The pace of digital transformation in financial services is – at last – speeding up. The sector has resisted such change and for a while was largely protected as a result of the 2008 crash when the increased focus on regulation helped to protect the status quo. Now things are different.
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Research from the BBC suggests that more than 600 bank branches across the UK closed last year as a result of more people banking online. This week, Royal Bank of Scotland announced the latest of more than 1,000 job cuts as it shrinks its branch network following a 30% drop in branch transactions since 2010.
But the closure of bank branches is just the most visible aspect of the same process that started to hit the retail sector 15 years ago. Already you hear commentators talking about “digital disruption” and the web replacing branches in the same way that retail experts said “clicks” would replace “bricks” – and much the same way as the media industry once said print was dead to be supplanted by the web.
There is an underlying truth in such claims, but they are wrong – or at least, they fundamentally misunderstand the nature of digital transformation.
The language used here is important. “Disruption” suggests replacement – that the old ways will be swept aside to be succeeded by the new. However, online shopping is booming but we still have physical shops; online news is huge but there will still be printed publications, albeit fewer and probably more niche.
A more accurate way to describe the effect of digital technologies on an industry is fragmentation. Technology breaks supply chains, processes and products into their constituent parts; it removes barriers to entry and allows new entrants to compete with low start-up costs. It allows those new entrants to cherrypick services that would once only have been available as part of a bigger offering from a bigger organisation.
In media, the print platform that dominated has been fragmented by the addition of web, video, apps, tablets, social media and so on.
In financial services, the most obvious fragmentation is happening in payments, with mobile apps and online services such as Apple Pay taking consumer payment methods out of the hands of the big banks – and fintech startups increasingly competing in areas like business payments and international money transfers.
This is how it starts – with new entrants chipping away at the edges, fragmenting the monolithic structures of old. And it won’t stop there.
For IT leaders, the concept that technology fragments – not disrupts – can be a powerful way to understand and explain to the boardroom the true impact, and the risks, of the inevitable and unstoppable digital transformation they face.