Have banks come to the party too late?

Software is increasingly driving competitiveness in financial markets but have banks arrived at the party too late?

The increased use of digital channels amongst consumers along with their changing needs and preferences has raised the bar on the levels of service that customers expect from their banks. Coupled with this, the numerous scandals that have plagued the financial markets since the credit crisis have made consumers increasingly skeptical of the value and services they receive from their banks.

For some, however, with change comes great opportunity. Against this backdrop of technological innovation, evolving customer demands and increasing customer uncertainty a large number of start-up firms have emerged in recent years to offer low-cost financial services to a mass consumer audience. Once the domain of expensive, exclusive and often inefficient product delivery these start-up technology companies are challenging banks in the core parts of their business, offering slick and efficient services and threatening the strength of brand that banks have enjoyed with their customers for years.

Venture capital investment in start-up financial services companies has grown steadily in recent years with these new players offering a range of traditional banking products and services direct to the consumer, such as cash lending, currency exchange, financial management, treasury management, payments and stock trading. In addition to these start-up technology firms a number of software development companies are also joining the party, particularly in the more discreet parts of the financial markets.

In the wealth management and asset management space, for example, firms are feeling competition from small software start-ups who are nimble, creative and have the infrastructure to provide quality investment advice at a fraction of the cost of traditional firms. Catering for the lower investment investors at private banks and wealth management firms who would not receive a personalized advisor service these software firms are not required to employ an army of bodies to provide financial advice. Recognizing that this segment of the market is not reliant on personal interaction these firms are instead using software as their product offering and putting their efforts into product engineering and delivering the best user experience within that software package.

This is just one of a number of areas where the traditional bank-customer relationship is now being owned by the companies who deliver the application and interface that customers interact with. As a result banks are in danger of losing brand association with segments of their customer base, and with it, losing their relationship to those customers. As the relationships between customers and technology and software firms deepen banks risk being sidelined and reduced to simple service and transaction institutions that are increasingly invisible to the customer.

In today’s environment the smart firms are making software their focal point. Delivering the best user experience and making it seamless provides a solid platform for firms to win over customers and ensure that they do not become disillusioned with the product or service offering. The ability for technology and software start-ups to do this is why they are providing such strong competition for the banks traditional business models.

In such a competitive environment banks have a number of options – they can either partner with such technology and software firms, they can white label technology or they minimize the threat of competition through acquisition. The problem for banks however runs deeper than a simple strategic play. Culturally banks need to change, particularly in their acceptance of software as the future of their business success. Currently banks actively push against being defined as software companies however, as the consumer retail market has shown, those who fail to accept that software and technology are where the future of customer interaction and product delivery lies will be left behind and will no longer be competitive. The reality for banks is that software is increasingly becoming their brand. In a market where competition and customer expectation are reducing the stickiness of customer relationships around core parts of their business banks would do well to rethink their approach to, and acceptance of, software as an enabler for more effective and customer-centric delivery of their products and services.