The danger of technological disruption of the banking industry is being hotly discussed. Surprisingly, the viewpoint of the customer rarely gets looked into at greater depth, Teodoro Cocca writes in his essay for finews.first

This article is published on finews.first, a forum for authors specialized in economic and financial topics.

The concerns about the disruptive effect that digitization has on banking are omnipresent. It is quite simply an existential issue of the sheer existence of banks as such. If a technological innovation happens to replace or make redundant an existing product, service or even an entire business model, the effect of it is disruptive.

At the present time, there’s a tremendous amount of conferences, where startups from all over the world in snappy three-minute-presentations promise nothing less than the certain next revolution of the finance industry. For sure, some of the fintech highflyers have great concepts and some are on the way to lasting success. But in recent months, a large number of the providers of this hip digital economy have started to realize that technological innovation as such is not a guarantee for success.

This is due to the fact that technological innovation – as revolutionary and advantageous as it may be – isn’t going to assert itself automatically. In the end, it remains decisive whether customers embrace innovation or not.

«The questions is: which clients are ready to accept digital financial services from totally new providers»

In this context, the most relevant (disruptive) question from the point of view of banks is whether a majority of customers actually would be ready to use financial services provided not from a classic bank but by a company that wasn’t originally a bank.

This would constitute the disruptive case of emergency or cruel worst-case scenario. An ominous scenario hanging much like a sword of Damocles over the heads of participants in strategy workshops organized by banks. It is in other words not a question of whether clients are asking for banking services digitally but about a step that goes much further on a scale of potential disruption: which clients are ready to accept digital financial services from totally new providers (bigtechs, fintechs or others)? A survey conducted recently allowed insights into the inclination of bank customers to disruptive behavior in asset management.

«Tech affinity for these clients does not necessarily imply leaving the traditional banking model behind»

To begin with, a widely held opinion needs to be disproved of: early tech adopters aren’t forcibly disruptive. Our data show that there is indeed a customer segment which is highly tech-affine and interested in innovation.

It is their eagerness that motivates such clients to test new fintech services with a limited amount of their assets. And still, these clients remain faithful to the classic banking relationship with the lion’s share of their assets – at least so far. Tech affinity for these clients does not necessarily imply leaving the traditional banking model behind. A much more worrying type of client is the one which combines an affinity for technology with a very skeptical and distrusting attitude toward a bank-centered model.

Accordingly, with this type of client, there is a much stronger danger for a substitution of a classic banking relationship with a new, purely virtual offering and this client group constitutes a true and immediate disruptive threat. In our survey, the share of this group makes up about 15 percent of the total customer population, which is a very relevant share.

«The subjective perception and approach to banks in general plays a crucial role»

This customer segment is typically predominantly young, male, prone to take risks and well informed about finance. The crucial aspect is that an increasing affinity for technology alone isn’t a strong enough criterion to put in question a classic banking relationship. But if a high tech affinity is paired with, let’s call it latent skepticism about banks, the toxic-disruptive mixture is complete.

The lesson to be learned for banks, on the one hand, is the conclusion that particularly tech-affine customers don’t necessarily pose a danger to banking. As it has been proven successful by many banks, such customers are suited for using the digital channels at the existing bank. On the other hand, disruption isn’t a question of technological innovation alone.

The subjective perception and approach to banks in general plays a crucial role. A latent-critical attitude is the key motivation and prime motive to turn away from banking. The usage of new technical solutions is in essence only an instrument to realize a deeply rooted emotional motivation.

«It has been shown once more that traditional banks hold all trump cards in their own hands»

At the same time, this also means that an effective anti-disruption strategy should take into account several aspects:

  • Tech-affine clients need to be offered a platform to indulge in their tech affinity within their existing banking relationship.
  • The positioning of one’s image relative to the bigtech/fintech firms needs to be looked into more closely.

It has been shown once more that traditional banks hold all trump cards in their own hands if they properly grasp the situation their clients are in. If they fail to do so, the share of customers that are latently prone to disruptive behavior will pose a real threat.

Teodoro D. Cocca is a professor for asset and wealth management at Johannes Kepler University in Linz. Before joining the university in 2006, he worked in investment and private banking at Citibank for a number of years. He was a researcher at Stern School of Business in New York and a lecturer at Swiss Banking Institute in Zurich. The Swiss, who has Italian roots, is adjunct professor for private banking at Swiss Finance Institute (SFI) in Zurich. He advises financial firms and government bodies in Switzerland and abroad. Since April 2011, Cocca has been a member of the board at VP Bank in Vaduz and heads the bank’s strategy and digitization committee. A new book, «Digitization in Private Banking» (in German) is out now at Frankfurt School publishers.

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