We’ve lived in an era of disruption for nearly 25 years.
While disruption was groundbreaking in 1995 (and some have suggested that the term be put to rest), the wave of digitalization — where digital technologies have changed a business model — has definitely altered how we interact with service providers. In the 25 years since the term disruption exploded in the tech world, we have seen a volcanic change in new companies that have grown out of the digital era and witnessed how they have shaped our expectation of service.
Napster, the grandfather of disruption, arrived on the scene in 1999 and changed music forever. Metallica launched a lawsuit and music sales declined. However, this also led to the digitization of music, the invention of the iPod and MP3 players and current streaming services such as Spotify and Pandora.
Then there are the companies that dominate certain industries but don’t own relevant equipment or material, yet they hold an outsized influence on our behaviors:
Facebook is the largest media owner, creates no content but has captured consumer attention. According to Accenture, consumers spend 50 minutes a day on their platforms.
Netflix is the largest movie house but doesn’t own cinemas
Uber is the largest taxi company but owns no taxis
AirBnB, the largest accommodation provider, owns no real estate
Skype and WeChat are the largest phone companies, but own no telco infrastructure
Now the pressure is on for the financial services sector. Not that change is anything new, as evident by the advances in technology over the past 45 years.
The pressure now comes from the pace of change. Because, while the advent of these technologies has significantly changed how we bank, when you compare the speed of change between the finance and tech sectors, disruption has been much slower in financial services. There are several reasons for this, which include:
The average age of the top 10 banks in America is 156 years. A century is enough time to dominate the market, establish a banking methodology and, eventually, develop complacency because of a decades’ long lack of competition.
A History of Paper
These factors are a huge disadvantage for financial institutions who are trying to keep pace or catch up to the tech sector. An industry, which unlike financial services, was born out of the digital age and therefore does not face the same legacy problems. This allows them to be more agile when facing challenges or in response to consumer needs.
Financial institutions have already become dispensable in other parts of the world. In China, citizens have turned to tech companies such as WeChat Pay and Alipay for their financial needs. Banks no longer have face-to-face interactions with customers as the customer experience is now owned by tech companies. Alipay can be used for online or offline purchases and users can get credit that is unavailable from banks. WeChat Pay gives users the ability to send money to each other, even if they don’t have a bank account.
Other countries are following suit with technology such as Google Pay, Apple Pay, and Paypal dominating. This is because, as current data suggests, banks are losing business due to a lack of personalization. Of those surveyed, 42% left their primary bank for a competitor because they either saw or received an offer. 50% said they would have purchased from their primary bank if the same offer had been extended. This mentality is opening doors for big companies like Amazon, which already dominates the buying cycle, who have already had talks with several financial institutions such as JP Morgan to provide checking accounts to retail customers. Bain and Co estimates that should that happen, Amazon would have 70 million banking customers within a five-year period, equal to the number of clients of Wells Fargo, the third largest bank in the US.
The Current State Of The Industry
Many banks have begun to shift towards digital. Some have chosen the M&A route by buying up fintech companies. In the last five years, there have been 81 deals, worth about $4.1 billion US in active funding. One of the biggest banks, JP Morgan, invested 10% ($10.8 billion US) of its 2018 budget into fintech, a figure more commonly seen in technology companies. This may sound impressive but consider that Amazon’s R&D spending in 2017 was 12.6% of revenue, which was $232.9 billion US.
Understanding Digital Transformation
Fintech is filling the technology gap left open by banks but, unlike big tech and fintech, financial institutions have the first-mover advantage due to their established history and long-standing customer relationships.
But before the financial industry leaps into digital transformation, there must be an understanding of why it’s imperative. Instead of trying to stop the customer drain and churn, financial institutions should acknowledge and address what customers desire and answer that with personalization. This is backed by data on search behavior, which found an 80% increase in “best” mobile searches, a 3X increase in mobile searches for “near me,” and more than 300% growth in search interest for “open now” in the past two years.
This shows a growing appetite for more convenient and relevant options, and in response digital-first banks have begun popping up. In fact, digital-first banks are already outperforming traditional bricks-and-mortar banks in customer satisfaction. That means digitalization is not an option, it’s a necessity to keep and gain customer loyalty.
However, it’s no longer enough to have an app where you can just pay bills or transfer money. Financial institutions need to internalize customers’ lifestyles and expectations and be where the customer is. Customers are no longer willing to conform to a financial institution’s schedule, so they must now provide the level of service customers have come to expect and deliver it when and where they need it. If they don’t, they risk losing customers to fintech and big tech players. Think of it as cutting the cord with cable and choosing between Netflix, Hulu, Amazon and Prime.
What Is Personalization Today?
What it isn’t is a happy birthday message on an ATM screen or via a push notification on their phone. While this might seem cute, it’s irrelevant if it occurs without understanding and addressing their needs. Personalization is about solving customer problems by helping them achieve their goals. Part of that is understanding a customer’s life stage and goals, such as whether they have student loans, are hoping to buy their first (or last) house or what their retirement plans are.
Purchase behavior and expectations are affected by forces outside the financial industry thanks to companies like Facebook, Amazon, and Google, who all use data, analytics and digital technology to create personal experiences.
In The Age of Surveillance Capitalism, author Shoshana Zuboff writes, “Where marketers in the past gathered data to match products to customers, Google, Facebook and other internet platforms use data to influence or manipulate users in ways that create economic value for the platform, but not necessarily for the users themselves. In the context of these platforms, users are not the customer. They are not even the product. They are more like fuel.”
Customers may be the fuel for financial institutions but if banks don’t meet customers’ needs with personalized products and services they’ll face a slow extinction. Because, in the end, customers will go elsewhere to find what they want. They are embracing technologies like voice-activated devices such as Alexa and Google Home, shopping via mobile devices and making purchases from targeted and personalized search results because they integrate into their lives and make mundane, necessary tasks easier and more convenient.
These are concepts that have been driven by retailers and while banks aren’t retail stores, they also have products they want to sell to current and potential customers. This means banks can and should learn from retailers to:
Reduce friction in the purchasing decision. Making a purchase from a bank can be long, tedious and filled with paperwork. While it can’t be fully eliminated, financial institutions should examine ways to reduce the friction and frustration inherent in the process.
Financial institutions have the opportunity to use data and contextual intelligence to provide real-time experiences for their customers. Imagine if a customer has been at an airport for longer than 30 minutes and currently does not have travel insurance. A bank could help the traveler get coverage quickly and seamlessly before he or she departs. Or, a bank could recommend a customer with a consistently positive balance to open an investment account and educate them on how to best manage their investments. These use cases can be enhanced even further by understanding the contextual situation their customers are in, such as whether they’re driving, if their device battery is low, or if they’re at work or home. This addresses a customer’s need at the right time when they can focus their attention. It’s no longer about selling products. Instead, it’s about fulfilling needs, solving problems and evoking positive emotions.
Implementing a strong digital transformation initiative, accompanied by connected data and advanced customer service, will help financial institutions maintain relevance with new generations of banking customers from millennials to Gen Z. Organizations that can achieve this will stay top of mind for all their lifestyle banking needs.
At the core of digitalization is delivering better customer experiences. Customers want on-demand control over their finances and financial decisions. They expect it to be effortless and integrated into their lives and activities. In other words, they don’t want to stop what they’re doing to ‘deal’ with financial issues. In fact, they are becoming increasingly accustomed to information and services being readily available.
It’s imperative that banks take into account these customer desires when creating new business strategies. Understanding that if these expectations are not met, customers will look to fulfill their needs elsewhere. The key is to look past traditional lines of service and find new, revolutionary ways to embed themselves into the lives of their customers via advanced personalization and next-level experiences they crave.