The New Digital Age

Do you remember the revolutionary time banking branches were first introduced in the UK?

Probably not, considering it was sometime in the 16th century. But can anyone question how groundbreaking the idea was even back then. It has survived as the main form of interacting with banking customers for the best part of five centuries, give or take a few decades.

After what I am sure is a record breaking run though, my prediction is by 2040 we most likely will not have branches in the UK. Sounds crazy I know but here is why. We are on the verge of a new revolution. Digital Banking. “digital banking is the digitisation (or moving online) of all the traditional banking activities and programs that historically were only available to customers when physically inside of a bank branch” to be precise. I know I am pointing out the obvious to most of you and it does not seem very revolutionary but it is not so obvious when you think about it. The internet has changed the game for pretty much every industry and finance is no different. FinTech is storming our daily lives, and so too is digital banking. There has been a huge increase in the number of digital banks in the UK but 60% of the population still does not know they even exist. For those who are aware the main reasons for the not using digital banks is the lack of branches, and the limited product range. These perceptions are changing very fast as the huge potential to pursue a broader range of opportunities in digital banking is emerging, including improved customer targeting via digital marketing, more dynamic, tailored pricing and product bundling, third-party integration (e.g. social, lifestyle), product white-labelling, and the establishment of distinctive mobile and online sales offerings.

However, it is just old financial products being adapted to the digital world and distributed via the usual digital channels smartphone and internet. What is so innovative about that? Well a simple example of this let us do a quick poll: how many of us are still buying newspapers? When you carry the news everywhere you go if you have a smartphone/tablet/laptop and an internet connection. They have to give the newspapers to you for free or virtually nothing in most cases now. Let us try another one, how many of you are shopping for groceries or clothes online, booking flights and holidays, buying books, music? Can you go back to doing all your shopping in-store? I am sure the convenience has consumed you like it has the majority of us. Small innovations like these have had a huge impact on our lives but rarely do we take notice of the significant change and it is hard to think, how we survived without being able to do these very simple things that completely changed our perceptions in a very short time. Speed and Convenience have become far more valuable to the customers now and it is no secret.

Although the shift to digital banking has led many traditional banks to create their own digital channels to enable customers to manage their money, many innovative FinTech startups have gone a step further to completely remove the need for conventional branches. These FinTechs are all trying to plug into the rapidly increasing use of technology as branch visits decline to all-time lows. Industry analysts CACI predicts that by 2022 consumers will be visiting the branch 4 times per year on average in comparison to 7 times a year currently.

This is reflected in the number of branches now left in the UK. The number of branches shut or earmarked for closure so far this year is more than the 583 closed in 2016 and is the most on record. Banks and building societies in Britain have been shutting branches at a rate of around 300 per year since 1989, a trend which has accelerated in recent years (Over 1,500 branches closed in the last 3 years) as banks respond to pressure on profits by slashing retail branches, (according to a Reuters analysis of bank announcements, academic studies and government data) which amount to around 30% of all the costs of a conventional bank. Bank executives say they are responding to changing patterns of customer behaviour and that they are providing alternatives for those who cannot or will not bank online. One of those alternatives they have adopted from a few of their new FinTech rivals. Barclays and Co-op Bank are the leaders in this chase and have formed a partnership with the post office. You can do everyday banking transactions in most post office branches. Which is a great step in the way forward. It begins to open up the floor for the conventional banks to start thinking about capitalising on the two biggest opportunities that represent the bulk of the value from digital banks. Which are automation of servicing & fulfilment processes and migration of front-end activity to digital channels. ATM machines can also play a huge part with many manufacturers claiming that new technology allows the most up-to-date machines to carry out 90% of all tasks conducted in a branch.

Another indicator is the increase in digital channel use. British Bankers Association (BBA) says digital banking is in a “consumer-led revolution”. We see this first hand, as consumers in the UK are increasingly turning to digital platforms to manage their money. As conventional banks continue to shift their focus to the digital experience, usage will only grow further. From 2012-2017 consumer use of banking apps increased by 356% according to BI Intelligence. And smartphone penetration in the UK leapt from 52% to 81% of the population in the four years from 2012 to 2016, according to Deloitte Global Mobile Consumer Survey 2016.

We are a generation that embraces new ways of doing things. The major drivers of our adoption to innovation is the increased need for convenience. The speed and convenience of mobile banking is a huge driver for its ongoing popularity, especially as banks add more and more functionality to their apps. Many believe that the real innovation will sprout once the conventional banks and FinTech startups move away from modernising the digital experience and plunge themselves into launching new digital capabilities.

It is difficult to gauge what lies ahead, mostly due to the yet untapped potential of the blockchain technology, Artificial Intelligence and Virtual Reality. However, with the legacy banks jumping on the trend and digitising their products, we are surely on the verge of a new unpredictable future where we can gain from increased accessibility and trust, cheaper and faster services and a significantly more automated banking industry.

Digitisation will change the traditional retail-banking business model, in some cases radically. The good news is that there is plenty of upside awaiting those banks willing to embrace it. The bad news is that change is coming whether or not the traditional banks are ready.

About The Author

Martin Luther