In Banking, the Best Relationships are Open
September 5, 2022 | 3 min read
By Jane Barratt, Chief Advocacy Officer at MX
The Consumer Financial Protection Bureau’s (CFPB) recent request for information highlighted a number of customer service issues within the financial ecosystem and asked how the industry can better implement a “relationship banking” model.
Relationship banking means treating customers as individuals by providing customized help and service. Our response highlighted numerous ways that open banking APIs can increase operational efficiency, reduce costs and deliver personalized insights and experiences. But it also challenged banks to go much further.
Financial institutions should address shortcomings in customer service with urgency, but this alone treats a symptom, not the cause. While the last decade of innovation has produced the opportunity for better, faster and more personalized financial services, banking remains largely commoditized. Financial institutions compete on the same playing field of attracting deposits, interest rates and loyalty programs, not on improving the financial lives of their customers (e.g., more savings, lower cost of borrowing, less time spent managing money, etc.).
Customer experience is based on reducing friction, cross selling products and maximizing digital engagement time, not on achieving financial outcomes. Customer loyalty is predicated on sticky technology and high exit costs, not on responsiveness and care. This is the antithesis of relationship banking. To reverse, financial services must become an industry incentivized by the achievement of customer outcomes.
Measurability of Improving Customer Outcomes
Outcome-based business models transition companies from the transactional selling of products and services to providing what the customer ultimately seeks. To deliver outcomes, companies must develop deeper relationships to understand customers’ goals, objectives and success, then strive towards meeting them based on measurable indicators. Measurability is particularly important. For example, if a customer desires a higher credit score, the provider must be able to demonstrate that its money management application (or debt consolidation product, automated bill pay tool, etc.) is a key driver of that outcome. This ultimately generates value for everyone.
Customers get the outcomes they want and financial institutions, who know exactly what is expected of them, can increase customer retention, drive account expansion, and create new revenue streams. There is no purer iteration of the relationship banking model.
Financial institutions should approach the transition to customer-centric business models the same way many firms are now adopting heightened privacy standards by focusing on data protection throughout the entire product development phase.
Privacy-by-design advances the view that privacy cannot be assured solely by compliance with regulatory frameworks; rather privacy assurance must become an organization’s default mode of operation. The same can and should be done with customer outcomes and the two share similar challenges. Both grapple with inflexible legacy systems, certain competing commercial objectives and the need for greater investment in understanding customer behavior. But most critically, both may also serve as self-governance mechanisms in the era of big data and commercial surveillance.
Surviving in a Competitive Ecosystem
Today, customers often compromise on features like privacy, financial wellness and customer service because switching costs are high and rival services are largely indistinguishable. This leads to a financial system that is very inefficient, as people cannot easily move their accounts to better products. This often allows financial institutions to set their own prices without fear of competition.
With open finance APIs, financial institutions (and fintechs) would not be able to rest on past products and reputations. They would have to make sure they are always offering the best services possible. Optionality helps shine a light on predatory practices and spurs innovation, which spurs further competition — all of which better serves consumers. By also bringing in an outcome-based banking model, imagine the implication: a financial services ecosystem that competes on who can most improve a consumer’s financial health.
Imagine the implication: a financial services ecosystem that competes on who can most improve a consumer’s financial health.
Without reliable and secure data access, a consumer has little transparency or insight into what is going on in their financial lives and the same holds true for financial institutions. APIs can generate new customer insights and revenue streams, while also improving customer experience. They also present through technical capability and market forces the opportunity for outcome-based financial servicing.
As banks grow accustomed to delivering outcomes, they need to build deeper, long-term relationships with customers that will in turn propel faster growth. The future of banking will not be defined by the number of new technologies deployed, but by how well financial institutions can adapt their entire service operation to changing customer behavior and improving customer outcomes.
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