For at least the last 5 years, customer experience has been the competitive battleground on which financial institutions differentiate themselves. No matter what new trends or statistics emerge, that overarching theme remains the same. However, in the face of ever-growing digital threats, it’s not enough to say you’re prioritizing customer experience.
One industry survey found that financial services leaders are prioritizing two primary ways to differentiate their brands over the next five years. First, they want to make digital experiences easy, fun, and valuable to the modern customer. And second, they want to enhance their reputations for excellent service across all touchpoints.
But how do you actually do that? To stave off digital threats, you have to take practical steps to revamp traditional financial customer experiences.
Identifying Digital Threats to Financial Institutions
The first step to staving off digital threats to your financial institution is identifying what those threats actually are. Vague concepts of disruption and emerging fintech disintermediaries won’t help you make an actionable plan to transform your digital experiences.
In theory, you’re facing increased competition from “a truly global, multi-service, low-cost, digital bank: customers accessing their accounts through their mobile phones, paying with a tap on their wearables, sweeping savings to an ETF portfolio (designed by an AI) engine based on their savings goals and risk appetite profile) offering no-fee, cross-border payments.”
This description has been at the heart of how financial institutions perceive digital threats. In practice, fintech disruption is taking three key forms in 2020:
- Digital Payments: This is the leading sector for fintech startups as digital payment volumes are expected exceed $1 trillion in the coming years. Fintechs like Venmo and established tech companies like Facebook are challenging traditional banks with these easy-to-use digital payment platforms. And the fact that they can support digital payment services without transaction fees only serves to put greater pressure on financial institutions.
- Debit Cards: Fintechs have started to offer their own debit cards with unique cashback, discount, and interest rate benefits. This impacts financial institutions on two fronts. First, the fintechs that offer debit cards with no fees can eat into the market share of institutions that have fee-based accounts. And second, adding debit cards to the fintech ecosystem takes disintermediaries from specialists to generalists that can mirror the experiences of traditional brands by providing a wider range of services.
- Lending: Fintechs have started a digital lending revolution in the United States and the market is starting to mature. By 2021, digital lenders will originate $62.84 billion in new loans with a focus on personal, small and medium enterprise, and student-focused segments. Without a way to compete with the ease of use and convenience that digital lenders are offering, traditional financial institutions will continue to lose their footholds in the lending market.
A few years ago, you may have been able to get by without safeguarding your business against these threats. In 2016, 62% of fintech startups are focused on retail banking while just 11% focus on corporate banking services. But as fintechs mature, these digital threats will extend into all areas of the financial services industry. That’s why embracing digital trends has become such a high priority for differentiating your customer experiences.
4 Trends to Help Financial Institutions Stay Ahead of Digital Competition
Once you’ve identified the current digital threats to your financial institution, you can start to develop strategies to counter them in the short and long terms.
There are 4 key trends for you to adapt to if you want to keep your traditional brand out ahead of rising digital competition.
1. Spinning Off Fintech Subsidiaries
“If you can’t beat them, join them” seems like an appropriate cliché for this trend. The last few years have seen a number of traditional financial institutions form partnerships with rising fintechs to bridge the experience gap. It seemed easier than completely revamping established operational systems and processes.
Now, traditional banks are launching fintech subsidiaries that “could be in the form of spun off independent groups. Capitalized with equity and with no internal transfer pricing or involvement from the parent, staffed either with capable internal staff or external hires.” While very few banks have taken this approach so far, the value of the trend remains the same. By launching your own subsidiary, you can compete with the agility and speed of fintechs without ceding market share to them in some kind of partnership.
This model has worked for Goldman Sachs where the Marcus division logged $35 billion in deposits in 2018 alone.
2. Targeting Small and Medium-Sized Business Lending
Fintechs gained a foothold in the lending industry by capitalizing on the underserved segment of small and medium-sized businesses. Their online capabilities served demands for more self-service options and increased ease of use. One survey found that 60% of small business owners would prefer to apply for loans entirely online.
If you make a shift to digital lending, supporting these loans will no longer come with the high transaction costs that once deterred larger financial institutions. If you leverage your resources to gain cheaper access to capital and engage your existing customer base, you can regain market share in the SMB lending category.
3. Diversifying Your Products and Channels
Channel diversification isn’t a new trend for financial institutions. You know that the modern financial customer has gone digital and expects you to have a presence on all kinds of digital platforms. However, simply having an online banking platform and mobile app is no longer the differentiator it once was.
Now, the experience you deliver in online and mobile banking is essential to customer retention and acquisition. If you aren’t diversifying your channels and creating seamless experiences, consumers will take advantage of an abundance of competing options.
While channel diversification has typically been applied to your ability to digitize financial services, it’s also critical for your marketing activities. Meeting your customers where they spend the most time will help you counter the rise of disruptive fintechs.
In addition to channel diversification, financial institutions must also diversify their product offerings. Where can you help customers outside of the traditional banking services? For Royal Bank of Canada, product diversification meant helping with company registration for startups, preparing customers for buying/selling homes, and streamlining AirBnB rentals. For others like Barclays, it has meant competing in the document storage space.
4. Simplifying Your Backend Architecture
Competing against digital threats isn’t just about your ability to implement new technologies for your customer experience. It’s also about your ability to cut costs and make your business more agile to keep pace with fintechs. But in the wake of increasing regulation, greater demand to implement new technologies, and rising fines stemming from the 2008 financial crisis, cutting costs seems nearly impossible.
But when you strategically execute digital transformation initiatives, you can free up valuable resources to compete with fintechs. One study found that going digital can help banks increase operating costs by as much as 30%.
Your ability to cut costs comes down to the ways in which you simplify legacy IT infrastructure and automate lower-level tasks. For example, implementing chatbots (both internal and customer-facing) can automate tedious service requests and enable your teams to be more productive.
Become a Digital Leader in Financial Services
When you make these trends part of your business strategy moving forward, you won’t just stave off digital threats—you’ll create differentiated customer experiences that solidify your position as an industry leader.
These trends give you an idea of where you should invest your money in new digital experiences and technologies. The next step is determining which technologies will have the greatest impact. And while it can be difficult to cut through the noise around things like artificial intelligence, chatbots, voice, and the Internet of Things, it’s far from impossible.
If you want to learn more about the technologies and how to power your customer experience, get in touch!