Who will change first – banks or their customers?

By Nitin Garg | 29 March 2018

The customer is often considered king, but it’s debatable how many organisations embrace this perspective. Of course some are better than others, and the most successful enterprises constantly adapt to meet evolving customer expectations. Those that have followed this key business rule have come to redefine and raise the standard of customer experience in industries such as online retail, entertainment, telecommunications, education and hospitality. But what about banking?

Until reasonably recently, most transformations in banking were mostly driven either by regulatory changes or the needs of the business. Customer impacts, if considered at all, came in third place. But the rise of FinTech changed the status-quo and offered customers more options.

As perhaps expected, banks first ignored the FinTech revolution, often dismissing it as a passing fad and then relying on regulators to level the playing field. But as more and more customers started to recognise the benefits of FinTech, banks gradually started acknowledging the need to change their approach. However, while the noise level increased – especially at industry conferences and in trade publications - it seemed that the change itself wasn’t as fast and as comprehensive as required. FinTech organisations then came to be seen as ecosystem partners who could help banks meet customer expectations without making too many changes in the overall core processes. 

A number of technology companies, few of whose core businesses are related to financial services, have used their customer-centric platforms to move into the FinTech arena. Alibaba, for instance, has issued $96 billion in loans over five years and grown Ant Financial to a market capitalization roughly equivalent to the ninth-largest bank in the US. The Chinese multinational e-commerce firm has also founded online bank MYbank, which approves loans instantly using automated processes based on consumers’ financial histories with Alibaba. Japan’s largest e-commerce player, Rakuten, operates the country’s largest internet bank and third-largest credit card company by transaction value, and its messaging app has around 800 million users. It issues credit cards to its members and offers financial products and services that range from mortgages to securities brokerage. Facebook has integrated P2P payments into its messenger app and is also rolling it out on WhatsApp. Similarly, Apple Pay Cash allows cash transfers via messages. Amazon has a cobranded credit card offered by Chase, and Amazon Cash allows customers to deposit cash directly to their Amazon accounts from more than 10,000 retail locations throughout the US. The online retail and media giant also provides loans for small and medium-sized merchants, and announced in June 2017 that it had completed about $3 billion of originations in total. It is now expanding offers to more of the two million businesses on its marketplace platform.

Trusting tech

It has been stated that banking is all about trust - built over years of association and business existence, and that trust would be impossible for other firms to replicate. However, customer behavioral trends have indicated that when it comes to convenience and evolving habits, customers are willing to look at non-traditional financial services companies. According to a recent Bain & Company survey, consumers ranked big tech companies as more trustworthy than banks. In a survey conducted by Accenture across 18 countries, 31% of respondents said they would switch to Google, Amazon, or Facebook for banking, if these companies offered financial services. So, winning customers’ trust may not be an insurmountable challenge for big tech. 

However, many leading bankers suggest big tech is a not a significant threat to their businesses, citing a lack of regulations and questioning corporate responsibility commitments in the industry. Derek White, global head of customer and client solutions at BBVA, for instance has said that people trust banks with some $52 trillion each year in savings and that these institutions help the growth of societies by lending. Indeed, last year banks provided more than $66 trillion in loans, globally. Also, there is a growing backlash against the big tech companies thanks to fake news, instances in which some have been found to be monetizing customer data, monopolistic practices and invading the privacy of customers. 

But whichever way we look at it, customers expect a better service experience from their banks. So how can banks maintain the edge in key areas such as lending? It is quite evident that banks need to adopt a comprehensive digital transformation approach to prepare for the integrated, digital and data-driven world of tomorrow to serve their customers better. Just digitizing existing processes will not help – instead the processes need to be completely redesigned and simplified while they are digitized. Also, they need to have agility embedded to quickly adapt to evolving ecosystem needs. This could translate into new capabilities such as launching new loan products in minutes, offering loan approvals in minutes, offering loans via a completely new channel, eliminating the need to visit branches and shifting the control towards the customers in benefitting from the relationship. 

Studies have indicated that customers do not mind sharing some of their data if they are assured that it will not be misused, if they are informed that they will need to share their information in advance, and if doing so will be used to improve their experience. Recent challenges in the world of social media have stirred many consumers into the realisation that these are profit-seeking companies like any other, and will expect something in return for using their services. In one recent, high profile case, the firm reportedly was found selling vast swaths of user data.

Informed data

Banks already have lots of customer data, and they can make use of it to tailor loan products which not only match their existing needs but also anticipate future needs. They also have the data required to make sure that they reach their customers using the channels they prefer at a time they prefer. By combining conventional sources of data such as credit bureaus, pay slips and investments with unconventional sources of data such as social media platforms, phone usage, bill payments and text messages, banks can build more accurate credit profiles. That will not only help broaden credit access but also ensure more informed credit decision making – a key area of differentiation for big tech and FinTech companies. By helping identify the customers that are likely to turn delinquent in advance and recommending curative action, data driven insights can help banks maintain their credit quality intact. Crucially, as banks enjoy a level of trust with their customers, by collecting data in a manner that reinforces relations, their customers will be delighted.

Customers prefer completely digital transactions rather than just website and mobile front-ends added to the old cumbersome processes. However, their current experiences with banks are still a far cry from their experiences with big tech companies. It might be better to look at enhancing the entire digital experience from origination to servicing rather than just tweaking the mobile apps. If the back-end does not work in tandem with the front-end, the customer experience still falls apart and customers are left disappointed and frustrated. This is something FinTech players are largely unconcerned about, as they do not carry the baggage of outdated legacy systems. With this out of the picture, it is relatively easy to add Artificial Intelligence powered bots, wearables and IoT devices as alternate channels to further enhance customer experience. 

The key point here is that irrespective of whether big tech or FinTech turn out to be bank’s biggest competitor or not, it is a turning point for the customers. Banks are well positioned to use this opportunity to further strengthen their position with their customers while benefitting from the advantages offered by technology enhancements. The big question though remains: who will make the first move, banks or customers?

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