Increased mobile lifestyles, technological development and a growing demographic of financially mature millennials continue to disrupt the financial world. Especially with regard to the future of retail banking, digitalisation creates opportunities and raises uncertainties.
In a pre-digital age, retail banking operated through mainframes, ATMs, batch processing and branches. Digitalisation has enriched the industry with social and cloud platforms, online and mobile banking and analytics, and is now moving towards a world of Internet of Things, blockchain, shared infrastructure, Artificial Intelligence, robo-advice and open banking.
For now, branches still seem indispensable. Yet, their number is likely to decrease as long-established banks experiment with new technologies, and purely digital banks that are completely branchless are gaining traction.
In addition to fintech stirring up the industry, a second wave of disruption is on the horizon with digital natives such as Google, Netflix, Amazon, Facebook, Apple and Alibaba. These tech giants are setting up alternative financial infrastructures to capitalise on their existing vast ecosystems and customers’ needs for convenient solutions.
Imagine writing an email to a friend and Google intuitively recognising that a payment is in order and offering to instantly process the transaction.
For some this may spell the beginning of the end of traditional banks. However, research reveals a more nuanced image.
Despite the global financial crisis and occasional scandals which have impacted public perception and at times triggered interventions and reforms, traditional financial institutions that have the benefit of familiarity are still generally trusted and preferred as primary financial providers, even by millennials.
However, the industry is undoubtedly fragmenting. Consumers are increasingly using multiple service providers and channels for a wide range of financial activities for which traditional banks are not always the first choice.
With all this happening, one of the key questions is:
How can traditional banks embrace digitalisation while at the same time leverage the existing levels of trust and customer loyalty, signified by long-standing relationships and universally recognised brands?
Scanning the banking landscape
Retail banking generates half of all global banking revenues. Interwoven with a country’s economic fundamentals, regulatory architecture and competitive dynamics, it is mainly a local business.
Indeed, macroeconomic dynamics account for cross-regional variations, but most retail banking executives need to constantly assess how advanced their organisation is compared to their immediate competitors who are subject to shared regulatory constraints and cater to the same demographics.
Although there is no single path, but rather a complex landscape carved by different pathways which banks traverse to optimise their position, most if not all banks are somewhere along a journey towards digitalisation.
Two objectives are at play:
Digitalisation for cost: adopting digital channels to minimise costs by increasing operational efficiency.
Digitalisation for value: optimising customer experience to increase sales and retention rates.
While leveraging digital channels to increase cost-effectiveness is proving to be successful, translating customer interactions into sales across new digital touchpoints has been less forthcoming.
Embracing the future of banking: 3 key strategies
As we look ahead, some strategies are coming into focus which need to be further developed in order for traditional banks to secure digitalisation for value in the future.
1. Hyper-personalising services
It was not too long ago that local branch managers knew individuals and their families personally. They were tasked with relationship-building to gain intimate insight into customers’ financial circumstances so as to best tailor services to their needs.
Although the nature of relationships is changing, digitalisation is not necessarily synonymous to de-personalisation. In fact, modern technology enables banks to progressively personalise services on a larger scale and in a much more tactical manner.
According to a survey conducted among over 800 organisations worldwide, the three most salient trends for the retail banking industry in 2017 were:
Removing friction from the customer journey
Using Artificial Intelligence (AI), big data, advanced analytics and cognitive computing
Improving integrated multi-channel delivery
The common thread connecting these trends is the drive towards offering streamlined, efficient and personalised services by adopting new technologies.
AI technology and advanced analytics can be used to optimise a customer’s digital experience. By better understanding their customer’s needs, a bank can filter out irrelevant products and only present those better suited. This is similar to how Netflix suggests content based on viewing behaviour.
Also, instead of following top-down promotional calendars, customer insights can form the basis for personalised sales promotions completely in sync with a person’s needs and capabilities.
Furthermore, machine learning can be applied to enhance customer retention by progressively understanding what prompts specific individuals to decide to leave or stay at key moments in their purchasing journey.
With more personal information being shared in exchange for tailored services, especially by millennials, banks are now able to deliver a one-to-one experience at the right time through the right channel.
Digitalisation is therefore not a departure from the relationship-based status quo, but the gateway to a new and improved hyper-personalised world.
2. Delivering omnichannel experience
While digitalisation does not render branches obsolete, a brick-and-mortar presence is no longer a given. Purely digital banks are on the rise and they are roughly 50% more efficient than their traditional counterparts in terms of employee-customer ratio.
Branchless banks such Knab in The Netherlands, which offers private and corporate bank accounts, insurances and mortgages, capitalise on efficiency by offering high interest, low fees and complete round-the-clock service, as opposed to office hours. And yet, across the board branch access remains expected and even preferred.
Research among US banking consumers reveals that 44% prefer to interact with bank personnel for standard daily transactions, while 39% opt for online banking. It was furthermore revealed that contrary to predictable assumptions it wasn’t seniors, but millennials that had visited a branch most often in the month before being interviewed.
What we can understand from this research is that there is no bias towards any particular way of banking. Rather, empowered consumers want to use all of them.
For this reason, it is crucial that banks take an omnichannel approach to integrate all channels and offer a frictionless experience where walking into the branch office is effectively the same as using the app or website.
This requires optimised routing, omnichannel tracking, automated customer recognition and seamless data collection to remove information barriers between channels. Transactions can then be completed across touchpoints.
Contrary to predictions of a future where banking is branchless, retail branch offices do have a place in such an integrated ecosystem. However, the nature of their operations is bound to change. Branches could specialise in specific services which require face-to-face assistance.
In some cases, as we learn from Storefront’s CEO for Asia, Benoît Clément-Bollée, banks can resort to temporary pop-up branches to reach out to new demographics or assist existing customers in learning to work with newly featured apps and devices.
3. Collaborating with fintech
While initially perceived as a threat, increasingly banks have been eager to invest in, collaborate with or acquire fintech businesses.
For example, previously mentioned Knab, though operating independently and serving its own customer base, is actually part of the well-established Aegon Bank which provided the necessary resources, permits and assurances to establish the purely digital Knab.
Other fintech companies, although generally running against the stream of traditional banking, have also found such collaborations to be beneficial.
Take Hong Kong-based Neat, for instance. Targeting millennials and start-ups who often find it difficult to be accepted by traditional banks, Neat offers a quick and easy way to obtain prepaid credit cards and open business accounts online. Yet, at the same time it collaborates with Bank of China, enabling customers to top-up their credit cards at more than 200 Bank of China cash deposit machines around Hong Kong.
Retail banking benefits from partnerships with fintechs by gaining market-share in rapidly expanding areas such as consumer lending. Partnering up with fintech businesses furthermore helps retail banks stay in sync with innovative developments, increase visibility among millennials and compete better with their traditional competitors.
Last but not least, joining forces also presents an opportunity for both traditional banks and fintech start-ups to prepare better for the second wave of disruption brought by digital natives, which may work to uproot the industry’s competitive dynamics altogether.
The future of traditional banking
Brick-and-mortar branches can no longer be taken for granted but they will not be rendered obsolete. Rather, their operational nature will change as they become part of a seamlessly integrated omnichannel experience, driving hyper-personalised services.
Traditional banks have a notable competitive edge when it comes to customer loyalty and the levels of trust with which their established brands are invested.
Indeed, in anticipation of the looming rise of non-financial giants casting their shadow over the industry, collaborating with fintechs can accelerate the culture change needed to shape the future of banking.