By Omar K Alghanim
We believe innovation is not only a critical part of our business, but the key to future growth and success.
“Disruptive innovation” are the types of innovation that have significant impact on our core business – things that shake up the industry, things that reward one bank and punish another, things that drive dramatic growth.
Most innovations in financial services are not disruptive. Interest-bearing checking accounts, 24-hour call-centres, ATMs, and online banking are all relatively new offerings that have a huge benefit to consumers. Today, they are available through virtually every bank, and are almost indistinguishable in form and function. These are the things that we spend most of our time on, and where we compete with each other all the time. They are things we have to do to remain competitive, but they rarely result in any sustainable competitive advantage.
Real disruptive innovation – the kind that builds new markets, new products, or new customers – causes upheaval in the industry. Disruptive innovations shake things up, they destabilise the status quo, hopefully by offering something completely new to customers.
Sometimes innovation happens without disruption, and that’s true with mobile banking. Just like ATMs and online banking, they’re great for customers but don’t necessarily create any sustainable competitive advantage. Keeping customers will mean offering mobile banking – and doing it very well – but it won’t drive much new business.
But we also know this about mobile - these devices are more closely connected to customers and their identities than almost anything else. More than their wallets, their home addresses or even their bank accounts, mobile devices tell us, on a truly granular level, exactly who our customers are: how they think, how they socialise; how they interact with the world – including how they bank. So understanding mobile ultimately means understanding our customers, and understanding our markets. That knowledge, at a level of detail and intimacy never seen before, could become the core of retail banking.
Consequently, we’re seeing a lot of activity where mobile and financial services intersect. This is driven by the attractiveness of these two huge markets. And a tremendous opportunity for would-be attackers to compete with institutions that appear to be very slow-moving, as they operate behind their regulatory firewalls. In particular, mobile payments – Apple Pay, Google’s Softcard, and Facebook Messenger – have the potential to shift brand value away from banks toward mobile devices, even though payments will most likely continue to be processed through banks. Consumers may not be aware or even care which bank is managing their mobile transactions. Their focus in that case would be less on the bank and more on the customer experience. Who would you expect to deliver a better payment app – Apple or your bank?
Here in the Gulf, we always tell ourselves that customers are more traditional, regulators more conservative, competition less fierce. We need to look at the innovations that threaten to take away our most profitable customers and businesses. According to Bain, as much as 30 percent of traditional bank revenues could be at risk. Just look at our customers. We have a young population with an appetite for new and innovative products and services and a high penetration of technology, which has huge disruptive potential. We have smaller markets, where cost-of-entry would be lower. And we have profitable customers – which would be prime targets for attackers looking to edge-in on our business.
To get a sense of how vulnerable we might be to a “digital disruption” in banking, we, at Gulf Bank did some research and asked over 2,700 individuals across the GCC a few questions. First, we wanted to know how comfortable they were using digital channels. 76 percent are using online or mobile banking. Around 50 percent are already using their phone for payments. A third interact with their bank via social media. And, what’s more worrying, over a third are using PayPal or similar payment products. Bottom-line, our customers are tech-savvy and already exploring new products.
Second, customers said that for “new and innovative products” they would look to their current bank first. But if they were to switch out: 1) they would prefer an Apple or a Google over a bank for payments; 2) they wouldn’t care who it is if they are borrowing money; and 3) they would only slightly prefer a bank for their savings. In other words, a new competitor, even for traditional banking products, does not have to be a bank.
Finally, 57 percent of the respondents said that they expect innovations to come from the tech giants like Apple, Google, or Facebook – not from the banks.
So we should beware that our customers are fertile ground for innovation from outsiders.
So what do we do now? Where do we go from here? As a regional player in the GCC, we have usually been dedicated fast followers of innovations that are developed elsewhere. We usually don’t expect to be creating innovations. We also tend to lean on regulatory safeguards to protect us against too much disruption. For our core businesses, I believe that these strategies may be adequate – but are certainly not enough.
We cannot, should not merely rely on regulatory walls to protect our businesses. We need to figure out how to better serve our customers, how to bring them new products that excite them. We need to make sure that when the boat leaves the dock – when disruptive innovation opens new markets, customers, or value propositions outside of traditional banking – we are on board for growth. And finally, we need to work with regulators to make sure that disruption does not mean instability. There is no reason why the two should be the same.
At Gulf Bank this is something we think about all the time. We are working hard to embrace innovation at all levels – both conventional and disruptive – and we’re building a culture that seeks to keep us ahead of the game. We believe innovation is not only a critical part of our business, but the key to future growth and success.