A new report from Cognizant's Center for future years of Work reveals traditional banks fear technology giants, for example Amazon and Google, a lot more than fintechs when it comes to market share

In the EU banking industry, simply becoming digital isn't enough. Incumbent banks' decision makers need to be able to read the major threats for their industry – regulatory change, the political landscape, new competition and emerging technologies – and know how these could potentially diminish, displace, disintermediate or destroy their business over the next five years.

New research released today by Cognizant finds that the Revised Payment Service Directive (PSD2) and open banking reforms are levelling the playfield for 'new' entrants. As a result, over half (55%) of digital-first challenger banks and three-fifths (61%) of fintechs feel well informed that they can compete with existing banks. What's worrying, however, is that incumbent banks seem to be oblivious to this, with only one third (36%) seeing the threats of the new landscape.

The latest report from Cognizant's Center for the Future of Work, 'The New Banking Genome: Building the Resilient Bank of tomorrow', features research from over 300 European banking executives. It highlights that the new banking reforms aren't another tick-box exercise of regulatory upheaval, rather the beginning of a new dynamic in the industry.

Digital unicorns are kicking down banks' doors

The research found that in addition to the concern of challenger banks and fintechs, incumbents see the existing technology giants such as Amazon, Google and Facebook like a major threat, with over a quarter (28%) predicting that these digital behemoths is going to be banks' main competition within the next three years.

While the majority of incumbent banks believe they are able to maintain a competitive edge over fintech firms and challengers across their existing service areas, 45% fear they may lose strategic advantage in unsecured consumer lending due to the rise in peer-to-peer funding. The potential for blockchain-enabled fintechs to disrupt incumbents at numerous points inside the banking value chain is also a serious threat. Fintechs are winning this battle with 34% already using blockchain, compared to just 17% of incumbent banks. The report highlights it would be extremely short-sighted for any player in the market to believe that blockchain does not have the possibility to disintermediate banks within the next five to 10 years.

Despite this, the majority of the banking executives surveyed (77%) agree that incumbents' use of consumer data is still a benefit over fintechs and challengers.

The new rules for banking are crystalising

In light from the perceived threats from challenger banks, fintechs and technology giants, a subset of incumbents are emerging as “resilient banks”. These banks have implemented advanced automation of information processing across the front office, embedded real-time data analytics to support core business services in the centre and back office, and embraced public cloud solutions. They're placing much greater priority than others on improving the internal culture and also the digital customer experience, partnering to some greater degree with third parties both within and outside the banking industry.

The report sets out the New Banking Genome and outlines five steps incumbents should follow to become a “resilient bank”:

  1. Put customers at the heart of operating models: reframe data and processes around customers. Start by simplifying legacy systems and applying automation. Then prioritise purchase of digital experience and data analytics
  2. Embrace industry model: open banking is still in its infancy, but it has the potential to scale innovation. Explore the possibilities of white-labelling fintech services, partnering or even creating fintech incubators/accelerators
  3. Use coming regulatory upheaval as a catalyst for change: PSD2 can expose incumbents' technology, cultural and customer service shortcomings. But this regulatory change ought to be viewed as the catalyst they are driving optimisation, innovation and transformation initiatives
  4. Make culture the development medium in your petri dish: a culture of innovation must come from the top and pivot a central strategic aim. Communicate this often, and encourage employee feedback on strategic initiatives
  5. Do not fall under blockchain oblivion: the ramifications of blockchain at nearly every stage of the banking value chain will be profound. Identify these potential risks, pilot and then build to remain resilient

Euan Davis, European Lead for that Center for the Future of Work, explains: “The times of traditional banking where barriers to entry were astronomically high are coming to an end, and a drastic mindset shift from the incumbent sector of the industry is needed to resist disruption.

“As regulators level the playing field, and technology helps to lower the barriers to entry and alter the industry dynamics, European banks have to become ever more resilient. They must redefine their operating and business models for that new competitive environment, rapidly accelerate their adoption cycles for brand new technology and drastically increase their responsiveness to geo-political change. The new approach from “resilient banks” could serve as the fintech antidote, helping incumbents to evolve and rebuild their models to keep their competitiveness – whatever the new entrants throw at them.”

Related post