Disruptive start-ups and banks - threat or opportunity?

Like my colleague, Caz, I was also at the Finextra Social Media day last week and I was also inspired by the social business panel and, in particular, Giles Andrews from Zopa’s comments on trust.

As Caz effectively outlined in her post, Giles distinguished between ‘hard’ trust, that is; trust in bricks and mortar, big vaults and legacy systems, and ‘soft’ trust, that is; trust that the organization is working with your best interests in mind and is listening to your feedback.

The big banks have traditionally done very well in gaining our ‘hard’ trust but have fared less well in winning our ‘soft’ trust.

Until recently this didn’t matter too much.

As long as we felt our money was safe and secure we could put up with some bad service.

As long as we didn’t have any other options we had to put up with some bad service (all banks were much the same right – they all offered much the same products and treated us in the same way?).

Things aren’t quite the same these days.

The financial crash not only further eroded our ‘soft’ trust in these institutions it also made us wonder how safe our money really was – suddenly our ‘hard’ trust in banks was in question.

In recent years we have also seen the rise of many disruptive start-ups that are evolving core banking services and threatening to disintermediate the big banks from their customer base.

As Giles explained with regards to Zopa, these start-ups are inherently more social – they often use social technologies to deliver their services in new and innovative ways.  They also have a tendency to be smaller and, not being hindered by hulking legacy systems, they can be more responsive to customer needs, evolving their products and services quickly to meet those needs.

This gives the start-ups ‘soft’ trust with their customers – customers tend to like these brands and the social elements of their business help them to feel invested in their success.

Off the back of this and by delivering on their service and product propositions, these start-ups have also been able to build ‘hard’ trust.

For example, Giles reports that Zopa offer much better returns than traditional savings accounts but they also run the lowest risk unsecured loan book in the UK.  This shows consumers that security is no longer solely the province of the big banks.

This is a massive threat to banks right?

Perhaps, but it could also provide them with an opportunity.

Rather than trying to replicate these start-up services and models, it makes more sense for banks to partner with these 3rd party disruptors.

This route means the banks can offer new value to their customers but also piggy back on some of the ‘soft’ trust these new companies have accrued whilst simultaneously shoring up the ‘hard’ trust in their systems by facilitating the delivery of these new services.

This is not a new idea.

Aden Davies argued the same point about back-end banking systems in his recent post ‘Please stop calling them dumb pipes’.

And Elizabeth Lumley and Brett King got into a very heated debate on Finextra recently debating the pros and cons of legacy infrastructure.

Make no bones about it, banks need to take these digital disintermediators very seriously for sure, as they pose a serious threat to mainstream banking.

But Banks also need to start thinking about working to their strengths.

They need to start thinking about developing their models to allow for these disruptive services to be included in their own businesses so that they develop partnerships that work to combine the best of both worlds for their customers.