The banking industry has reached the point of no return when it comes to digital. The traditional players have invested billions in digital, yet there’s no end in sight. Instead, they’re faced with ever-evolving digital strategies that require a continuous rethink of their business models, modus operandi and skillset requirements.
While banking executives come to terms with the growing investment that digital requires, they’re also beginning to realize the opportunities to reduce costs, acquire more profitable customers, increase retention and grow revenue. However, this comes among a backdrop of new, tech-savvy challengers threatening to erode their market share. In September 2016, we witnessed the UK launch of two new digital challengers, Fidor and Monese, while another, Secco, announced its intention to enter the fray.
Digital satisfaction is failing
Despite the huge investment in digitization, customers remain underwhelmed. Capgemini’s 2015 World Retail Banking Report showed a sharp increase in negative customer experience levels:
“In Western Europe, five [out of eight banks] … posted negative experience increases of more than 10 percentage points.”
A large section of society is already deeply engaged with digital banking. The latest data from the ONS shows that 56% of UK adults regularly use internet banking:
Recent research by the BBA found that UK customers will check their current account on their mobile 895,000,000 times in 2015, double the number of branch interactions. In response, banks are pursuing a number of different digital strategies:
- Digital add-on. Offering a digital layer on top of existing customer services (eg HSBC, Lloyds etc.).
- Digital-only. Designed for digital, with the end-to-end experience designed around smartphones and tablets (eg Atom and Starling).
- Digital/branch hybrid. A digital-first strategy that’s supported by a small-scale branch and telephone service (eg Lintel Bank believes that in offering these, it provides customers with reassurance as well quick and easy customer support).
- Virtual front-end. Branded digital services that are (or have) the autonomy of a startup, yet act on behalf of an existing bank (eg Moven, Simple, and Russia’s Instabank).
Despite not benefiting from the economies of scale of a larger player, a recent study by KPMG found that the UK’s new entrants boast better returns on equity, faster growth and similar cost-to-income ratio to the ‘Big Five’ banks. The opportunity can be exacerbated by digital-only players who are not burdened with legacy infrastructure. Atom, for example, is predicting a cost-to-income ratio below 30%.
According to McKinsey, traditional banks could themselves remove 20-25% of their cost base by further shifting processes and services to digital.
Evidence of lack of satisfaction
Our own research shows that, for 82% of customers, the strength of a financial institution’s digital banking solution is one of the primary considerations in choosing them. Yet, as the 2015 World Banking Report reported, many traditional financial institutions aren’t meeting customer needs and expectations.
Generation Y customers, in particular, registered lower satisfaction than customers of other ages, reflecting the high expectations Gen Ys have for digital banking capabilities, noting the high importance of digital technology in that demographics’ lifestyle. As Forrester points out, “Empowered customers have new expectations set by digital experiences with other industries. They demand more from digital channels, yet still expect personal connections at key points along their digital customer journey.”
The success of Atom and Starling relies upon their ability to reset the bar for banking.
McKinsey estimates that, across Europe, retail banks have only digitized 20-40% of their processes, leading to digital offerings that are ‘relatively shallow’. By focusing on the lowest hanging fruit, many basic banking functions remain untouched by digital.
ieDigital, for example, is hoping to further capitalize on the demand to digitize the collection and recoveries experience – an area of banking that one commentator described as being “stuck in the pre-digital age”.
More than that, though, banks are discovering that the business of digitization isn’t a project, nor even a series of projects. It’s a transformation that requires a rethinking of the organizational model, taking into account the new skills and flexibility required. There are increasing levels of organizational maturity:
With digital banking platforms ever-evolving, as soon as one new, disruptive technology has been embraced, another appears on the horizon. Right now, our clients are coming to us to help them make sense of a range of emerging opportunities, including cloud storage, wearables, biometric security, social media, augmented reality and image/camera-based banking.
‘Going digital’ means acquiring the skills and flexibility needed to innovate over and over again, along with incentives to encourage adoption to ensure these innovations have a real impact on the top and bottom lines.
When it comes to digital banking, then, success is all about the scope and quality of the digital offering. Banks must develop and execute the broadest possible digital strategy that creates customer value and increases operational effectiveness. The costs of building digital infrastructure are high, but the rewards of getting it right will be greater still:
- Increased customer acquisition through differentiation and relevance.
- Improved service efficiency and cost reduction by right-channeling interactions.
- Raising retention rates by staying relevant to customers.
- Earning revenue through cross- and up-selling.
The following steps can help you achieve this:
- Be more customer-centric. Put the customer first and last, and focus on delivering experiences rather than features; address the digital customer journey end-to-end. For example, simply offering a service that allows customers to digitally apply for a mortgage isn’t enough. It won’t be long before customers no longer tolerate an experience that starts digitally, but is quickly immersed in a world of paper, envelopes, photocopies and stamps. Or take the debit or credit card holder: Is there any reason why they should have to wait a week for a piece of plastic to arrive in the post when a digital version could be uploaded to their smartphones in less than a minute? An effective digital onboarding process not only reduces the cost of doing business in one interaction, it retains customers in these lower-cost channels.
- Embed a digital culture. Digital affects every aspect of your business, from customer acquisition and retention to long-term brand identity. It’s no use letting just one department take on responsibility for digital success. You need a company-wide commitment to digital. Apps, for example, don’t sell themselves. Once the developers have finished creating and testing them, your marketing department needs to promote them and encourage customers to download them, while customer service staff need to be able to help people use them. Without the latest adverts promoting Apple Pay, for example, most consumers would be none the wiser as to which banks support it.
- Think and act like a challenger. To win in the digital world, traditional banks need to start thinking like digital leaders. To amaze their customers, they need to stop looking at their peers for a lead, and instead focus on the technology sector that’s setting customers’ expectations.Take opening an account as an example. By using mobile functionality – such as turning a smartphone into a document and ID scanner with optical character recognition (OCR) – you can replace slow and error-prone processes while improving accuracy, friction and risk management.
- Partner for success. You can’t innovate quickly in isolation. You need to work with technical experts who can help you forge an understanding of what’s possible, and how your challenges could be met by new and emerging trends and technologies. Increasingly, this means cooperating with potential competitors and organizations from outside of the banking and financial services sectors. It also means cooperating on industry standards such as Fido (Fast Identity Online), so that investment can be focused in areas that add value and create a common customer experience.The alternative is fragmentation and sluggishness. Take a great product like Paym – it has yet to realize its full potential because every bank has given it a different name, and have embedded it in their customer journeys differently.
Digitization is already disrupting traditional retail banking. The new digital-only players are set to radically influence the way we bank. Their potential for significantly lower operating costs and profit potential, combined with a favorable regulatory environment, threaten to erode the market share of traditional retail banks.
We agree with McKinsey: most banking executives are thinking about digital too narrowly. There is much further to go in leveraging digital to offer a more immediate, simple and contextual customer experience. Those who are willing to fully embrace this will not only cut costs, but more importantly will offer an engaging and relevant proposition to a group of customers who are largely unsatisfied by an industry that’s not keeping up with the pace set by others around them.
Want to know more?
ieDigital can help your organization deploy a digital self-service platform that gives you the foundations to foster a relationship with your customer and, in time, extend and flex your value proposition. We can also work with you to better understand your customers’ needs and to prototype, test, and try out new concepts and ideas with them.
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