Man using a card reader on a phone

Digital Banking in a Post-App Era

In the constant noise about FinTech disruption, identifying and understanding the trends that are really significant is becoming increasingly difficult. A trend to watch is the “post-app era” which Gartner defines as:

“A world where mobile apps will be joined by many alternative approaches to providing functions and experiences for mobile users, and rewards for developers and service providers.”

Given that the centrepiece of most banks’ digital strategies is the mobile banking app, this heralds a marked about-face. This may at first sound like a purely technical issue: it is not. In the post-app era, every aspect of a bank will have to be rethought, just as the entire music business has been reconfigured for the era of music streaming via platforms such as iTunes, Spotify and Tidal. The banks have gone through the first stage of digitisation, akin to replacing vinyl with CDs and selling CDs online; they now need to digitise their business fully. To see why, we need to start with a picture of the digital landscape in which banks and their customers will reside, with a focus on three particular trends: contextual commerce, platforms and smart agents.

Contextual commerce

In retail, the term “contextual commerce” is used to describe a pervasive trend where shopping opportunities are embedded in customers’ digital lives so that they can buy anything, anywhere, anytime. (To read more about this and other technology-driven trends, see DXC’s Innovation Model). Purchasing information is triggered by the context of what someone is doing and where they are.

What have they searched for? What have they purchased? What are they chatting about? Where are they? What’s the time of day? How’s the weather?

Context is derived from online tracking tools, GPS, Wi-Fi, beacons and ‘things’ connected to IoT.

In the same way, financial products will be marketed and purchased in the context of customers’ digital lives, though with the additional spin that the trigger will often follow the purchase of another product: holiday insurance will be purchased as an add-on to a trip and a loan taken out when a customer buys a mobile phone. This reflects the reality that, for customers, financial products are a means to an end, not an end in themselves – no one really wants travel insurance; they just want an enjoyable worry-free holiday.

Platforms

The natural venue for contextual commerce is the networked markets created by platforms such as Google, Amazon, Apple, Alibaba, eBay and Facebook because this is where customers will live their digital lives, and where companies will come to sell their products. Everyone is talking about the platform revolution, where producers and consumers are matched in a multi-sided marketplace and network effects create a virtuous circle that attracts ever more producers and consumers to the platform. However, not everyone can be a platform – by definition. The reality is that no bank comes close to the two million 3rd-party merchants that sell through Amazon, the 247 million U.S. unique visitors that use Google, or the more than 50 minutes that the average Facebook customer spends each day on their suite of apps. Moreover, platforms have an additional advantage since many of their apps, such as geolocation services and chat, e.g. WeChat and Facebook’s WhatsApp, are the likeliest to be left running live which makes them best placed to understand and act on context.

The upshot of the platform revolution is that, with one exception (see below), banks will in a literal sense be the last place that consumers will go for their banking. This applies not only to a physical bank but also to banking websites and apps because the trigger for customers to purchase an item, and add-on financial products, will come through the platform. For the banks of the past it was essential to have a presence on the high street; for the banks of the future the critical presence will be on the digital high street, where the high street will take the form of one of the platforms. A shopping mall may be a better metaphor as platforms will have a stronger say about what gets sold and how inside their ‘shopping malls’ than any single company has in a physical high street.

Of course, a complication is that the platforms themselves offer basic transactional banking services, such as payments and foreign exchange and even credit cards in the case of Amazon, with its “5% off” at Amazon.com. In this sense, the platforms will be competitors to the banks. But, transactional services have already been commoditised owing to the ability of so many new players to enter the market by piggy-backing on existing banking infrastructure, ApplePay being just the most prominent example. This commodification will be hastened by the EU’s PSD2 and the UK’s Open Banking which will allow any type of organisation to initiate payments and provide services based on aggregated transaction data. Banks should be planning to move up the hierarchy of customer needs and provide more added-value services focused on money management. The banks should regard platforms more as distribution channels than as competitors — in fact the principal distribution channel.

Smart agents

A third technology trend is the rise of ‘smart agents’ and ‘virtual private assistants’ like Google Now, Cortana, Siri and Alexa which are predicted to become the primary interface to platforms. Customers can interact with smart agents through voice recognition and chat bots. In addition, third parties, such as banks, are able to integrate with smart agents to give their customers a voice or chat interface to products and services. Smart agents will accompany us everywhere, not just at home and in the workplace but even in our journey to work: for example, Ford, is already incorporating smart agents in new models. The use of smart agents for voice will become pervasive for all devices, but above all for mobile. After all, mobile phones are designed for talking and listening! As a result, Gartner predicts that by 2020, smart agents will facilitate 40% of mobile interactions.

An early example of a smart banking agent is Bank of America’s Erica, a play on the bank’s name. Erica will act as a “personal advocate” to help consumers adopt better habits in managing their money. Customers can chat with Erica via voice or text message. For example, Erica might send a text saying to a customer, “Michelle, I found a great opportunity for you to reduce your debt and save you $300.” If Michelle wants to learn more she can ask Erica and learn that, “Based on your typical monthly spending, you have an additional $150 you can be putting towards your cash rewards Visa. This can save you up to $300 per year.” The customer can then use a voice command to go ahead with the new instruction. Under the covers Erica is driven by artificial intelligence and predictive analytics. (Read more in my blog Rise of the Financial Services Robots).

Customers can access Erica through Bank of America’s banking app, but I expect that in the long run customers will not use a separate banking smart agent when all day everyday they interact with the smart agent of their preferred platform which has been trained to recognise their voice and understand their preferences. The strategy for the banks will be to integrate with platform smart agents.

Harnessing the opportunities

The digital landscape of contextual commerce, platforms and smart agents has profound implications not only for digital banking but also for how banks market, distribute, manufacture and monetise financial products.

Partnerships – Because the trigger for customers to purchase an item and add-on financial products will often come through platforms, the banks will need to form partnerships with retailers, telcos, travel and other companies who will sell their wares through platforms. Banks will also seek to create new joint-offerings with partners, not just distribute today’s products. In a fully digitised business where products are purchased and supplied on demand and where manufacturing costs are lower, all sorts of new products and services become possible: for example, loans and insurance linked to any digitally purchased product; and pay-as-you go products triggered by any IoT-connected device. To paraphrase George Westerman of MIT, true digital transformation is about turning caterpillars into butterflies, not just making faster caterpillars.

People use Apps but Machines use APIs – In order to make banking services accessible to platforms and partners, banks will need to expose APIs (Application Programming Interfaces) that allow developers in the bank or outside to write code that exploits bank data and services. The API may push marketing messages, supply information about a customer’s transactions, initiate a payment or make a transaction, writing back to a bank’s core system. The point here is that though people use apps, machines use APIs. Since the new digital landscape is characterised by machine-to-machine (M2M) interactions, APIs will become central, whether to communicate with an IoT sensor, a chat-bot linked to a voice interface, or a platform’s electronic marketplace. This model has already emerged in industries such as travel, where distribution has moved overwhelmingly to digital channels. For example, DXC has enabled an airline’s customers to search and book flights via Facebook Messenger where the customer’s chat is the trigger for an advertisement and flight-booking.

Money management platforms – Apps will not disappear altogether — the term “post-app era” is too absolute — but the prominence of apps will decline sharply as services shift to M2M interactions served by APIs. Moreover, the bar for the banking apps that remain will be raised. In order to persuade consumers to ‘come direct’ by downloading and accessing banking apps, banks will have to offer a much richer set of services than commoditised transactional banking and instead offer “money management” services such as budgeting, Erica-like financial management and help with longer term financial goals. To extend the earlier analogy, if you want customers to drive past their usual shopping mall and come to your stand-alone out-of-town store, it had better be outstanding and offer lots of products that they cannot get at the mall, with excellent service at that. Here the aspiration to become a platform, in the shape of a financial management marketplace, makes sense, with banks aggregating money management services spanning every aspect of their customers’ financial well-being. Third parties will look to banks as being logical distribution partners for their products and the trick for the banks will be to create the right mix of in-house and partner products.

Multi-sided business models – A characteristic of platforms is multi-sided business models. Today’s banking models are one-sided, where a bank sells directly to a customer, or two-sided, with brokers and comparison sites sitting between banks and their customers. In the future, business models will often have three sides or more, with a platform, a retailer, a bank and the customer. Here, monetisation becomes a complex question. For example:

How much is a bank prepared to pay to be introduced by a retailer or a platform?

What happens if it is the bank that makes the introduction to the retailer?

What if a product, say holiday insurance, has low margin but brings with it the chance to establish a relationship with a new customer?

The most expensive ad word on Google is Insurance at the cost of $54.91. Is it worth it? I doubt if many banks have the required level of expertise in pricing algorithms to reach the right answers consistently.

Truly mobile banking – In contextual commerce the mobile element is critical, i.e. that someone is at a given place at a specific time, for example, at the till about to buy a camera and wanting a loan. Few of today’s mobile banking services are intrinsically mobile; they are standard banking services that just happen to be accessed via a mobile device. Because mobile banking services will have to be personalised not just to a customer, but to a customer at that exact place and time, banks will need much more sophisticated analytics and be able to run these in real time. At a technical level banks will need to be able to exploit bidirectional APIs where an external API communicates in real time with a bank API allowing data to flow in both directions. An example is where a customer’s online action alerts the bank to a customer’s presence and the bank is able to push offering information, respond to the customer’s action in the same session and record the outcome of the ‘conversation’ in the bank’s CRM system.

The hardest change of all, complete digitisation of operations – In order to support the full range of real-time digital interactions envisaged, it will not be enough just to automate the front-end; the complete digitisation of operations is required, otherwise the seamless customer experience will be derailed at the first manual step. Products will have to be digitally manufactured, compliance checks automated and embedded, IT infrastructure spun up in real time, and many management decisions performed digitally. Not hitting this month’s profit targets for holiday insurance via tour operators? Then automatically set up a randomised test to see whether the higher volumes from a cheaper white-label product outweigh the increased margins of an own-brand product. Got the answer; instantly apply adjusted pricing across all digital channels.

Meeting the challenge of end-to-end digitisation is what is keeping my colleagues at DXC most engaged in supporting our customers today.

David Rimmer

Author: David Rimmer

David Rimmer has 20 years’ experience in transformation and information technology. He is FSI Director at DXC Technology. His particular responsibility is for mid-Tier financial services institutions and the provision of ‘best-practice’ applications, operations, and infrastructure through the cloud.

David has a background in Public Finance, including tax, debt collection, student loans and welfare, and in management consulting at A.T. Kearney and Ernst & Young, where David specialised in designing and managing complex transformation programmes. In addition, David managed the start-up of Europe’s first stock-lending platform and an artificial intelligence company in France.