Disruption is the watchword of the financial services industry globally these days. Banking is dead, long live fintech.
That means Canada, with some of the biggest banks in the world, should be ripe for disruption, right? Yet, very little true disruption has taken place even though Canadian consumers are just as digitally-ready as other spots around the world.
Why hasn’t it happened yet? The often-cited reasons are the stability of Canada’s banking industry, combined with a customer base that has historically been well-served by the status quo.
Despite this, bankers need to consider the prospect that the status quo is impermanent and fragile. They must ask key questions about the sustainability of their consumer value propositions against challengers, even in the absence of current candidates.
It seems unlikely Canada can remain immune from financial-services disruption forever, given the scale of the change seen in other markets. Emerging regulatory requirements like open banking will inject further uncertainty into the market. It is inevitable that either the banks themselves will become the disruptors, or the disruption will be forced upon them from the outside.
The defense against interlopers requires that Canadian banks build distinctive value propositions that create emotional connections with customers, beyond the convenience and security benefits of the universal bank model. Failure to do so means leaving the field open to the disruptors who will take aim at customer segments and market friction.
STANDING OUT IN A CROWDED FIELD
An attack on the status quo is likely to focus on one of three competitive levers: price, big data driven precision customer marketing or creation of an emotive challenger brand and experience.
To stand out, bankers need a deep understanding of the key customer segments that will lead the change in financial-services consumption. These segments are defined not only by age or income, but by attitudes to convenience, advice and financial security.
The bank of the future likely will have multiple distinct product lines. One-size-fits-all won’t fly in a digitally-disrupted world, but Novantas research has found that is exactly how customers view Canadian banks. Banks that show an ability to pull away from the crowd with a distinctive value proposition will be better-positioned to win the digital race.
A LESSON FROM OTHER INDUSTRIES, COUNTRIES?
Industries that have been disrupted by the digital revolution — television, music, retail, urban transport — all share similar characteristics of disruption. The new entrants bring new customer experiences, eliminate friction, increase convenience and introduce new products or services that previously didn’t exist. They also provide new economic models with improved efficiencies that are shared between the producer and consumer by attacking industries that have high fixed-cost infrastructures or large inventories.
Banks share many characteristics with these large, obsolete business models, including high-friction and opaque pricing. One of the big differences in banking, however, is that regulatory requirements have provided a barrier to entry.
Yet neo-banks, new digital brands and all sorts of other fintech upstarts are threatening traditional banking in other markets. (See Figure 1.)
These threats in the U.K., for example, have forced traditional banks to build challenger proposition to compete with the core bank for investment offerings and retail customers. The U.S. landscape has gone through a sea change in the last 12 months; neo-banks are acquiring customers (although not large deposits) at a rate similar to some of the national banks, and they are outpacing regional players in many U.S. markets. The Australian market has been disrupted by several large banks that are developing cutting-edge payment and cashless technologies, which, in turn, has changed customer expectations and create openings for new challengers like ING.
So, it isn’t hard to imagine that this wave of banking innovation and disruption sweeping the world would land in Canada. Recent Novantas research indicates that Canadian consumers are, if anything, more likely to consider alternative players, even as the number of choices available is currently tiny. (See Figure 2.)
PROSPECTS FOR CANADIAN DISRUPTION
The competitive stability of the Canadian market, coupled with a digitally-friendly customer base, leads us to believe that disruption is most likely to occur from within Canadian banking rather than from outside it. What might it look like?
The disruption patterns in other service industries (telecoms, airlines, etc.) provide the template. It is likely to initially consist of a radically better customer experience that is sold through digital direct-to-consumer precision targeting at an attractive price. It will be built around a brand that starts with simple pricing and convenience, but is associated with anti-traditionalist or anti-establishment themes. (This strategy can later pivot towards relationship products and more mainstream messages.)
Canadian banks should avoid the pitfalls of being purely focused on price. In the U.K., U.S. and Australia, many disruptors have focused on price alone. Competitive promotional pricing is on the rise in Canada, creating a sizeable pool of “hot” deposits sloshing around the bank’s balance sheets. That said, there haven’t been any equivalent high-rate plays in Canada that are similar to the high-rate players in the U.S. Instead, Canadian banks can target behavioural characteristics and savings patterns with value-for-value transparency (i.e. you give us your savings dollars; we give you much better pricing and fees).
With barriers to entry falling in direct-to-consumer scale and abilities, the use of customer-level targeting in digital channels will be one area where disruption can occur quickly, especially with open banking as a possibility. Canadian customers will be likely to trade access to their data for better pricing, services and experiences.
Lastly, affinity brands may offer another source of competitive advantage. Bank brands are largely undifferentiated today, with bland reputations and a general sense of “they are all the same” in the customer minds. Distinctive retail brands, like Loblaw’s and Apple, are already making forays into financial services and other well-known brands may also enter the fray.
DON’T BE TOO LATE TO THE PARTY
Ultimately, the future of Canadian banking may be far different from today’s model of five large banks and myriad smaller ones. Instead, there may be a larger set of national players — some that are stand-alone brands and some sub-brands of larger institutions that compete in discrete segments based on affinity, customer experience and levels of advice and personal interaction.
Leaders of the national and large regional players have long depended on geographic ubiquity, operational scale and widely-recognized brands. Those are at threat of being undone by data-driven targeting based on the scope and availability of digital customer data and an inherently lower-cost digital delivery system. The incumbents will have to respond. Once meaningful competitors emerge, disruption takes hold quickly. That means the smart money should be on creating distinctive and emotive plays that can build direct bonds with customers that provide more than the basics of convenience and security.
Failure to do so means leaving the field wide open to the disruptors.
Kevin S. Travis
EVP, Toronto/New York