Smooth Revolutions

24 August 2016


David McCarthy
David McCarthy

Smooth Revolutions

‘Digital mobile is our version of the carbon-fibre bike’

Roll on Tokyo

Success comes to British cycling every four years it seems. Another haul of medals from Rio is just reward for the team’s dedication and skill but it’s also a fascinating case study into what can be achieved through ‘marginal gains’ – an approach that has allowed Team GB to dominate cycling at the last three Olympics. The team’s mission is a simple one: to propel bike and rider as quickly as possible from start line to finish. So they work on several areas, each of which might shave fractions off lap times: more powerful ‘engines’ achieved through identifying the best athletes and optimising their training and diet; formula 1 style data analysis to identify where the performance drops or to model and test race strategies; lighter, more rigid materials for the bike; improvements in aerodynamics and traction to reduce friction between rider and air and between tyre and track. These innovations have collectively succeeded in chasing the records down and down. The x-factor is that the team seem to hold back the reveal of these innovations until they really matter – every 4 years…

Whether in sport or in business, this is how competitive advantages are usually achieved - several small improvements that collectively build a lead. Sometimes the changes are more radical (or ‘disruptive’ in management speak). Carbon-fibre bikes transformed cycling, Ford transformed car manufacture with mass production and Amazon transformed book selling, and then retailing in general, using the internet.

The common-theme is that innovations are used to reduce or eliminate the frictions that burn energy without gain. In business, these frictions waste time and money for the customer and reduce the return for the shareholder. In banking, as with cycling, we have a lot of frictions to work on so lots of room for improvement.

Chained to the past

Banking provides important services to its customers: a secure place to store money, a way to transmit it and an effective method to bridge between the needs of savers and borrowers. But ultimately all transactions transform money into, well, money, so minimising the frictions that consume it is imperative. Processes should be slick, fast and low cost so that you keep as much of your money as you can – and add to it where possible.

But banking today isn’t exactly renowned as a paragon of efficiency. Many of the core systems used by traditional banks are old, poorly integrated,designed for a pre-internet age and are centred around a network of branches which are used less and less. Whilst a lot of information is gathered on the customer, little of it seems to be used to help them. And the customer often struggles to find the best deal for them due to all the unnecessary complexity and cross-subsidy built into product design. Overall this means customers spend too much time in branches, in telephone queues, chasing paper or searching the web.

Of course, banks get this but are often unable to make the changes, being prisoners of their technologies or their existing revenue streams. To move forward positively, banks need to eliminate the frictions they have become used to rather than continuing to mask them with complexity, cross-subsidy and opaque pricing.

Friction-free motion

So what about banking in the future?

Banks have been slow to embrace innovation because a small group of them were making substantial profits, and high barriers to entry saw off new competition. This is changing.

Technology to radically transform and improve banking exists and evolves by the day and this will allow banking to become ‘thinner’ and more helpful to the customer. Automated, paperless credit decisions and account opening will become the norm as will customer self-service, which should almost entirely cut out the need for inward calls or branch visits.

Use of cash is inexorably declining to be replaced by new forms of electronic money transfer. New cyber-currencies such as Bitcoin may take a while to move into the mainstream but are likely to build momentum.

Also, the development of inter-connected apps will transfer more power to the customer so that they can better understand their financial needs and more efficiently find the best solutions.

We foresee more product specialists born out of Fintech start-ups developing across financial services and these base their advantages on specific innovations in systems or processes. Increasingly the stranglehold of the traditional high street bank on these services will decline and people/firms are likely to interact with a much wider range of product providers - not all of them banks.

There will also be a new breed of bank that connects more closely with its customers to help them manage their financial affairs more efficiently and to find the best solutions for them, whether provided directly or from one of these specialists.

Armed with better tools, customers will demand more and banks will not be able to hide poor value behind complexity or opacity. Instead, the successful banks will work in partnership with their customers to help them optimise their financial situation. Collectively these sorts of changes will dramatically reduce the costs of banking, which should in turn allow for better interest rates, lower fees and faster response.

The next lap

Digital mobile is our version of the carbon-fibre bike. App-based banking aims to be more convenient, more informative and better value than that based on branches or indeed call centres or browser-based internet.

Our analytics will help you find the best products for your needs, even if they’re not provided by us. And we’ll fine tune the running of the Atom business using a statistical model we have developed to minimise wastage from poor decision-making.

We have a very long list of initiatives we’ll be implementing in how we run the business and present information to you, which should mean that there is less hassle and less cost in getting things done.

Follow David on Twitter @inachief1 or connect with him on LinkedIn