During our most recent event, Dharmesh Mistry shared lessons from his extensive experience of digitising banks in the UK. With over 30 years’ experience, Dharmesh has been keenly involved in the genesis of technology within the banking industry. His profile includes rolling out the very first PCs within Lloyd’s Bank in the 1980s, launching the UK’s first mobile banking application in the 1990s, and, more recently, being a key player within the Fintech industry.
From the outset, the key lesson is that technology moves fast, but customer adoption is slow to keep apace. Banks needed 15 to 20 years for 50% of their customers to adopt internet banking and mobile banking. These experiences require market players to be clear about their real goals when digitalising. Additionally, they must anticipate unintended consequences of adopting new technologies. For example, Dharmesh noted the rollout of 40,000 PCs across the Llyod’s banking network in the 19080s as a means of reducing personnel and costs. However, the project resulted in expanding the bank’s work, requiring the bank to hire more people to keep on top of its growing workload.
There are several drivers of change in the banking sector, but two — competitive landscape and the regulatory environment — are particularly salient. The competitive landscape is evolving with several non-bank players entering the fray, such as Proptechs, Fintechs and ‘BigTech’. In the regulatory environment, PSD2 has been a key development in unlocking banking data for third parties, while the GDPR has increased the focus on privacy in relation to the use of banking data. Both aspects are captured within ‘Open Banking’ which is the means of gaining third-party access to customers’ financial information. Dharmesh highlights that there are currently more than 200 Fintechs using open banking data. Facilitated by key regulatory developments such as the PSD2, ‘Open Banking’ is driving competition across the industry.
Importantly, Dharmesh highlighted the key differences between digitisation and digitalisation within the industry. The former focuses on driving efficiency and renovating existing processes. It is characterised by manufacturing products for sale, dependency on human input, and organisation around product silos. However, the latter is fully immersed in the online realm with focus on hyper-growth and innovative business models through the internet. Manufacturing is optional, with emphasis largely placed on distribution, and design being consumer centric (rather than orchestrated around traditional product silos). Typically, incumbents focus on digitisation, whereas start-ups focus on digitalisation.
The impact of Open Banking has led to the growth of new business models, ecosystems and segmentation models in financial services. Traditional banks manufacture and distribute their own products. However, Open Banking has helped create new models, such as pure manufacturing, pure distribution, and pure services (e.g. credit scoring and KYC checking services).
In concluding, Dharmesh addressed the future of open banking. It is likely to lead to the re-segmentation in the banking sector, with banks creating different products for broad customer segments such as credit cards, accounts, and mortgages. The quality of the services offered as well as industry experience will differentiate the major players. Furthermore, he added that Covid-19 is likely to impact the industry by flattening the number of Fintechs as investor funds dry up and revenue streams struggle.
About the Author:
Melvin Obadha is a Fintech Researcher at OFLS, and a DPhil candidate in Health Economics (2022) at the University of Oxford.