The Strategist

Do banks need sharing economy?

08/31/2018 - 14:42

Instead of developing their own services, banks should start using each other's strengths, believes Saxo Bank analysts. This will help them to repeat success of companies that have become pioneers in the sharing economy, and modernize their business

Every day, we read news about a new financial and technological start-up that tries to use innovations to improve quality of services, or that a well-known bank is launching a new project in the IT field to keep up with the times.

However, an effective and customer-oriented transition to digital technology in the financial industry requires not only investments in IT, but also a radical change in business models. In order not to lag behind new technologies and to meet the growing expectations of customers, banks need to understand the very spirit of the sharing economy, go beyond regulatory and technological constraints, and also focus on their core competencies in the value chain.

Many banks openly admit that the outdated infrastructure binds hand and foot. Some modern banking systems were founded back in the 1970s, and a huge amount of external infrastructure seems to be cemented with the help of chewing gum or scotch tape.

According to the study, an ordinary European bank spends up to 80% of its IT budget to maintain outdated systems, that is, to start the old engine every day. Due to the fact that a significant part of the resources is spent on maintenance, there is few opportunities to develop new solutions to meet the ever-changing needs of customers.

At that, outdated systems do not necessarily mean that modern banks are not able to provide customers with a decent digital service, but this situation carries a certain threat in the long term. After all, this situation shows that banks generally lack efficiency, flexibility and opportunities for scaling.

As a result, the financial institutions are so confused with complexities of its own system that they risk falling behind its competitors and eventually losing out to those who can offer better and more comprehensive digital services.

The first reaction of bank managers and governments can be a global review of the entire infrastructure. Such a decision will help to cope with the "symptoms of the disease" for some time, but it will not eliminate the main problem.

It is not possible to create a bank from scratch nowadays. However, you will have to deal with all the issues. You can collect all the necessary technologies and infrastructure lust like Lego to achieve your main goal - customer service. This is good news for banks that are "mired" in the problems associated with obsolete technologies: solutions for all their troubles already exist.

Sharing economy and related technology are not just about just purchasing software. The financial industry is a complex and rigidly regulated sphere, and software vendors do not always manage to maneuver in these conditions quickly and productively.

Therefore, partnership with other financial organizations, competent in the Bank as a Service sphere, is a very topical solution.

Airbnb, the largest site for finding and renting housing around the world, does not own any real estate. The most popular social network in the world, Facebook, does not create any content, and the world's largest taxi company Uber does not have its own fleet. This clearly shows that transition from ownership of assets to their use has significantly transformed many industries. Now this approach finds application in the sphere of banking services.

15 years ago companies created their own customer relationship management (CRM) systems. No one does it now. Almost all market participants purchase such systems from several specialized companies like Microsoft or Salesforce. The same applies to telecom operators, accounting systems and a number of other key functions.

Søren Kyhl, Chief Operating Officer at Saxo Bank, analyzed the telecommunications industry and found a clear similarity in how the resellers created a unique offer in addition to the existing infrastructure provided by those who were mainly their competitors.

Instead of striving to own a complete value chain, they decided to spend resources and energy on the work in their field - to develop solutions targeted at a specific audience, with excellent service quality and attractive prices. By mastering partnerships and sharing technology, banks can eventually get the same network effect.

This is what many financial and technological companies do. For example, instead of creating an entire infrastructure for managing a consulting robot, they apply already ready-made technologies of other banks and use their access to the market as a basis. Thus, they receive the necessary base and can focus on distinctive features of their proposal.

Søren Kyhl believes that in five or ten years the financial industry will change very much. Technology, regulation and customer expectations will help all financial institutions to realize their role in the value chain, master the economy of joint consumption and get ready to work with partners in order to be able to offer customers a unique service.