It’s safe to say that the banking landscape is evolving. Billions of dollars are spent annually by financial institutions hoping to differentiate themselves through solid solutions that will provide long-term benefits for consumers.
A common and prevalent business problem for traditional financial institutions has been the struggle to keep up with fintech companies, which have stolen the spotlight over the last decade as the adoption of technology has skyrocketed. The general shift in consumer behavior left traditional financial institutions - aka, any financial services entity that is not a neobank or fintech company - playing catch-up while taking cues and drawing inspiration from these new companies themselves. Fintechs are seemingly better at customer service, user experience, transparency and communication; all high-priority qualities that consumers look for when shopping for all types of financial services.
While startups have done their part to make a mark on the banking industry, traditional institutions have found solace through investments and partnerships. One of the most sensational developments in the recent years is Zelle, cautiously dubbed “Banks’ answer to Venmo,”a payments platform backed by the largest banks in the industry. The introduction of Zelle was the turning point of the war against startups in the banking industry - that and subtle cannibalism of financial services - institutions eating startups, such as Goldman Sachs’ 2018 acquisition of Clarity Money.
While imitation may work and partnerships may produce returns, traditional financial institutions face unique challenges that fintechs do not, and have to think deeper and wider to cover all the bases of sustainable advantage in the banking industry. At the same time, while fintechs have introduced and injected a new way of thinking in the financial services industry, traditional financial institutions possess great assets that could allow them to surpass the success of fintechs. Here are 5 concepts that traditional financial institutions should focus on in order to come out on top against fintechs in the new banking industry:
1. Customer journey
Enhancing the customer journey should be the primary focus of traditional institutions going into 2019. Where neobanks and fintechs have excelled in meeting customers at multiple touchpoints, traditional banking has remained stagnant and stale. traditional institutions, with the help of innovative product marketing and quality technology partners, have to make transactions feel seamless both online and offline. An experience at the ATM should be as easy as ordering sixty dollars to a nearby ATM and picking it up when it’s convenient. Additionally, depositing a check should be as easy as scanning a QR code and witnessing the funds arrive in a customer’s bank account.
The concept of self-service is accelerating in banking. Customers can deposit checks on their own and transfer from peer-to-peer directly, and the need for a middleman banker is no longer necessary. What is necessary is ensuring that customers are using the tools correctly. Banks must make applications easy-to-use and instructions and signage easy to read. Self-service in the customer journey is allowing customers to expand their own financial planning skills. By giving customers all the tools that they need to succeed, banks can instill a sense of “power” amongst customers, while proving that they are still there if needed.
Traditional financial institutions must consider their user experience (UX) design, on both mobile and desktop. Now more than ever, consumers are willing to entirely switch providers simply based on UX - meaning it is directly impacting revenue. Take cues from the FAANGs - if an institution’s target users are on these platforms, it's important to recognize what elements of the platforms resonate with the customers and how the institution can incorporate that into their own outputs. Any spend on UX designers and advanced UX technology is an investment.
Personalization is defined as “tailoring a service or a product to accommodate a specific
individual’s needs or interests,” in order words: meeting customers at their needs. Traditional banks must create individualized experiences for their customers because they want to feel valued, understood and know that they matter. This can be attributed to the basic psychological need to be recognized and appreciated. If banks want to show that they care, they must take the time to learn each customer, whether that is through AI, long-term data collection or meaningful relationship building. Banks can employ user data to recommend specific, personalized tools and options. For example, if a customer has student loans, or if they are graduating college, offer refinancing options. Even simple tactics like using first names and relatable messaging to the demographic automatically gives off the impression that the consumer is in control of their own customer journey. Fintechs and neobanks have excelled at winning over customers by using consumer-centric language that makes sense to the audience that they are marketing to, and they have been able to follow through on that even after the consumer has been “won over.”
3. Evolving Payments
When sourcing inspiration from fintechs, traditional banks can especially take notes in the payments space. According to the World Payments Report (WPR)released by Capgemini and BNP Paribas, digital payments worldwide are expected to reach 726 billion transactions by 2020. The payments marketplace, nourished by emerging markets that are quick to adopt digital payments and successful technology providers creating solutions quicker than the world can keep up, traditional institutions must find their voice in the ecosystem. The common hesitations banks have with the digital payments, according to the WPR, are cybersecurity concerns, regulatory concerns, and complexity to move to real-time.
The act of buying itself sits right at the intersection of the bank, the merchant and the customer. At that intersection lives unlocked potential on the institution’s side to integrate more and more touchpoints to further integrate consumers’ purchase behavior and the bank. This integration will, more likely than not, be in the form of collaboration between traditional institutions and fintechs. But the collaboration may also come in the form of partnerships with retailers - from offering point-of-sale systems to specific retailers or providing alternative payments solutions, traditional institutions have the opportunity to loan their products and services to retailers to increase the amount of recognizable touchpoints along a consumer’s payments trail. While open banking APIs, big data and artificial intelligence filter into the cracks of the payments marketplace, partnerships and strategic alliances will increase in prevalence and continue to be a space to watch.
4. Embrace RegTech
Large, traditional financial institutions such as banks are often perceived as laggards in innovation and change, but not by choice. Traditional financial institutions often face tougher regulatory pressure from internal and external stakeholders as well as regulatory bodies. That said, these institutions end up spending a significant dollar amount on regulatory necessities and save little for innovation and development. According to Risk Management Association data (cited hereby American Banker), 50% of bank respondents spent between 6-10% of their revenue on compliance in 2017. When compliance is eating up budgets, it is easy for banks to impose a burdened attitude to regulation, but why not use regulation as a constant “nag” for innovation? Instead of reacting to each new regulation with the minimum level of compliance, banks need to proactively seek out partners that can help them create end-to-end technology solutions that address their risks and compliance challenges. There is so much room for innovation and growth in regulation technology, which can be employed to automate workflows, produce report and analyses, while reducing human error and overhead. While banks struggle with the creaking foundation of traditional systems, APIs allow seamless integration and efficient implementation into existing systems. Investing in regulation technology is one of the biggest steps to catching up with fintechs and “future-proofing” a traditional institution.
5. Advanced technology in security
Finally, it’s entirely beneficial for banks to stay ahead of the curve with advanced technology in security. For fintechs and neobanks, digital security solutions have been the norm, but for traditional institutions, they must be incorporated manually. In 2012, when fingerprint unlocking capabilities were first introduced, most consumers were skeptical and also thought it was “over the top;” however, after Apple integrated Touch ID on the iPhone, the tradition PIN has become obsolete, and almost a nuisance. The same thing has happened with Face ID. Banks and financial institutions can take advantage of these capabilities by making their apps the most accessible through biometric features, a differentiator for users who are increasingly searching more the most efficient, least time-consuming solution. With the API ecosystem growing rapidly, more financial institutions will be able to take advantage of these solutions with their partners across different platforms. More advanced solutions include voice and signature recognition.
Fintechs may be leading the way for innovation in the new banking industry, but traditional financial institutions possess unmatched capital and credibility. Collaboration and synergy, combined with advanced solutions offerings, will allow traditional institutions to collectively build a banking ecosystem built to last.
Octavio Marquez currently serves as the senior vice president and managing director, Banking Americas at Diebold Nixdorf. In this role, he is responsible for leading the organization's Banking operations throughout North and South America. His span of accountability includes sales, service, manufacturing and distribution, professional services, project management, finance and HR.
- Banking Algorithms, the Apple Card and Sexism
- Senior Official Recommends the Launch of a Real-Time Payment System to the Federal Reserve
- Intelligent Engagement in Commercial Banking
- Three Ways Technology Can Make Banks More Resilient
- What Santander Bank’s Acquisition of Ebury Means to the Banking Industry