Digital Disruption In Financial Services, Retail Banking and Credit Unions

Every interaction a financial institution has with its customers, employees, partners and shareholders is an opportunity to create value. Each customer experience can be perceived as positive or negative, and these experiences form our individual beliefs and realities. Positive experiences lead to happy customers, conversion, revenue, advocacy and loyalty. Negative experiences create frustration,  bad reviews, loss of customers and consumers sharing negative experiences with friends/family which hurts brand value.

Today, many local and regional bank customers are challenged with outdated, legacy banking technology, siloed data, performance issues and lack of any personal experience. Call center volumes remain high, customer satisfaction remains low, many millennials have never stepped foot in a brick and mortar bank and bank brands are indistinguishable. There’s little loyalty, and while many regional banks and credit unions have strong community ties, it’s simply not enough to overcome customer pain points.

Meanwhile, fintech startups (SoFi as an example) are building fast, scalable, decoupled solutions on modern frameworks using microservices, open source technology and agile methodologies to disrupt the status quo.

In response to digital disruption and in an attempt to retain and grow their customer base,  financial service firms are making significant investments to enhance customer experience, but only 46% agree or strongly agree that their firms are adequately preparing for digital disruption, according to Deloitte's recent research.

Financial service firms are slow to adapt and falling short of customer expectations

In 2018, most banks and credit unions continue to fall short of consumer expectations, particularly when it comes to more complex transactions, payments and areas involving personal financial management.  These shortcomings leave one-third of consumers open to trying a non-bank provider to get what they want, according to a study fielded by Oracle.

The financial services industry is embarking on a journey to create better customer experiences, but most are moving much too slow, and legacy firms are failing to differentiate themselves. The players here are well known. Defined, and some would say hampered, by their history and, in most cases, their high street presence and large customer base.

According to Forrester, “In a market where one-third of all customers say ‘all banks are basically the same,’ it would make sense for executives and their teams to obsess over how to differentiate.” But legacy systems stifle innovation, and large customer bases restrict the ability to expand quickly to meet evolving customer expectations.

Mobile Banking Is Not Enough

Financial institutions are struggling to find proficient resources and instill digital cultures to drive internal change. The banking industry has talked about ‘customer-centricity’ and ‘improving the customer experience’ for over a decade and have implemented basic mobile banking applications, but most organizations have had difficulty breaking down product silos and leveraging internal data to deliver seamless, highly contextualized digital experiences. In a world where customers expect great experiences and 24x7, always-on access to their account information; daily batch processes, single points of failure, and maintenance windows are no longer acceptable.

Nimble fintech companies, armed with business acumen, product development skills and the ability to move quickly are creating simple, seamless customer experiences and applications. In Oracle’s research, more than half of consumers ages 20 to 36 said they already use a digital wallet or mobile payment platform provided by a fintech or challenger bank. The danger of course is that consumers will try these products that are likely more innovative and offer a better consumer experience and never go back. And then migrate more and more of their financial life over to fintechs and challenger banks.

Fintechs and banks are preparing for the future of APIs and open banking systems

Increasingly, financial technology firms with innovative products and services have been attacking some of the most profitable elements of the financial services value chain — among them lending, personal finance, mobile payments, and e-money. Couple that with the European Union’s PSD2 (Revised Payment Services Directive) which took effect January 2018 and requires financial institutions to participate in an open banking system, and any savvy tech company now has an open door to leverage a bank’s customer account information to create value-added services. What does this mean for the future of  banking? You can pay bills, transfer funds and manage your financial accounts through Google or Facebook. That means personalized relationships with bankers may become a thing of the past. Reducing banks to nothing more than a commodity.

In response, many European banks are partnering with fintech companies to develop new innovations and in many cases investing heavily in their own startups to create new digital products and services. Those that aren’t risk imminent failure.

Although this doesn’t immediately impact the United States, you can expect the US to follow suit over the next few years. Banking professionals within the US are observing the PSD2 rollout in Europe, along with open banking initiatives taking place across Asia, with great interest. As foreign banks, third-party fintech providers and customers begin to develop and streamline processes and procedures for operating within a fully open banking system, they are simultaneously building out a skeleton framework for the US to base its own open banking standard practices.

Financial service firms struggle with digital IQ

Digital IQ plays an important role in how businesses interact with customers, partners, vendors, employees and shareholders. This is especially true in financial services, where products can be complex, competition is heavy, and engagement is often a challenge. Although many financial executives understand that they need a new digital strategy, hiring and retaining  top talent and implementing a strong digital culture remains a challenge. Technology allows much faster scale and much thinner margins. But while financial services leaders are implementing internal digital programs, creating innovation labs and hiring data analysts, others are paralyzed and unsure how to proceed in this new world.

Digital transformation requires leadership, agility, transparency and technical acumen.  ‘The bank’ is no longer a collection of products distributed across channels, but experiences which surface the value of the bank to a consumer contextually.

Even the best technology companies spend years attracting talented project managers, UX professionals, data scientists and developers. Leaders implement agile processes create transparent learning cultures based on software development lifecycle best practices and continuously evaluate state of the art technologies. It’s imperative that financial institutions partner with great consultants and agencies, working as one team to implement great customer experiences across digital channels, and also adopt the processes and culture needed to succeed in today’s digital frontier.

Conclusion

From insurance to retail banking, financial firms are making investments in digital transformation, but most are:

• Moving too slowly
• Focusing on products and services rather than customer-centric
• Lacking the digital IQ and culture to make significant internal improvements quickly

Meanwhile, fintechs are gaining traction through great customer experiences and frictionless technology, which allows for much faster scale on much thinner margins. If trends continue, many retail banks may suffer the same fate as Blockbuster.

We’d love your thoughts and comments and are happy to share additional insights. Feel free to comment or reach out if you’d like to have a discussion.