Corporate Innovation/Opinion/

Dear banks: this is why you’re still losing out to fintechs

Covid changed everything about banking, but the big banks still haven't noticed

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Leon Gauhman and Alessandro Hatami

By Leon Gauhman and Alessandro Hatami

Covid-19 reshaped how customers interact with their banks forever — but has anyone told the banks? At recent banking innovation events including Money 2020 and the Paris Fintech Forum, we found banks still focused mainly on improving the present, not creating the future. Like a carriages conference in 1895, everyone was thinking about making the horses faster and not how to use cars.

PSD2 and open banking dangled the prospect of increased consumer choice, improved service and greater control over finances. Yet despite glossy ads promising banks are “By Your Side” and “Making Money Work for You”, the banking sector still hasn’t stepped up to the challenge of solving customer problems in a way that is genuinely customer focused.

The banking sector’s survival pivots on flawless customer experience while also holding on tight to the relationships

Banking is fragmenting as payments/savings/loans split off and a thousand fintechs spring up to handle them more nimbly and in a more customer-centric way. Tech giants with deep pockets and more robust customer relationships are hoping to grow their slices of the pie. And all the while, decentralised finance (DeFi) looms as an increasingly viable and more accessible alternative to the centralised licensed custodians — the banks.

The banking sector’s long-term survival pivots on its ability to deliver a flawless customer-centric experience while also holding on tight to the relationships and data that make that possible. Here are the five areas they need to address to stay relevant.

1/ Banks need to ride the big tech beast (but manage it carefully)

Apple, Google and Amazon are leagues ahead of banks when it comes to customer experience. What’s more, they’ve identified financial services as ripe for the taking. Their business models hinge on owning the customer relationship and data, so they are prepared to offer banking cheaply or for free to secure these. For banks, big tech’s interest simultaneously threatens their direct interaction with customers while devaluing the banking offer.

More trouble is brewing as tech companies seek to integrate financial services with retail, social media and gaming. WeChat Pay is a pioneer in this respect, but PayPal’s rumoured acquisition of Pinterest is also ominous. Some banks are trying to mitigate this risk by partnering with big tech, but they need to do it in a way that preserves their relationship with their customers; otherwise, they risk becoming the “dumb pipes” of the financial services sector.

In this context, Citi’s tie-up with Google Pay — where it was one of many banks providing back end infrastructure to an all-powerful Google — seems ill-advised. Meanwhile, Goldman Sachs’s more exclusive launch of the Apple Card, which gives Goldman access to best-in-class customer experience expertise without undermining its connection with customers, appears more of a partnership of equals.

2/ Covid has changed everything

Yes, the global pandemic briefly posed an existential threat and sent shareholders rushing to prioritise profitability over growth. But the latest round of banking results shows that the major players have weathered the storm.

Banks must back long-term investment rather than wait for another crisis

However, they mustn’t be complacent because the pandemic has seen a paradigm shift in the way customers interact with banks. Across Europe, the use of online and mobile banking surged by up to 20% during the pandemic. Against this backdrop, banks must back long-term investment in best-in-class customer experience — rather than wait for another crisis to force the sector into panic-induced innovation.

This is key given the high levels of VC investment flooding into fintech firms this year. A large proportion of that money is channelled into better marketing and faster innovation — with the end goal of poaching bank customers. Starling, which saw its revenues rise by 600% in 2020/21, has launched a high-profile TV advertising campaign encouraging incumbent bank customers to “set themselves free”.

3/ A cool mobile app and “me too” offers no longer cut it

Incumbent banks have done a decent job of keeping up with the neobanks through straightforward functionalities such as digital onboarding and categorising spending.

But except for Goldman Sachs Marcus — a good value offering wrapped in excellent customer experience — attempts by banks to launch or buy neobanks have flopped. RBS’s challenger bank and the recent closure of BBVA’s Simple are two salutary lessons here. 

The message from consumers is that they want something more imaginative from banks — which is how WeChat’s Red Envelope proposition, originally an experiment to celebrate Chinese New Year, led to Tencent becoming one of the world’s largest financial services companies.

4/ Prioritising product profitability over customer retention is risky

Customers don’t want or need financial products; they are only interested in what these products allow them to do. Yet the vast majority of banks still focus on product profitability rather than customer outcomes. While there is residual value in the fact banks offer a complete suite of products and services under one trusted brand, these aren’t designed around individual customer needs and circumstances and too often aren’t priced to reward customer loyalty.

The only protection for banks is to empower consumers to reshape their idea of money

Focusing on product profitability over customer retention is a risky approach now that consumers often have more than one account, can easily compare costs online and banking mobility is gaining pace. In this scenario, standard products become commoditised, with customer experience the only differentiator. Consumers are increasingly opening secondary bank accounts that could easily become primary accounts. So the battle for customer retention will come down to a high-quality digital experience.

With incentivised bank account switching also driving mobility, the only protection for banks is to empower consumers to reshape their idea of money in ways that are 100 % customised to their situation and goals.

5/ The tech and analysis capability to support transformation already exists

The frustrating thing about big bank inertia around solving customer problems is that it’s eminently possible. The technology exists to allow banks to make almost any product they want for their customers.

From cloud service providers like AWS to open banking platforms such as Plaid and TrueLayer, the tools exist to enable banks to build new types of customer services. Thanks to open banking, the data around customers has been liberated and is much more accessible. Combined with advances in AI, machine learning, data analytics and mobile tech, banks can design their financial ecosystem in a much more intelligent way.

Banks are enablers, not stores

Banks tend to think of themselves as stores — but they are not the same as Ikea, BMW or Nike. The key to surviving fintech disruption is for banks to remember that they are enablers, not retailers and that their relationship with customers is pivotal to their success.

This approach involves reinventing their business model around helping customers achieve their financial objectives through deep personalisation, real-time advice and a focus on profitable customer satisfaction. By providing an invisible, intuitive, empathic experience through seamless user interfaces, compelling customer journeys and natural language interfaces, banks stand a chance of becoming trusted partners once again.

Leon Gauhman is co-founder and chief product and strategy officer at Elsewhen, the digital product consultancy, and Alessandro Hatami is managing partner of Pacemakers, the strategy consultancy. 

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Christophe
Christophe

Very interested for a future discovery of examples of what you put behind “invisible, intuitive, empathic experience through seamless user interfaces, compelling customer journeys and natural language interfaces”