Open innovation and private banking
In the last years, banks have been attacked in many segments of their value chain. New entrants like Pay Pal and more recently Apple have been very successful in developing activities in new areas. Moreover, other competitors are growing all along the value chain, attacking niche markets one after the other. Even though there is no global new competitor yet, the pressure banks are feeling is definitely increasing.
Digitalization is a disruptive change in this industry which is creating space for new entrants. Fortunately for banks, the entry ticket is rather high as regulation is heavier and heavier every year (Mifid 2 and Basel 3 for example). Nevertheless, the regulation cost is also increasing for established banks cutting down profits and limiting the investment capacity in new territories. Furthermore, some niche areas are not fully regulated, leaving space for new entrants on markets with potentially high margin.
More specifically for private banking, we see new comers taking fully advantage of digitalization, not being slowed down by legacy cutting down costs and bringing a compelling value proposition to the market.On top, web giants like Google, Apple, Yahoo, are always seeking to expand. Banking sector could be for them a very attractive area as they already own the customers, have already access to a huge amount of information and have outstanding technological capacities. Banking knowledge is for them the only missing part.
In addition, to make things even worse, the fundamental value the banking industry was bringing to its customers, trust, has been quite damaged with the financial crisis. New entrants have not any more to overcome this entry barrier.The agenda for those banking organisations is rather challenging:
- Restore trust
- Streamline processes to reduce cost
- Increase product offering to compete with new entrants
New forms of relations between companies and customers are emerging. Open innovation is becoming more and more popular in various industries. A recent book "Leading open innovation" is listing and detailing the various aspects of this approach. Some of those ideas could be applied to the banking industry though introducing a complete paradigm change in the customer relationship.
Restore trustRestoring trust will be a better shield than regulation against competitors. Having a stronger and trusted relation with our customers will protect the banking business. To reach this goal, transparency will be the key word to rebuild the trust with the customers. In that matter, open innovation can be of great help, bringing this needed transparency. For example, active web communities enable to interact directly with customers, listening and understanding more their needs as well as explaining better the products and services and their associated costs.
This will require a deep and challenging transformation of existing sales and support teams to take fully in consideration these new interaction channels.
Streamline processesBanking processes can be streamlined. Digitalization is giving the opportunity of deeply transforming manual processes which are not any more in sync with most customers expectations. As a well known example of this disconnection between customers and banks, branches are less and less visited and are still being opened only when customers are busy working. Most of those branches are generating a very high cost not bringing back expected revenues.
For streamlining processes, open innovation techniques could again bring some help : for example, one could setup an internal contest to voice the numerous ideas that are already within the company. An innovation team could trigger such a contest through an intranet channel, collect and prioritize those ideas from the employees and propose to top management an implementation plan of the selected ideas.
For the implementation phase, some projects could also benefit from open innovation : external innovation contests could be used to speed up the digital transformation of banking actors. Compared to its web competitors, the banking industry has not the same intimacy with technology and digital channels. Seeking for outsource resources will help to faster the digital transformation.
Increase product offeringIn the private banking area, customization is the rule. Customers want a dedicated service matching their needs. Here again, open innovation could bring new ideas : the toolkit approach enabling customers to customize products is a powerful way of enriching the product offering without bearing the full cost of it. It also enables to tailor the products to the exact needs.
As an example, financial products could be inspired or even created by customer input, wizards could customize the service offering matching more customer needs, managed communities could help to share information along customers and identify new needs.
As a summary, banking industry is declining and adopting leading edge approaches like open innovation is key to bring back banks in the forefront and radically change their image.