Digital Banking: A Necessity for Banks to Survive Beyond 2020
Over the past 5-10 years we have seen the banking industry in The Netherlands move along gently with our evolving expectations as customers, focusing primarily on providing us with a solid mobile & online experience through digital banking. These experiences were mostly a 1-on-1 reflection of the products and services that banks traditionally offered through their branch offices. Today the banking industry as we know it is about to change more fundamentally than ever as the role of banks in our society will change.
This change is caused both by the digital revolution expanding into the banking industry and by specific regulations forcing banks to relinquish their stronghold as the only financial services providers. Before long we – as bank customers – will demand that our banks provide us with an experience that suits an ever more connected world. Furthermore, our government will expect banks to be PSD2 compliantin January 2018. Under the PSD2 regulation, banks no longer hold the monopoly to provide one of the most basic (yet very important) financial products: payment initiation. In addition, banks will be forced to share their account management data to other providers whenever a customer requests so, opening the door for innovators in the banking industry.
4 Imperatives For Banks to Be Successful in Digital Banking
Changing customer expectations and increasing competition will force banks to focus on developing a distinctive proposition, and on combining this with a superior customer experience throughout. In this article we shed light on four key elements that will make banks successful in the digital age:
- their ability to create such a differentiated proposition;
- their understanding of what their customers need at all times;
- the ability to provide them with the right experience – anytime and anywhere;
- the ability to be flexible enough to change rapidly
1. Have a Clear and Distinctive Proposition
The majority of today’s banks are based on a full service concept: a very wide range of products and services across all client groups, segments and geographies. This offering has developed over time and has resulted in the incredibly complex mid- and backoffices that we see today where simple changes require months of work to be effectuated. In order to achieve the agility and flexibility in customer proposition and operations that is required in the digital age, banks will have to make clear choices in regard to their digital business model and accompanying customer proposition. These choices will, in turn, dictate the discussions on operating model and the required business / technology capabilities.
Now, there is no one-size-fits-all business model and choices vary on a spectrum between becoming a bank providing bulk utility services to banks becoming the partner of customers in their everyday lives. Generally speaking, banks would be best served to choose a business model that suits their relative strengths, especially if they choose to build upon what they already have.
In line with the decisions made regarding the business model, banks need to evaluate their earning model. Traditionally the bulk of bank revenues have been generated via net interest. With low interest rates projected to continue in the foreseeable future, banks are forced to look at their fee based products & services to become a more significant contributor and to critically examine their cost base in order to maintain a healthy profitability. As many services are free of charge these days, bank customers will only accept fee based servicing if a bank indeed provides a superior experience – an experience worth paying for.
2. Be a Digital Bank That Understands Customers Needs at All Times
Most banks either have already declared or are likely to declare that ‘they want to be closer to their customers’. A lot of customers will be open to this – as long as it makes their lives easier. So how can banks make life easier for their clients? The answer is straight forward: by acting on the anticipated needs of their customers. In order to do this banks need to leverage their most important competitive advantage: their massive amounts of data (balance and transaction information in particular).
"Analyzing this data in the right way can tell banks almost everything they need to know to become a true life companion to their customers"
Analyzing this data in the right way can tell banks almost everything they need to know to become a true life companion to their customers. We call this ‘People Like You’ analytics: using historical data, profiles with similar expected customer journeys can be created, which in turn can be used to predict what your current clients will need at which point in time. This fact-based, bottom-up approach to segmentation is much more effective than the traditional top-down client segmentation. The same principle can be applied to SME’s – as long as banks have a large enough client base. Effectively, banks should be trying to follow their customers’ journeys throughout their lives in an almost literal sense – and be there for them every step of the way.
There is one downside to the opportunities that analytics offer to banks: others can seize them too. Banks need to be aware of the increasing competition from tech giants and FinTechs (a recent survey by Accenture showed that 31 percent of respondents were willing to purchase banking services from a company like Google or Amazon). Where banks have the competitive advantage of being able to make predictions based on historical data, these technology companies have the advantage (at the moment, at least) to be able to predict buying intentions based on your online behavior.
With mobile banking becoming, if not being, the default way to e.g. make payments there is plenty of opportunity for the technology companies to become involved – and plenty of reason for banks to be worried.
3. Provide the Right Digital Banking Experience
Being a digital bank that is there for customers every step of the way means owning the client conversation. Technology provides banks with the ability to do just that – take the following example. If you want to book a holiday to the southern European sun, traditionally banks only came into play when the flight and hotel needed to be paid. And if you got lucky, you got a discount because your bank had a deal with your travel operator.
However, the customer’s journey to book a holiday begins long before he or she reaches the payment step. It starts out with an assessment of the financial situation and budget determination, then moves to orientation on location, which is followed by comparing airlines and hotels on price and quality, etc. Banks that intend to be closer to their customers now have the ability to get in on that journey early on via API’s, offering customers the ability to take these steps via the banks' user interface (which in most cases will be the bank’s app).
Speaking of the banks' user interface, customers no longer expect a ‘website-in-an-app’ experience but rather a personalized, two-way means of interacting with their banks. This requires a human-centric approach to designing customer interaction – and its needs to be designed and architected such that banks are able to adapt to shifting customer expectations swiftly.
4. Be Flexible Enough to Change Rapidly
Being able to adapt swiftly is difficult in an environment with such strong regulations and massive legacy application landscapes. However, both of these constraints are the bank’s problem and not the customer’s; customers will not accept them as an excuse for tardiness. So the ability of a bank to create an environment where change and innovation can happen at pace and at scale will be crucial to survive.
This is where a multi-speed delivery model comes into play. Such a model will allow for change to happen at the pace required by the bank’s customers. That is, rapid change on the frontend side concerning the systems that facilitate customer engagement to keep up with changing customer expectations; and a more gradual change on the backend side concerning the systems of record.
Implementing a multi-speed model is based on three core enablers:
- Pace (via devops and the ability to deploy multiple change methods).
- Decoupling (a service based architecture).
- Flexibility (both organizational and with respect to infrastructure).
Getting such a model implemented in a typical banking environment is a major challenge – but an absolute necessity.
Equally important is the role of the bank employee in the near future. Their work is about to change drastically with the arrival of chatbots in the front office and robotics in the back office (or blockchain solutions, when the hurdle of immutability is overcome). And additional advanced artificial intelligence solutions (e.g. based on cognitive technology) are imminent! With the bank so focused on providing a superior experience, it needs to make sure its employees are equipped to contribute to that purpose – and to become their workforce of the future.
Going forward, we will continue to share our perspective on digital transformations within the banking industry within this space. Stay tuned and feel free to reach out in case you have any questions or comments.