The history of capitalism is one of upheaval: when a sector has faced technological disruption, the dominant incumbent ends up dislodged. Banking is currently highly vulnerable to technological change.
Disruption is only just starting in the U.S financial industry. Digital – or direct – banks, are making inroads in the savings market. With state-of-the-art core operating systems, they offer the user experience that the market wants. Many larger U.S. financial institutions, once global leaders, retain decades-old legacy IT systems, patching the holes in a sinking ship to create new channels or address vulnerabilities, and losing profits through the gaping holes of inefficiency. These institutions will have to respond through copying, collaboration or confrontation.
“I liken the changes facing U.S financial institutions now to what the automobile industry went through when faced with just-in-time production in the 1980s,” said David Arnott, CEO of Temenos. “There’s a seismic change occurring, and the winners will be those who undergo a business transformation to respond to new consumer expectations, pursuing a progressive renovation of the customer experience.”
Many industry experts and financial analysts believe, for instance, that the U.S. no longer needs 6,400 banks,1 leading to consolidation and transforming the financial services landscape. From Wall Street to Wyoming, change is already being driven in the U.S. by tough regulatory and compliance requirements, tighter margins and, above all, the challenge of offering the best services and products digitally. Increasingly, discerning clients are choosing financial institutions based on user experience.
“The traditional brick and mortar branch is no longer enough to maintain account holder relationships,” states Jay Mossman, President, Temenos USA. “Face-to-face interactions aren’t required to complete transactions anymore, altering the way consumers connect with their financial institution both inside and outside of the branch. Despite the challenges that come with any change, these organizations must take action in order to remain not only competitive, but relevant. Standing still is not an option.”
The following study examines the headwinds buffeting the sector, starting with results from a global survey of financial institutions which highlight the digital divide between North America and elsewhere. From there, we will investigate issues surrounding legacy systems, branches, digital banks and competitors, sketching an outline of the financial institution of tomorrow.