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Financial Institutions Unprepared for Digital Future

Jul 23, 2014 10:26:00 PM

This post was originally published on The Financial Brand. Read the full piece (with charts) there — and follow Jim Marous on Twitter.


There is no question that banking is quickly becoming a digital business, supported by enhanced online and mobile offerings from traditional financial institutions as well as new market entrants. But how ready is the banking and credit union community for this transformation?


According to a Bain & Company report entitled, “Building the Retail Bank of the Future,” more than half of the 78 global financial institutions benchmarked lag substantially in the ability to create the “bank of the future” experience that customers already expect – integrated, on demand, real-time banking services via a combination of digital and physical assets.

Bain found that while many banks have focused their digital investments on digitizing transactions that reduce brick and mortar cost, less has been done to make consumers’ banking experience more convenient, easy and engaging through a seamless integration of channels.  While consumers have definitely appreciated digital innovations such as remote deposit capture, remote bill pay and other simplified transactions delivered through a mobile app, winning the digital consumer in the future will require more.

In fact, many of the comments made by the dozens of participants in the discussion revolved around simplicity of design, the removal of friction and the ability to improve the customer experience. Moven CEO/Founder Brett King in an interview with The Financial Brand. “In fact, while lower acquisition costs and lower distribution costs are key metrics for neo-banks and P2P lenders, their ability to generate business purely through digital is the biggest single threat to the existing model of retail financial services.”

The impact of not being able to provide the digital capabilities customers desire is difficulty in defending against more nimble, low-cost, digital-only entrants that are increasingly grabbing market share. The cost of losing these digital natives can be high.

In fact, in a survey of 77,000 banking consumers, Bain found that consumers who conduct the most digital transactions also have the greatest satisfaction with their banks (as measured by Net Promoter Score) and do more business with them as well. As shown below, customer loyalty scores were nearly three times higher for digitally-active customers than for less digital counterparts. There was also a correlation between digital channel use and affluence.

Integrating Digital With Physical

While digital channel use will increase in the future, they will not fully replace physical channels, according to Bain. The number of branches will continue to decrease and the role and structure of branches will continue to evolve. Branch networks may be organized around a ‘hub and spoke’ configuration, with far fewer full service flagship branches being surrounded by smaller branches with limited functionality. These branches could be supplemented by video call center technology that links customers with more complex needs to remote experts.

Chris Skinner, Chairman of the Financial Services Club and author of the book, Digital Bank told The Financial Brand, “A digital bank has to be built with a digital base. Interacting with the bank is then through various form factors – human, machine, device and chip. It is not about adding a new channel – mobile, tablet, social, app – to the old ones … that’s the wrong thinking. Digital infrastructure (the web) must be at the core.”

In what Bain refers to as DigicalSM (digital+physical) transformation, some leading banks are transforming their core business – including products, channels, back office technology and organization – funded by the reduction in legacy costs and systems. Some banks have gone farther to reinvent the customer experience and provide new ways to engage and add value to customers, sometimes partnering with technology start-ups to accelerate innovation and create new propositions.

Skinner agrees that organizations should fund their reinvention of core infrastructure to be web-based through freezing legacy upgrades. According to Skinner, “The savings per annum in upgrades and maintenance should then be used to fund moving the data to the cloud and creating APIs and apps that leverage that cloud-based data.”

Digital Pure Play Competition

The need for traditional financial institutions to provide better digital banking is no longer an option as low-cost digital-only entrants are taking market share. Anthemis Group, an investment and advisory firm for digital financial services companies, tracks 3,000 such companies worldwide. The impact in financial services is similar to what happened in industries like music, retailing, and travel. Bain clustered the digital pure play competition into three groups:

  • Aggregators redefine the interface between traditional banks and consumers, providing added value while squeezing profit margins. Moneysupermarket, Mint and CHECK24 bring transparency to pricing and product features, and could become a primary interface.
  • Innovators use existing technology platforms, but leverage innovative sales and service platforms. Square, Paypal, Starbucks and many of the players in payments take what was once considered ‘marginal’ business away from banks, potentially reducing banks’ function to simply processing transactions.
  • Disruptors such as Simple, Moven, Serve and several players overseas provide alternative products and services, leveraging mobile to provide a better overall experience. Starting with a mobile-first perspective, they threaten banks’ economics in market niches that prefer a digital platform (see correlation between sales, loyalty and affluence above.

Making the infiltration of traditional banking strongholds easier for digital pure play competitors is the reality that shopping for financial services now begins begins online, that the power of bricks and mortar is crumbling, that the trust in traditional banks has been reduced and that traditional banks have been slow to respond to the needs of the digital consumer.

Imperatives for Building a Stronger Bank

Bain’s research provided five imperatives that are essential for building a strong ‘bank of the future.’

1. Combine digital and physical capabilities for a differentiated customer experience

Instead of deploying technology to replicate previous processes in an online or digital world (usually to reduce costs), customer-centric digital banks combine the best digital and physical assets to make consumers’ banking lives easier, more convenient and more engaging. In Chris Skinner’s words, “The bank does not become digital through technology. People are what will make the digital bank.”

For instance, in South Korea, Hana Bank has innovated around a core of “moving money.” The Hana N mobile platform serves as a full-service bank in a smartphone, working seamlessly with Hana’s branches. Customers can withdraw cash from ATMs via their smartphones, parents can send money to their children via their mobiles, and N money includes near-field payments technology that can be used to pay at many stores. There is even a platform that offers integrated money management, location-based offers and coupons, as well as the ability to borrow for larger purchases while in the store.

2. Rebuild the branch network … smaller, leaner, seamless

With teller-assisted transactions declining at an annual rate of 10% to 15% for many institutions, optimizing the branch footprint is an imperative, with some organizations needing to shrink their branch network by as much as 30% over time. Unfortunately, for a US bank with 1,000 leased branches, the cost of closing 30% of a network might cost up to $120 million.

Many organizations are either implementing or considering a hub-and-spoke configuration that includes centralized full-service advisory offices, smaller retail branches with limited functionality and self-service kiosks. Each of the new formats incorporate digital technologies to enhance the customer experience and provide self-service capabilities that customers increasingly expect. Some spoke formats have removed bank tellers altogether. According to Bain, 40% to 60% are adding in-branch tablets, video teller machines, smart ATMs, etc.

The term ‘omnichannel’ is both misused and misunderstood as it relates to becoming a bank of the future. Chris Skinner has been outspoken in his distaste for the term, calling it ‘last century’ and hoping it will simply go away. “What banks need to do is put the consumer at the center of the engagement process and ensure that the experience is seamless with digital (web) at the core,” says Skinner.

The challenge grows more complex as banks introduce more solution specific mobile apps, or digital form factors based around communities of humans. With more diverse needs come more coordination across channels. But from the consumer’s perspective, seamless channel connection is nonnegotiable.

3. Overhaul the technology platform to simplify consumers’ lives

It’s impossible to build a strong solution on a weak foundation. Unfortunately, this is the case at most financial institutions that are trying to deliver a ‘bank of the future’ solution with a core processing system that is decades old. Bottom line, to deliver a differentiated, seamless experience to customers, most banks will need to make substantial improvements to their IT infrastructure to eliminate data silos, duplicative and/or incomplete customer data files and incompatible systems.

The new infrastructure must allow different departments and functions to share a uniform 360 degree view of the customer data. This will also allow all frontline employees to see the entirety of a customer’s history with the organization. Organizations also need to implement technology that supports one-and-done processes and speeds up transactions by processing them in real time rather than in batches.

Unfortunately, only 60% of financial institutions benchmarked by Bain reported having IT upgrade plan with clear budgets and allocated investments.

4. Fund the transformation by halting legacy funding

The change recommended to move forward does not come cheap. Institutions that are moving forward are funding change by simplifying their product lines, processes and organizational structure. They’re also selling real estate (branches), reducing staff, and streamlining operations.

The boldest of financial organizations have gone as far as moving funding that was allocated for projects related to their legacy infrastructure to projects related to improving the new digital interface with customers. Again, the reality hits home as Bain found that only about half of the benchmark organizations fully understand the cost of digital change for their business, with less than 60 percent of the benchmarked banks having a budget.

5. Reorganize to encourage innovation and change.

Silos are the enemy of innovation and change. Innovations that are product, department or functionally based will deliver just a fraction of the potential benefits. According to Bain, 70 percent of the benchmarked organization organized “digital” as a standalone department. While this may sound like a way to focus resources, the standalone structure usually hinders the objective of an overarching transformation. Remember, digital is not a channel.

Asked whether they exhibit common innovation requirements, such as incentives to test new ideas, freedom to experiment and tolerance of failure, fewer than half of the benchmarked organizations said they did. Another disconnect is that digital channels are seen as competition to the branch network, with manager sales incentives creating a conflict within the organization. The branch staff also sees digital as a threat to their future.

Some institutions have set up innovation labs that are separate from the core business, with freedom to explore external deals and relationships. BBVA, for instance, acquired Simple and invested resources in a strategic alliance with SmartyPig. BBVA also has invested in start-up accelerators.

Meeting the Needs of the Digital Consumer

The digital consumer no longer sets their expectations based on other financial institutions. Their expectations are being formed by the experiences and delivery of products and services from non-banking organizations like Amazon, Apple, Uber, Zappos and even Disney and Southwest. Physical branch networks are no longer structured for a digital universe. They are costly to run and costly to change.

Time is running out. Digital pure play competitors are gaining recognition and building a base of customers. In effect, the market is moving faster than most banks and credit unions can keep up.

Most industry observers believe traditional banks can leverage their historical strengths and still compete effectively. But, it will require laser focus and the commitment to rebuilding internal and external business models around consumer priorities leveraging digital technologies.

Chris Skinner has a warning however, “Remember that digital just augments the interaction and takes away the friction – or should – and is not the be all and end all. But once you’re committed to digital, make sure you design it for humans.” Brett King is even more direct when he told The Financial Brand, “If bank and credit union executives don’t have a plan to deliver more than 50% of their revenue across digital by 2020 – then it’s time to start packing bags and beefing up resumes!

Jim Marous

Written by Jim Marous

The Importance of Becoming the Amazon of Banking April 21, 2016 | Subscribe to The Financial Brand for Free Twitter Facebook LinkedIn Email Print 1 Comments Amazon has become a central part of the retail establishment by mastering the concepts of 'knowing the customer' and flawless delivery. What are the opportunities for banking to do the same? By Jim Marous, Co-Publisher of The Financial Brand and Publisher of the Digital Banking Report Subscribe TodayHow many stores does Amazon have? Do you have a favorite employee at Amazon who knows you and who is friendlier than the competition? When was the last time you saw an ad for Amazon? So, why does Amazon perform so well in driving positive brand recognition and such a loyal following? To find the answer to this question, it may make sense to look into the findings surrounding Brand Intimacy done by MBLM. Through 6,000 consumer surveys, 52,000 brand evaluations, and by applying learning from neuroscience and psychology, they have built a better understanding of the decision-making process across all industry categories. According to MBLM, “A consumer’s emotion is the driver of decisions, and a consumer’s rational mind retrofits their selections after the fact. In other words, how a consumer feels about a brand is the best predictor of behavior.” And while there are several components to a consumer’s feeling about financial services in general, suffice it to say that financial services does not rank well against other industries. In fact, there are lower percentages of customers who feel a brand intimacy in financial services than in health & beauty, entertainment, technology & telecommunications, or automotive. Increased Intimacy Results in Increased Revenues So, how does Amazon (or financial services companies) increase the level of intimacy with a consumer to the level that makes a difference. It’s with consumer insight. And, rather than just using their huge database of insights to build reports around their customers’ buying behavior, demographics and segmentation, they use these insights to directly improve the offerings, delivery and relationship with the customer. A very important added benefit of using advanced analytics to know their customers better is that the ability to develop an experience that is personalized for the consumer creates a greater propensity for consumers to pay more for products. In fact, the MBLM research found that brands with a higher intimacy score have endured and outperformed the S&P and Fortune 500 indexes in profit and revenue over the past ten years. Bottom line … using customer insights to improve the consumer experience improves the bottom line. Becoming the Amazon of Banking As noted earlier, Amazon is able to deliver on fulfillment, the archetype that drives the retail category. It offers superior service by being reliable, anticipatory and, most importantly, delivering value. The majority of these qualities are driven by knowing customer profiles and suggesting appropriate future purchases. The Amazon formula for success is not voodoo science – it is taking all of their learned insights and delivering a customer experience that is truly addictive. According to MBLM, “Amazon exceeds expectations by continually innovating, evolving, and expanding its offerings (based on customer insights). By being pervasive, direct and peerless in fulfilling customer needs, Amazon has established itself as essential.” Despite being an industry that has more insights into the financial well being, product ownership, buying behavior and even channel preference of customers, how many financial institutions believe they are a significant part of their customer’s lives … something upon which they depend? Amazon has achieved this very unique position without promoting an emotionally-oriented brand promise like banking tries to do. They have established brand loyalty and a place in the hearts of consumers by doing nothing more than processing vast amounts of insights expertly and delivering a memorable experience using these insights. When a customer of Amazon has a problem with a product they have purchased, there is never a lengthy process of asking the customer all of the basics like name, address, account number, etc. Instead, the customer service representative immediately takes action to solve the problem at hand using the insights at their fingertips. Advanced analytics and delivering insights to the entire organization is worth the expense because it’s a hallmark of human interactions. Why should a consumer tolerate being asked for information that their bank already has? In the age of big data, and digital technology, the consumer knows we can do better. And if you have the ability to show the customer you know them, let them know during every interaction. Reference a previous conversation, life event or previous transaction. It differentiates your organization in the marketplace. Amazon uses their knowledge of the customer to exceed expectations throughout the customer journey. This may mean nothing more than making returns easy, or may include delivering a replacement product before the customer has even returned the previous purchase. Every Amazon employee knows the value of the customer’s relationship (from the very first purchase), and is passionate about never losing that relationship. Amazon doesn’t just use their customer insight to build smarter market visualization, better segmentation models, enhanced product development capabilities or to measure sales within different customer categories. They use customer insight to arm every employee with the capability to serve the consumer better than any retailer in the world. Remember, most of the products they sell aren’t manufactured by Amazon. They need to deliver the product better than the manufacturer or direct retailer. Brands like Zappos, Netflix, and Amazon already know the power of big data and advanced analytics. Not only does smart data provide the power of personalization, it does so without many of the expenses associated with improved service. Customer insight doesn’t require a vastly expanded customer support team … it may actually allow you to reduce call center headcount. The Intersection of Data and Technology The foundation of the fintech marketplace has been the ability to marry the benefits of big data with the new digital technologies around the advanced delivery of products and services. The most successful P2P lenders, challenger banks and payment firms like Paypal have built a following by collecting insights and delivering highly targeted solutions digitally. The ability to know their customers and personalize solutions sets them apart from traditional banking organizations. To succeed against (or with) new fintech start-ups requires the processing and application of the vast amount of data at our disposal to benefit the customers we already have a relationship with. The secret is not in the technology and much as it is in the data … but we need both to succeed. AI, IoT, VR and the Insight Economy The future of banking may or may not include branches, but it most certainly will include some level of artificial intelligence (AI), the Internet of Things (IoT) and virtual reality (VR). The ability to provide market insights and advisory services leveraging artificial intelligence (robo-advising) is already a reality. An artificial intelligence system similar to Apple’s Siri is already being used to provide basic transactional support. The ability to recommend the payment of an upcoming bill or to warn about a potential overdraft is also a reality at the best of digital banks. Advanced customer insights are the foundation of this trend. The ability to use sensors to assist in daily banking activities is also already a reality. The combination of big data and IoT devices can help turn information into a force that can boost efficiency, increase productivity and drive fundamental improvements in customer experiences. “We’re very soon going to be entering a world though, where we may not have to be physically touching a device in order to execute transactions or to be able to engage with computers,” Derek White, chief design and digital officer at Barclays, told CNBC in an interview at London Technology Week. Capital One already announced a partnership with Amazon’s Echo, a device that users can talk to in order to carry out actions such as paying a bill, transferring funds or opening a new account. Many other examples include ways to monitor inventories for commercial lenders, provide home monitoring devices for insurance companies or even becoming integrated within buying processes with Amazon’s Dash or Flow. One of the most futuristic uses of customer insight in the future could be in the world of virtual reality or mixed reality. Imagine the possibility of bringing an entire virtual branch into a living room, complete with virtual tellers, robo-advisors and fintech specialists all ready to discuss personalized solutions without the customer ever leaving their favorite chair. The potential for putting on some VR goggles and entering the ‘branch of the future’ within a customer’s home or workplace is not as far fetched as it seems. Some the exciting advances in virtual and mixed reality can be seen here. The key to delivering this previously unheard of level of customization is all dependent on managing customer insights the way that Amazon does today. Delivering the Amazon Prime Experience The banking organizations who win the battle for the customer in the future may not have branches, the friendliest employees, the best products or even the best technology. They will have the best understanding of their customers. Without an intimate understanding of the consumer, enabled through advanced analytics, and the ability to deliver flawlessly, a relationship is always at risk. But to double down on the value of building and using our stockpile of customer insights, we can again look to Amazon and their Amazon Prime program. The program was launched to secure loyalty by providing unlimited two-day shipping for fixed annual fee. It has since morphed into a program with benefits from video downloads to additional savings on products and services which has resulted in unsurpassed loyalty in a very fickle retail sector. One of the biggest benefits of Amazon Prime is that it is making customers reconsider doing business with any other retailer. This is an enviable position for any industry, not the least of which banking, where most consumers hold almost a dozen services at as many as five institutions. To use customer insights and a rewards program that is customized to each consumer not only provides Amazon a lure for new customers, but a barrier of attrition for current customers who don’t want to reteach another retailer what Amazon already knows. In banking, this same logic would make acquisition initiatives more successful as well as cross-sell programs more targeted. The key determinate of success in banking in the future will not be the firm with the next shiny object as much as it will be those organizations that can understand their customers more than any other firm. Customers are comparing our level of service and proactivity to Zappos, Netflix, and Amazon. Their tolerance for anything else is wearing thin. Jim MarousJim Marous is co-publisher of The Financial Brand and publisher of the Digital Banking Report, a subscription-based publication that provides deep insights into the digitization of banking, with over 150 reports in the digital archive available to subscribers