Out-Law News 3 min. read

Banks investing in innovation to counter threat of digital disruption, study finds


Most banks have increased the amount of money they are spending to try and innovate to counter the threat posed by technology companies, retailers and start-ups entering the market, a new study has found.

According to the 2015 Innovation in Retail Banking report (60-page / 806KB PDF), by industry think tank Efma and Infosys Finacle, 84% of banks increased "their innovation investment" in 2015 compared to 2014.

A total of 140 representatives from retail banks based across the world responded to the survey. Nearly three quarters of the respondents (72%) said they view the threat of industry disruption from at least one of technology companies, start-ups, retailers, insurers and telecoms companies to be high or very high, the report said.

"The highest perceived threat is from tech companies like Google and Apple, seen as high or very high by 45% of banks," the report said. "The next highest perceived threat is from start-ups, rated high or very high by 41% of banks. Much less of a concern is the threat from telcos, retailers and insurers."

A YouGov survey of 2,092 adults last month, which was commissioned by Pinsent Masons, the law firm behind Out-Law.com, found that 74% of the public see themselves still banking with a traditional high street bank two years from now, despite increased competition in the market from challenger banks, payment service providers and other companies that have not traditionally operated in the retail banking market.

Most banks said they believe they are "becoming more innovative", and many identified mobile technologies, big data, open APIs and the internet of things as likely to have a high or very high impact on the industry, with start-ups expected to have an impact in the deployment of those "disruptive technologies".

"In the area of advanced analytics the proportion of banks expecting start-ups to have a high or very high impact is 58% for customer intelligence, 58% for social intelligence, and 56% for real-time analytics," the report said. "In products and services, banks expect that start-ups will have the most impact on payments (where they could be competitors, partners or suppliers) and on digital marketing (where they are most likely to be suppliers). In payments the impact of start-ups is predicted to be highest in P2P payments."

The majority of banks said they "expect to increase their involvement with innovative start-ups", according to the report, with 86% and 78% set to increase their digital marketing and payments collaborations with start-ups respectively.

More than two thirds of respondents to the study (69%) said they think start-ups "can have a high or very high impact on innovation by helping them to develop more innovative solutions". More than half of banks (57%) also believe start-ups can help them "get innovations to market faster". Regulatory and security concerns are among the challenges banks identified they must overcome when working with start-ups, the report said.

The Efma and Infosys Finacle report said banks can "boost their innovation efforts" by working with start-ups. It said there are "numerous ways of doing this".

"Banks will need to assess their own situation carefully and decide what approach to take," the report said. "This could include investing in start-ups on an ad-hoc basis or through a corporate venture fund, setting up an accelerator/incubator internally or in partnership with a specialist, or simply partnering with innovative start-ups to launch new products and services."

Banks should put in place a "sound innovation strategy" and look to work with start-ups either as partners or suppliers to tap into the "radical innovation" they deliver, the report said. Banks also need to understand and respond to developments in mobile technology, advanced analytics and with open APIs and look at in which areas start-ups are "likely to have the most impact", such as in payments, personal finance management and digital marketing, it said.

The Pinsent Masons study found that many consumers are reluctant to embrace innovations in financial services, such as in relation to open data and new payment services. In one example, 60% of UK adults surveyed said they are either not very likely or not at all likely to use banking APIs that the UK government is in the process of finalising standards for. The use of APIs in banking would enable customers to access transaction and other bank account data and share it with third party businesses.

Financial services and technology law expert John Salmon of Pinsent Masons said there needs to be a re-think on how to address "public scepticism" over banking innovations.

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