they try and develop banks that are kind of separate from the policies because they really have some innovative CEO who is able to break free.
Do you think that they could present a challenge for you guys? I don't know.
I tend not to for most of my clients. I think so. I think they have a few problems.
One is that. I think people in traditional banks, let's say retail financial services, broadly speaking,
are so obsessed with financial products and so siloed in their thinking and organisational design that they organise themselves
around each financial product and work on the optimisation of that financial products to the exclusion of all else,
to the exclusion of the customer. The customer seems like an annoying inconvenience that sort of get their money in and
get them out of the way so we can just focus on doing more of this financial product.
A lot of people at big banks have never talked to an actual customer using the actual products.
They spend a lot of something that the product that they think about the human being. And so that I think is the first problem.
The second problem, I think, is that we moving from a full service bank where you sign up women very young.
And Barclays or HSBC or whatever. Cross sells you all of its own products throughout your life.
This kind of KPI of of products, cross-sell per customer.
And I think we're moving to a platform model of banking or hub and spoke where you are a single interface but
you plug in all of these different products from out from across the market giving the customer better choice,
better customer service, better price. So single interface but different balance sheets all plugging in via APIs basically
that prevent presents an existential threat to the banks business model.
The banks are predicated on acquiring a customer young and then selling suboptimal products.
They don't want a price at the top of the best buy tables because they make less money.
So they rely on inertia and cross-sell. So I think this move to a platform model fundamentally undermines the big banks business models.
To learn more about these issues. I sat down with Alice Cresswell, a fellow MBA students and friend of the podcast.
After starting her career in strategy consulting.
Alice spent the past few years working in digitalisation and digital strategy at the Commonwealth Bank Australia.
I started by asking Alice about how new challenger banks are changing the banking ecosystem and
whether there was a gap in the market that caused so many of them to pop up over the past few years.
I think that part of it was more that there was this opportunity for truly great digital
experiences that was going nuts from the tech giants that we've seen pop up your gafa.
You know, google and apple, facebook and amazon and and the rise of incredible platform like companies in places like China as well with WeChat.
And traditional banks have just never really played in that space.
And the other thing is that I guess since the financial crisis, you know,
we talk about this loss of trust or loss of trustworthiness that banks have gone through,
and it has left an opportunity open for players to come in who are offering something
that's completely different to what people are used to expecting from banks.
And it's come in a few forms.
So when we when we talk about a challenger bank, we generally mean any type of bank that is challenging the traditional big banks.
And so that could even be things like Metro that still have branches,
but have come in with a new model that is much more customer centric then than potentially the old high street banks.
When we think about Neobanks, we generally mean neo as in kind of almost banks.
They don't yet necessarily have banking licences,
but they're able to offer some banking products and they offer a super slick user interface that connects people with banking products.
So an example of that might be Resolute or Monzo up until February last year, which was when they got their full banking licence.
That can bring us to the last category of these new banks, which are digital only banks providing super slick,
mainly mobile app based platforms that have an entirely new tech stack behind them.
So the systems that they're based on are not the systems that the old banks were building in the eighties in the nineties,
but are brand new tech designed to be as as quick and as seamless as possible for
people to be able to do their banking tasks and also as flexible as possible.
So how do you think this has affected the banking ecosystem?
Do traditional banks see these neobanks as their direct competitors, or do they have potential to work together more collaboratively?
Has there been evidence of that happening so far? Yeah, I think that it's it will be a long process.
And the new banks are being taken more seriously as they are growing in in customer base and in brand recognition.
So you mentioned Monzo. Monzo has an incredibly strong brand.
But I think that the traditional banks are are saying this and are acknowledging it.
But it's yet to be proven whether this is something that's quite novel and fun and
exciting for people to get involved and something something cool to have in your wallet,
but not necessarily the institution that you were considering as your main financial services provider.
There is still a gap there, and most of the new banks suggest that only, you know,
20 to 25% of their customers are actually depositing their salaries into their new accounts,
which means that most of their banking is still being done at a bigger traditional provider.
And I think that until that reaches critical mass,
the big traditional banks will still be able to sit back and say, let's let's see how this plays out.
But at the same time, it has definitely prompted change in the industry.
People still trust traditional banks to keep their money and their data safe.
They still trust that basic security capability of a big bank with the new banks.
That trust hasn't yet formed yet because they just haven't been enough years.
There's not enough of a track record there. But the way that they are coming in and the way that they are positioning themselves and as
transparent as they are being about the development of their features and their strategy,
people, people are loving that. And so trust that that bank is really trying to do something different that they are putting the customer first.
It's probably stronger for some of these. These neo challenger banks.
So what do you think the solution is then for traditional banks who are trying to figure out how to respond or react to these challenger banks?
I think the solution is that the big banks have to be very real about what's coming,
and I think they are taking that seriously to certain extents around the world in terms of putting the customer first,
because it's not going to be good enough anymore to have an institution that is structured around channel and product.
You need to be structured around customer need. If a customer goes into a branch and they hear different information or see different branding or have
a different experience to what they get when they call a service centre or when they are on their app,
that's going to be quite jarring for customers and that inconsistency is going to be a problem.
So the big banks are really going to have to be a lot more serious about integrating all of their channels for a smooth experience.
And they are going to have to think about how they can add greater value to customers.
They have sat on customer data for a number of years, but traditionally that data has been used to optimise the selling of banking products.
Now it's time to be looking. And a lot of banks around the world is trying to do this and how that data can be used to benefit the customers.
Yeah. And obviously there's a lot of backlash at the moment against the use of personal data.
I imagine with digital banking, you know, you're going to be doing a lot of processing of customer's data.
Is that, do you think,
going to be a roadblock for a lot of these challenger banks or even traditional banks who are trying to develop their own sort of digital strategy?
Mm. I think when it comes to data there are a few things.
First is is data security and banks invest huge, huge amount of money into data security as as they need to.
The second is the amount of data. So big banks, having had customers for so many, so many decades, have an enormous amount of data.
The structure of that data may not be ideal to be able to use it to the best of its potential.
But the volume is there near banks, challenger banks.
Digital banks have access to great tech and algorithms to use the data,
and they might be getting new data that's well structured, but the volume isn't there.
And to build truly great algorithms and to make the most of that data, you need a high volume of data being pulled into that.
So it's a it's a balancing act between those two things.
People are a lot more comfortable sharing their data, even if it's their banking data, if they think that that's going to give them better services.
And this is applies not just to banking data, but to our lives in general.
I am comfortable with Google knowing where I am if that means I can use maps.
And same thing goes for banking. So if my bank,
knowing where I am through location services on my app means that when I'm at the airport they
can remind me that I should lock my card for transactions in the country that I'm leaving,
or to remind me to tell them that I'm going overseas so that they have an alternate number to contact me on.
Then I'm happy with them having that information about me.
And I think that that's largely I mean, it's a generalisation, but it is something that our generation is more comfortable with.
And the data shows that when people think that they will get better or cheaper services, they are happy to give away personal data to get that.
So a lot of people are like opening accounts with challenger banks,
but are they really putting their whole savings into are they paying their salaries into it?
Has that trust being established yet or is it more kind of, you know, small amounts of money that they think you budget with and that sort of thing?
I think that at this stage people are playing with the idea and I think they think it's cool.
Look, you know, you see some of the cards that the challenger banks are putting out there.
And even when they just move the the writing on the card from, you know,
a horizontal card to a portrait card, suddenly it looks like a completely different card.
And you're like, wow, wow. They're really shaking up the industry. But I think that novelty is something that people want.
But the excitement factor, will that translate to people taking those banks absolutely seriously as their long term financial service providers?
Not yet, because at the moment, it's only about.
A fifth to a quarter of people who are putting their salaries into these digital only banks.
I don't know how quickly that is changing, but certainly when I think about it from a personal perspective or when I talk to friends about it,
they say, let's just see how this plays out before I move my serious products over over to the digital banks.
A lot of people say, oh, digital banks are the best thing that's ever happened to the banking industry.
And then you say, Oh, but you know, where's your salary? Oh, it's going to of course it's going into the High Street Bank.
Yeah, absolutely. But I think, like you're saying, you have to sort of give give the digital banks credit.
Like their marketing strategy has been really good.
It's interesting to see, you know, it's almost like when you get one of these cards that you're joining a club, you know,
like they have to sort of make the most like, you know, there are limited amounts of cards available, like, you know, the different kind of brands.
And, you know, it's very interesting. You sort of see why it draws people in.
But like you say, in terms of, you know, in the long goal, obviously they want people to to, you know, bank with them as their main bag.
But I guess that remains to be seen.
Definitely the emotion that these digital banks can evoke in people and I am thinking most specifically of Monzo now,
I think N26, which is a German based digital only bank, have done quite a good job as well.
The emotion is incredible and I love that emotion is being brought into banking because when people feel more emotional about their service provider,
they are probably also thinking more emotionally or more actively about the day to day running of their money.
And I think that's incredibly important for people's financial well-being and not to be scared of their bank,
to be scared of looking at that balance, to kind of buy it. Yeah, exactly.
To be engaged with your day to day money management is important, and I love that digital banks are bringing that to the forefront.
I love that traditional banks are responding by also trying to create engaging user experiences through their digital platforms.
I imagine it must like, you know, encourage responsible spending, especially after the last few years.
I think people are probably so more conscious about what they're spending their money on.
They don't necessarily want to take out of loans and having that sort of transparency
and that kind of visibility of what's going in and out of their accounts,
I think probably can only help something that's quite interesting.
I mean, I'm from Australia, so I don't know what the international data on this is,
but younger people are becoming more and more cautious about things like credit cards not wanting to get into too much debt.
Housing prices skyrocketing as they are around the world scares people.
I think that being able to be a generation of people who are engaged with everything digitally and used to open opening up apps multiple times a day,
we're also seeing that translate into banking where people are opening up their banking app every single day.
To have that kind of engagement is surely a good thing.
I hope that it helps to stop people going into financial hardship if they can see what's happening in their
accounts on a day to day basis and they can look for things like fraud and stop it as it's as it's happening.
Thank you so much for joining us today. We have a lot of great episodes coming up for this latest season of the Future of Business podcast.
So subscribe on iTunes to make sure you get the latest interviews and analysis from Oxford, said Business School as soon as it's released.
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We'll be bringing you a new episode in just a couple of weeks time. So until then, goodbye.