“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.”

-Bill Gates

“Disruption” is one of the biggest buzzwords in banking today. Many within the industry associate it with various technological developments and the fintech companies selling them. True disruption, however, goes much deeper. Even more importantly: traditional banks are not doomed to watch helplessly as the industry they know disappears. In fact, by focusing on their customers’ wants and needs—something Wisconsin’s banks have always excelled at—community banks can continue to thrive in a disruptive world.

Defining “Disruption”

According to JP Nicols, managing director of FinTech Forge, disruption in banking occurs on three layers. The first is the experiential layer, which includes everything that directly impacts consumers, such as mobile banking and P2P payments. Second is the tactical layer, which is the digital connective tissue between customer experience and the bank’s core operations. Disruption in this layer includes technologies like open API and process reengineering. Finally, the strategic layer of disruption is home to developments such as artificial intelligence and blockchain. “Most of the disruption we have experienced so far has been in the experience layer,” Nicols said, but noted that the other layers will have more impact in the future.

Despite its pervasiveness, disruption can be difficult to define. “It doesn’t mean something new is launched and all the current players disappear,” Nicols explained. “In this day and age, no industry is invulnerable to disruption,” he continued. “Our customers’ expectations are being reshaped by technology.” Ultimately, disruption can be defined as change driven by customer expectations.

Setting New Standards

Perhaps the biggest challenge disruption presents to the banking industry is that banks are no longer only competing against other financial institutions. Instead, non-bank retailers and fintech companies are transforming their customers’ expectations, particularly in mobile banking. “The digital products are the most discussed disruptors in the banking industry,” said Kyle Manny, CPA, CGMA, senior manager, financial services at Plante Moran. “Consumers are demanding well-developed mobile banking applications as a qualification for who they’re going to bank with.” Fintech companies have been quick to develop mobile applications to meet that demand, but while they are attractive to consumers, haven’t been able to achieve scale on their own in many cases. “Fintech companies are reimagining how banking should work in a mobile world,” said David DeFazio, partner at StrategyCorps. “When you pull back the curtain, among the most successful are the ones who have partnered with banks.” DeFazio will demonstrate some of that during his presentation at the upcoming WBA Bank Executives Conference.

Even more disruptive than the fintech companies that tend to attract the most attention from the industry, giant non-bank retailers are the true impetus behind rising standards for digital services. “Where we haven’t paid enough attention is to well-funded players from other industries, such as Amazon, Walmart, and Facebook,” said Nicols. “Financial services used to exist in a unique middle zone where all competitors looked the same, and we only competed with one another. Every single line on the balance sheet now has one or more non-bank competitors.” Again, this is particularly noticeable within consumers’ expectations for the mobile experience. “Companies like Facebook, Apple, Amazon, and Starbucks are changing the way that customers expect things to work in the mobile world,” DeFazio explained. “Looking outside of our industry to see how these non-bank retailers are setting new standards for mobile payments is very important.”

Disintermediation—another buzzword—is the ultimate side-effect of this non-bank disruption. “Banks have been a trusted third party in the middle of a value network for a long time, and if we don’t need that third party anymore, for example because Amazon now offers its own financing, that’s true disintermediation,” Nicols explained. In the days before mobile wallets, PayPal, Venmo, and other digital payments disruptors, banks could count on the fact that with every purchase, their customers would reach into their wallets and pull out a debit or credit card (or checkbook) with the bank’s name and logo on it. “We were always there,” said DeFazio. “Today, that is disappearing. Sometimes consumers even forget which credit cards are attached to their mobile wallets. These companies that are outside of banking are stealing the experience from banks.”

In today’s highly digital, interconnected world, consumers also cause disruption directly. “Customers these days are far more researched than they’ve ever been before,” Manny explained. “Even within small communities, they’re walking into a business having already done research. Many have made their purchase decision before they walk in.” That includes for financial products and services, such as mortgage loans, which reduces the banking industry’s monopoly on customer relationships. For example, rather than automatically going with the bank and product recommended by their realtor, a potential customer may shop around and get a lower rate with Rocket Mortgage from QuickenLoans.

Finally, today’s regulatory environment is also capable of disrupting bank operations. “People don’t think of the regulatory environment as being a disruptor,” said Manny, explaining that some banks have chosen to exit small lines of business because of the perception of the regulatory compliance risks they present. “People who specialize in compliance and consumer protection are very difficult to attract or retain,” he said. “Companies may need to invest significant resources in employees or consultants to ensure they remain compliant, and it might not be cost-beneficial to do it.”

Keeping Up

So, what can Wisconsin banks do to keep up with today’s rapid pace of change and adapt to disruption? The first thing is to shift your mindset; see disruption as an opportunity, rather than a threat. “The natural reaction is to see disruption as a problem,” said Manny. However, he pointed out that banks have more data on their customers’ purchase habits than any vendor out there, enabling them to hyper-personalize opportunities and options for their customers. “Even if the customer gets a loan through another entity, typically the bank can see those payment transactions,” Manny explained. “If banks can find ways to better target new products and services to their customers, they can take away some of the market share that’s going to nontraditional competitors whereby they can ensure consumers understand their value proposition that is likely very different.”

Creating and communicating value within the customer experience is key. “Be the keeper of the experience,” DeFazio advised. “Try to understand and exceed the expectations of your customers.” Bank staff also need to know how to communicate that value to current and potential customers. “You have customers who are more well-versed in the competitive landscape than your front-line employees,” said Manny. “That can be a challenge if your front-line employees don’t know how to effectively differentiate your products to your customers. Make sure you understand your service model so you can empower your front-line employees to be able to react to those issues.”

It is also important for bank management to understand that, for most community institutions, they will not be able to keep up on their own. “Be willing to partner,” Nicols advised. “Banks are used to building things in-house and testing them for years before releasing them. That’s not going to be sustainable.” For many institutions, the solution will be to rely on the bank’s core provider or current technology vendor. “Form strong relationships with your core providers and other vendors,” said DeFazio. “In some cases, you’ll need to challenge your vendors to close the gap.” Some banks may also find value in partnering with a non-bank company to offer digital products/services. “Identify partners and consider joint ventures or other arrangements where you can dip your toe in the water to provide products or services in new ways,” Manny suggested. “I would encourage banks to listen and be open to those opportunities as they arise.”

Finally, the key to successful adaptation in a disruptive world is for bank leaders to become more aware of the new reality. “Our biggest challenge is that bankers understand there are disruptions happening around us, but they’re not studying them,” said DeFazio. “I challenge bank leaders to be more aware.” Attending this year’s Bank Executives Conference is one way for bank management to expand their knowledge of industry disruptors. Another is to experiment with various mobile applications and products as a consumer. “Community bank leaders need a better understanding of the competitive landscape outside of their communities,” Manny advised. “Know who your competitors are.”

The one thing banks must not do if they are to survive: nothing. “The default is to keep doing what you’ve always done, since you’re good at it,” said Nicols. “But, your plan only works well until it doesn’t. Pay attention to what’s relevant to your customers so you can continue to deliver value. The way your customers perceive value is the most important thing that’s changing.” 

Seitz is WBA operations manager - senior writer.

Plante Moran is a WBA Silver Associate Member.