Customers across the Caribbean look longingly at innovations in the US and other markets, such as full-service online and mobile banking, marketplace lending facilities and merchant payment solutions. The open question is if, or when, similar facilities will become available locally.
The competitive landscape in the Caribbean does not provide optimal incentive for fast-paced, customer-centric, banking services innovations. Instead, dreams of Caribbean e-commerce initiatives and Internet-based entrepreneurism are often dashed at the doors of traditional financial institutions.
For many, the region’s financial services status quo seems at variance with calls for greater innovation and economic diversification in the wider economy. This is a major problem that must be addressed.
The challenge facing bank executives and policy makers is how to redefine banking models to meet the challenges and seize the opportunities of the digital age. Before that challenge can be addressed an important question must first be answered: Is there genuine interest in investing in technology to deliver a more efficient customer-focused banking experience, when there is so much profit to be had by maintaining the status quo?
A 2014 report by Deloitte found that banks, particularly in developed countries, are facing increasing competition from alternative lenders and technology providers. It also found that they need to adapt how they use technology themselves if they want to maintain their market position.
According to Deloitte, there are “compelling cost advantages” for banks that decide to upgrade their core banking systems. This despite the “significant” costs in doing so and the fact it would be a “major endeavour” that could be considered a “‘once in a lifetime investment.” However, short-termism, risk aversion and a lack of suppliers are factors behind banks’ reluctance to overhaul legacy banking IT systems, Deloitte said.
Deloitte reports that many banks have chosen to avoid huge overhauls to their core IT systems because they view making small changes to those legacy systems to be “the path of least resistance”. Further, many traditional banks face cost constraints that make a large scale overhaul of their legacy IT infrastructure impractical.
Reluctance to Change
Obviously leaping into new systems simply because technology is available is not a practical option for banks. The need to provide improved customer services has to be balanced against security and privacy risks that attend technology-based systems.
Banks have to consider the potential for reputation damage or loss of customer confidence if systems fail or are compromised. There also have to weigh the timeframe for return on technology investments. These considerations have to be carefully examined in any decision to introduce new technology into their business.
“The central challenge is that banks have designed their IT systems to support processes that deliver products across multiple channels,” Deloitte’s ‘Banking Disrupted’ report said. “Bank systems are, therefore, arranged around products rather than around customers. Digital transformation, on the other hand, demands that customer data be leveraged to provide services at the point of need.”
“The rich customer data banks collect often gets lost within product silos. Turning this product-centered model on its head would allow banks to serve not just customer needs but also to capture their experience and address their future expectations,” Deloitte said.
The customer-centric approach to new technology solutions design is exactly where the opportunities lie. Recent Accenture research shows customers still value the branch, which remains the primary sales channel. Yet bank branches are becoming less relevant for younger customers, who are more comfortable with digital technology and less concerned with traditional markers of a bank’s trustworthiness.
For example, while more than 80 percent of customers consider it important that their bank has a long track record of financial performance, this factor is less important for younger customers.
“These customers want a bank that is agile and innovative, with the digital tools to connect with them on a daily basis,” according to the Accenture Digital Disrupting in Banking report.
However, in emerging markets, such as the Caribbean, even this inevitable shift in customer preference may not be enough to trigger investment in more innovative banking solutions and services.
“From the bankers’ perspective, they may well feel that they have no choice but to resist the forces of change until such change is inevitable or can be effected without compromising profit growth,” says Ronald Hinds, a former financial sector executive, turned technology entrepreneur.
Hinds believes that in this scenario “banks will continue to be vulnerable to any business model that can authentically address customer needs in an efficient and cost-effective manner.”
Innovative Leadership Required
Implementation of cheaper, disruptive, technology solutions may well be the saviour that banking customers have been crying out for and that banking traditionalists have been reluctant to invest in. There is a real opportunity for new, more entrepreneurially minded players to create new models for more customer-centric financial services delivery. Enabling policies are also necessary to make it easier for new providers and new service options to proliferate.
There is certainly also a role for community banks, credit unions and even entirely new social micro-financing platforms, such as the eSou-Sou idea floated at the recent Forum on the Future of the Caribbean. New ventures have the best opportunity to seed disruptive technology, based on more modern IT infrastructure and customer-first approach to service delivery. But such ventures also require fresh, forward-thing, leadership initiative if they are to become a sustainable reality.
Competitive and regulatory pressure can help speed the pace of systems upgrades and modernisation projects. However, in the absence of such competitive pressure, or regulatory incentive, banks can literally afford to sustain inefficiencies and defer service improvement options.
Contrary to what profitable annual reports may appear to convey, slow banking innovation is not good business. Banking inefficiencies have negative repercussions across the entire economy. Technology is a proven enabler of efficiencies, however, technology innovation cannot proceed without human leadership.
As with most technology revolutions, the disruption may be uncomfortable and even expensive in the short term. However, the spoils are there for those with the foresight and courage to depart from the status quo.
Contending with Disruption
On the global stage, we are already seeing convergence of traditional and emerging finance, combining the best of both worlds to make finance better for consumers.
One example is the recent partnership between Lending Club, a US-based online credit marketplace and Citigroup, a global financial services giant with over 200 million customer accounts in more than 140 countries. Citi now uses Lending Club’s platform to supply up to $150 million to underserved borrowers and communities its branch network is unable to reach.
There are similar opportunities for collaboration and partnership between banks and technology services firms in the Caribbean. However, it is unlikely that traditional banking institutions will muster the leadership resolve or investment prioritization necessary for such radical, technology-enabled transformation any time soon.
What is more likely is that new, disruptive innovators will arise. When they do, they will greatly benefit customers and the wider economy. How quickly they come forth will depend on the initiative of policymakers and the arrival of innovative solutions that can catalyse the banking revolution customers both desire and deserve.