The relationship between banks and their consumers changed entirely. Banks need to adapt and make the jump to the data-driven age by using Cloud services and turning their infrastructure to modern data centers.
Just as the traditional mom and pop convenience store was one of the cornerstones of growing up in a certain generation, so was holding an account at one bank from the cradle to the grave. You knew your local banker just as well as your butcher or the doctor. Well, those days are gone.
The 1990s saw fast consecutive mergers in the banking world while accelerating (sub)urbanization turned many people away from a typical town lifestyle. Consequently, people’s relationship with their banks also changed. Although inertia still managed to keep in a lot of customers, three main causes turned a lot of previously inert customers into active multi-bankers.
Three converging challenges
An obvious first was the shockwave of the 2008 Credit Crunch, which tarnished the image of big banks, that were previously thought unassailable. Even though traditional consumer banks had little to do with the gregarious appetite for risk that led some commercial banks to ruin, they shared in the blows, both financially and in terms of PR.
Secondly, and perhaps spurred on by this very crisis, agile startups – or upstarts, as we might cheekily call them – being more in tune with the latest technology trends, began offering financial services to consumers, ranging from microcredit innovators to spin-offs from established brands. Their position was further strengthened by the European Union’s revised Directive on Payment Services (PSD2) in 2015, which provided a legal framework for these entrants to compete with the traditional bank.
Thirdly, just like Uber disrupted the world of transport without owning a single vehicle, Netflix (initially) laid waste to video stores without owning a single brick-and-mortar store, the rise of peer-to-peer lending creates financial flows without a single banker, vault or office. Put bluntly, some people increasingly feel that they might well do without a bank altogether.
Sitting on a diamond in the rough
Before we succumb to existential nail-biting about the banks’ futures, let us take a step back and look at the technologies that made this possible. Without widespread adoption of smartphones, Uber would not have been possible. Without the idea of peer-to-peer file-sharing taking root 15 years ago, peer-to-peer lending would not have been possible. There is no reason why a bank should not be able to leverage these technologies as well.
However, instead of adopting a ‚me too’-approach (i.e. in setting up an app), a bank can use its considerable resources, both in data and classic capital, to take a more proactive route. Let us look at data as an example. A start-up does not have the same amount of data on its customers as a bigger bank has. The challenge for the bank is to structure this data and then use it to reconnect with its customers and their way of living.
A fintech (financial technology) startup doesn’t have access to a customer’s spending or saving habits from the past ten years, but a bank does. Based on this, a bank can offer more accurate advice or a much finer granularity of personalization. With some sense for drama, this brings back the fine-tuned advice – or personalized product bundles – from the days when people saw their banker personally, but adapted to the needs of the modern urbanite. Modern calculation engines and network technology have become so fast that these things can be created in the blink of an eye. That is, if the underlying structure is sound.
Clouds, but not hazy skies
While all enterprises need to take great care of their data, this holds even more true for financial institutions and the customer info they store and manage. This limits their ability to turn to technologies like the public cloud. What they are doing instead, is using the principles of cloud computing, but without externalizing any of their data. That’s why we notice many of our financial services customers turn to the IPC-principle of Internal Private Cloud. This offers them the best of both worlds, keeping valuable customer data close to their chest while, at the same time, benefiting from the scalability and flexibility of cloud computing.
Another trend we see in banking and finance, in general, is the willingness to opt for converged infrastructure for their core applications. Our VBlock offering, for instance, is quite popular, as it allows financial institutions to focus on offering a great customer experience to their customers, rather than puzzling together disparate pieces of equipment.
By turning their infrastructure into a modern datacenter, banks will get both the solid foundation to build their business on, and the peace of mind to focus on what will really make them win the battle against startups and upstarts: writing third platform applications that make the difference in the market.