Tutu Fellow: Banks are changing but not obsolete

Traditional banks are coming under increasing pressure from their digital competitors. But banks are changing but not obsolete.

The increasing number of people who do their banking online and by mobile phone has caused banks to close branches and lay off workers in countries ranging from Uganda, to the US, the UK and the Nordic region of Denmark, Finland, Norway and Sweden. Now that e-commerce companies like Amazon are looking to expand their financial innovations in the banking market, there’s a fear that this will bring about the demise of traditional brick-and-mortar banking.

While changes in strategy, technology and customer preferences are leading us into the unknown, it is too soon to consign banks to the grave. Financial technology (fintech) and technology companies such as Amazon may be disruptors and innovators, but the new competition is not a zero-sum game. Yes, banks as we know them likely will change, but they will not become extinct if they base their futures on three strategies: (1) redefining why they exist; (2) growing and cultivating relevant relationships; and (3) innovating.

Why do banks exist?

First, it is important for banks to understand why they exist. The leadership of individual banks and the banking industry association need to understand their models not simply in terms of what they do or how they do it. Leadership expert Simon Sinek believes that inspired and distinguished leadership in industry occurs because of companies effectively communicating why they are doing what they are doing. Most banks’ mission and vision statements are well crafted yet fail to say why they exist. 

My experience as a strategist in the financial services sector has led me to understand that banks exist to facilitate benefits for making our lives easier. The driving force of donor-funded market facilitators such as the Financial Sector Deepening (FSD) network funded by UK aid is that improvement in the financial services ecosystem will lead to reduced vulnerability and poverty. Market facilitators are important because they understand why banks should exist and aid them in the form of technical assistance to achieve the end goals mentioned above.

Banking is about relationships

Second, banks need to recognise that banking is not about transactions but about relationships. How banks and clients relate is changing, with increased use of technology. Nevertheless, banks need to be critical and ask, “Who are our customers, how are their needs changing, and how can we best serve them?”

Microfinance is a good model for how to do this well. Microfinance institutions rose to prominence with the award of the Nobel Peace Prize to Muhammad Yunus for his pioneering work in the field in 2006. They serve people whom traditional banks were not typically suited to serve. They rose fast because of their ability to grow and cultivate relationships and because they were more willing than banks to understand and cater to the needs of their customers, such as providing financial literacy, making it easier to access products and creating suitable products for rural areas and the urban poor. 

Banks can similarly meet their customers where they are by understanding changing customer needs and balancing direct contact against the benefits of digitisation. Although banks are increasing their interaction with online customer support and engagement on social media, in countries with low trust and literacy (including financial and technological literacy), the use of community-based agents will be critical.

The focus on relationships is not limited to clients; it is also relevant for banks to engage with regulators, lawmakers, fintechs, mobile network operators and industry associations.

Innovation is vital

Lastly, banks need to transform and innovate, or they will die. They need to move on from being financial product companies with “brick and mortar” processes to become flexible design labs. Research, trial, design and redesign are no longer a luxury – they should be the norm.

With the rise of fintechs, there are areas of concern. Fintechs exist because they solve a problem in a particular payments value chain. Since fintechs are premised on the marketability of data, they move fast to make sense of it. Banks need to invest in strong data analytics expertise to help them better understand customer behaviour or they will not survive.

And according to consulting company McKinsey’s annual review of global banking in 2017, banks should be more worried about the rise of “platform companies”, such as Amazon, Alibaba and other e-commerce companies, than the fintechs. These companies are blurring sector boundaries with their ability to provide a wide range of products from a single platform and are exploiting their wealth of customer data with great effectiveness. Innovation is essential.

Banks are at a moment where they have not yet fully understood how technology will revolutionise their businesses. It’s clear, though, that if they do not want to go the way of companies like Kodak and BlackBerry, they need to be willing to make fundamental changes. No reasonable leadership of a bank would want their legacy to be that of presiding over a company that became irrelevant through a lack of foresight. It’s time to make a change. Banks will survive, although they will look different. Perhaps the current frenzy will help improve the financial system by only leaving the best banks standing.

Jacqueline Musiitwa is a lawyer specialising in regulation, compliance and governance. She has a diverse financial services board portfolio and was 2014 Aspen New Voices fellow.