The NAB results yesterday included one of the clearest signals yet of the digital disruption which is hitting the finance sector (and other customer facing businesses too).
Worth also reflecting on the fact that since the turn of the century NAB’s net interest margins have fallen 100 basis points, to below 2% today. They have to find a different economic model for the business. Just pulling back to Australia and New Zealand and flogging more mortgages will not solve their problem. The biggest expense by far is the people they employ.
They will shed 6,000 banking jobs and replace them with 2,000 people holding digital skills, from analytics through to software engineers. The future of banking is indeed digital.
This is because banking is a very “bittable” business, and just like newspapers do not need to sell physical documents to distribute news, banks do not need branches, or people on the customer service or sales lines. If they get the digital design right.
In fact, when we completed our last “Quiet Revolution Survey” which looked at customers and their banking channel preferences, we concluded:
The Quiet Revolution highlights that existing players need to be thinking about how they will deploy appropriate services through digital channels, as their customers are rapidly migrating there. We see this migration to digital more advanced amongst higher income households but momentum continues to spread. So players which are slow to catch the wave will be left with potentially less valuable customers longer term. Players need to adapt more quickly to the digital world. We are way past an omni-channel (let them choose a channel) strategy. We need to adopt a “mobile-first” strategy. Such digital migration needs to become central strategy because the winners will be those with the technical capability, customer sense and flexibility to reinvent banking in the digital age. The bank branch has limited life expectancy. Banks should be planning accordingly.
Many households and small businesses were critical of the slow pace at which banks were moving to service digital, and the lack of innovation available via mobile banking applications. And not just younger “digital migrants”.
So the task in hand for NAB and other other industry players, is to manage down the traditional branch and ATM infrastructure, while building compelling digital alternatives, whether it be payments, core banking or wealth management. And keep the business afloat during the transition. Think changing the propellers on an airplane for jet engines while in flight!
It is quite feasible to use robo-banking technologies to replace mortgage brokers, and financial advisers. It is completely possible to apply for a mortgage end-to-end on line, and deliver a quicker and more compelling customer fulfillment experience. Electronic payments can now replace cash. The mobile device will contain an electronic wallet and payment capability and rewards programmes and much more. Physical plastic credit cards are a thing of the past. Every electronic transaction produces data which is now the new life-blood of banking. Use that data to guide customers to new solutions.
The barriers to change have been the culture (especially in the middle management ranks) within banking organisations, so defaulting to a “let the customer choose” channel approach. But this was always a cop-out. Plus the complexity of the ancient “back-end systems” many of which are tens of years old, have to be tackled or replaced (as the CBA has done).
But now, banks have to be re-engineered and migrated to digital, harnessing the power of algorithms, robotics and user experience experts. A whole new world. We may need banking services, but do we need a bank?
Then there will be consequences for society. First, banks of the future will have many fewer staff, and those who remain will need different skills. Almost none will be customer facing. Just as robots replaced workers on the assembly line, robots are now becoming bankers.
Second, the minority of customers who a Digital Luddites will need to be handled appropriately. The current branch infrastructure is just too expensive. How will banks meet their implicit service obligation? Or will they try to trade it away, as they did with the ATM network?
But third, and this is the rub. What we are discussing here is also happening across other industries, and as the digital revolution gains pace, the risk is that more people find themselves without employment.
This is the worry-some aspect of digital transformation. Digital efficiency will mean fewer jobs. What happens to those without?
We are just 10% along the digital journey. It is unstoppable, and business models, careers and whole chunks of the banking system will be shaken to pieces. Just ask the Fintechs! But the social implications should certainly be considered too.