The topic of digital transformation for banks and financial institutions goes back my early years (~2009) working for one of the largest US banks. Back then, the discussion hovered around improving bank operations (back-office functions, over-the-counter transaction processing, etc). While these areas have improved over the last decade, the critical focus with technology shifted towards user experience.

Customers are migrating accounts, transaction activity, deposits, and loans away from financial institutions to digitally-agile neobanks, challenger banks, and other fintech companies. The ability to onboard a user, open an account, and start transacting in minutes through an app continues to be a gamechanger. Legacy infrastructure and processes weigh banks down, while tech-enabled competitors build from the ground-up with the latest in cloud, API, and machine learning capabilities.

For financial institutions, competitors aren’t the only reason to up their game when it comes to digital experience. Here are other trends making this happen and how personalization by banks is needed to be truly customer-centric.

Combined TRENDS WEIGH HEAVY on financial institutions

By the time banks and credit unions started updating their digital experience, fintechs had established a strong footing in this area. Ultimately, the delay to change wasn’t due to lack of awareness (the ‘why’) but more so in cutting through the layers of management and bureaucracy in choosing the ‘how’. It’s commonly held that change in banks takes time and the pace is slow. Other compelling factors are forcing these institutions to pick up the level of urgency.

remote workforce

This is the ‘new’ driver in delivering a digital experience. While banks started the journey in restructuring technology in the last 5-6 years, they were not prepared for the the impact from COVID-19. Their core distribution and engagement channel of retail bank branch banking was turned upside almost overnight. Clients were unable to walk into their local branch to transact with a teller or speak to a personal banker (or adviser) about their account. Customer walk-in traffic already declining since 2012, is coming to a standstill.

Banks and credit unions needed to quickly switch gears in how their workforce operated during lockdown. There was now a new ‘digital-only’ mindset for sales, service, advice, and operations. Working from home meant new security risks in protecting customer data and access on non-bank networks. Solutions and applications had to become cloud-based to accommodate the changing needs of the new banking workforce.

As banks and customers adjusted to the ‘new normal’ and the COVID-19 threat subsided somewhat, retail branches have re-opened to operate “business-as-usual”. However, most clients are still staying with digital channels, opting not to go into a branch.

digital accounts for today’s business client

The sector for B2B payments and banking has taken on a life of its own. The growing demands of businesses to transact across multiple payment rails (ACH, wire transfer, card processing, checks) and jurisdictions (domestic and international needs) hits hard on corporate banking. Banks need to optimize for efficiency and safety in addressing the needs of their business clients.

This comes down to offering a flexible suite of solutions to pick from, particularly when it comes to invoicing, account structure, payments, and reconciliation. The fintech companies able to provide virtual accounts, real-time money movement, accounts receivable/payable bookkeeping, and payroll are finding success and taking market share from banks.

Business banking is a low-user, high-volume revenue segment where banks have an advantage through treasury services and lending. Unfortunately, the lack of features and account controls is causing financial institutions to play catch up with fintechs.

RISING EXPECTATIONS FROM CUSTOMERS

The sum of these trends points to meeting customer expectations with the right digital experience (based on the latest products & services). Any gap in experience causes a client to quickly switch to a banking alternative to fill their need.

For financial institutions, working with technology partners and other 3rd parties is the new norm in rapidly overcoming legacy system issues. New services, features, and access are being pushed forward through application programming interfaces (APIs) that allow banking services to be embedded outside of financial institutions and onto customer platforms themselves.

the path forward requires api integration

APIs dynamically changed not only financial services but everything else done digitally in today’s mobile-first world. By allowing connections and data exchange, the new API economy has not only emerged but flourished. Additionally, customers have better control over where this data is shared, stored, and what products/services are available to them.

Instead of replacing or updating outdated infrastructure (both costly & time-intensive), APIs allow for better data movement, access to reporting, and generating analytics and insights. No more challenges with architecture or data silos.

APIs are also leveraged externally as a revenue source. Banking-as-a-Service (BaaS) is the best example of APIs dynamically adding revenue to banks. By partnering with banking technology providers, financial institutions are able to expand their user base, deposit volume, transaction fee income — no need to establish more branches or hire staffing since everything is digital.

API integration is THE way of operating for legacy banks focused on maximizing their current tech stack. Financial institutions are also using this path to innovate their own digital engagement — this includes linking bank accounts, sharing bank transaction data, and verifying customer identity. Unlocking this next generation of financial services allows banks to serve clients even better than ever before for with a personalized, customer-centric experience.

THE NEW DIGITAL EXPERIENCE BUILT on PERSONALIZATION

Around the industry, the common expectation is that banking will transition from in-person to fully digital over the next decade. We mentioned earlier the slower pace of foot traffic in bank branches — no signs of this turning around as the health risks from the pandemic start to subside. The branch network across all financial institutions diminished since 2010, and in sync with this trend is the decline of staff size at each location. Walking into a branch today, there’s about 2 tellers processing transactions and 2 bankers servicing customer accounts.

Banking is slowly creating a customized experience based on the high bar in experience with other services. If you can order food, book a hotel, or get a ride to the airport on-demand — you should be able to bank just as seamlessly. Business customers are also looking for the white-glove treatment that consumers receive in a feature-rich banking platform. Elevating the overall digital experience and differentiating between consumer & business banking comes down to personalization.

Banks are able to provide these custom experiences based on data insights gained from artificial intelligence (AI) and machine learning (ML). The unique needs of customers can be met based on spending habits, inflows/outflows, average balances, loan payments (on mortgages, business loans, credit cards), and interest earned on savings. There’s an in-depth story to tell from the transaction and account level detail in a user’s bank account and card.

Additionally, confirming financial goals provides a full picture of where customers are today AND where they’d like to be in the future. The platform that gets them there will be the long-term winner in this saturated market. It’s a win for the client and a win for the financial institution that set the plan and provided checkpoints & necessary products to get them there.

A study by Boston Consulting Group (BCG) puts this ability to execute as a tangible figure: for every $100B in assets of a bank, there’s a revenue growth opportunity of $300M+ in revenue growth through personalized client interactions.

What’s needed to hit the pinnacle of personalization in banking?

Banks must target:

• increased control over data that builds a holistic customer view; this is the heart of what it means to be a “relationship-based bank” — providing customers the best services based on their needs;

• custom pricing based on service packages delivered to customers; incentives and rewards based on transaction activity and balances can come in tiers and offset banking costs (if any); tailored fees can accommodate various segments of customers, including the unbanked & underbanked;

• corporate client profiles that are updated regularly to provide custom, pre-approved lending offers; businesses can see what they’re eligible for before processing a formal application and banks can reduce the time for underwriting and approval;

• loyalty programs with true benefits for length of banking relationship (in addition to activity & balances maintained); customers are proud to say they’ve banked with the same company for over 20/30/40 years — financial institutions should reward these clients on a regular basis;

The first-mover advantage for banks is that they have the customer’s trust — they have data on their habits and transactions. It’s up to the product and innovation teams of financial institutions to put all the pieces together in a compelling program. Beyond revenue benefits, personalized banking experiences will reduce customer churn, drive up product usage, and increase client satisfaction. The time is now for banks to act on this precedence they have with their customers.

WHAT COMES NEXT?

If we look back at one of our first posts (from late 2017), the themes centered on financial institutions considering new technology solutions as part of their programs. There’s no more consideration at this point — banks are now actively evaluating, integrating, or acquiring companies and technology to improve their digital capabilities. The pandemic made this a high priority as the majority of clients now rely solely on mobile or online engagement. It felt as if operating models had to change overnight.

Digital transformation has taken on a new meaning as financial institutions focus on the digital banking experience of their customers. The winners in banking over the next 5 years will be the banks best able to personalize offerings for their clients, help accomplish financial goals, and make recommendations as needs change throughout their lives. Despite an early advantage in existing customer relationships, banks and credit unions have yet to tap into the trust and data they have on clients. When and how they take this next step will determine the long-term success of financial institutions.

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