During this series of articles, we’ll look at the journey a bank needs to make to become an engaging bank, including the challenges and solutions it will encounter along the way.
It’s no secret that the retail banking industry has faced its fair share of change in recent years. The rising ubiquity of digital has literally put the power in the hands – and at the fingertips – of end consumers. As such, customer experience has become paramount across almost all industries, and banking is no exception. In fact, McKinsey analysis shows a direct correlation between good customer experience and higher deposit growth. Certainly, it’s now more important than ever for banks to develop good relationships with their clients.
Problematically, the bank-client relationship isn’t as strong as it has been in years gone by. As many as 40 percent of customers have decreased their dependence on their bank as a primary financial services provider, according to one survey, choosing instead to use nonbank providers. This puts legacy banks at risk of being disintermediated. Banks are being outcompeted by new industry entrants — including neobanks, fintechs and even non-financial tech firms — that offer customer experiences better tailored to clients’ situations expectations.
Take Google’s recent news, for instance…
The Silicon Valley giant, which has built its brand around user-friendly, innovative technology, announced in November that it will launch its own current account service. And it’s not alone. Facebook, Apple, Uber and Amazon are also entering into the financial services market, launching credit card, payment system and loans services. The forays of tech firms into the financial sector isn’t a disintermediation of legacy banks, yet; new industry entrants rely on incumbents to navigate regulatory issues and provide financial know-how. But their knowledge of how to engage a customer base, as well as their clear intent to reach out directly to end consumers, could prove a major disruption to the industry.
Of course, none of this will come as a surprise to legacy banks. The threat from nonbank providers has been touted by experts and the media for years, and the industry incumbents have adapted accordingly. Focus has shifted to a customer-first approach, more akin to the ways in which their nonbank provider counterparts operate. This has included faster time-to-markets and more user-friendly technology. But legacy banks haven’t made this shift alone; rather, they have enlisted the help of nonbank industry entrants to help them. In October, for instance, Metropolitan Commercial Bank announced a partnership with UK fintech Revolut; and Goldman Sachs has a recent history of acquiring fintechs to fold into its own digital bank, Marcus.
These are just two examples of many, but they highlight the important role of engaging with the wider industry and ecosystem, whether it’s by partnering with nonbank providers or acquiring them to evolve distribution models and product offerings. They also show that the banking industry no longer exists as its own isolated ecosystem (if it ever did); instead, it is clearly an industry segment in support of a wider ecosystem.
However, creating a foothold in the ecosystem via partnerships…
is just one step banks need to take in order to thrive in the digital era. In order to be truly effective, they need to become what we call “engaging banks.” The ultimate goal of the engaging bank is to create a platform of service that can cope with the fast-changing nature of the digital era. That means moving beyond the two-dimensional approach of “integration” — that is to say, partnering or entering the ecosystem on a one-time basis – and moving toward a philosophy of dynamic and sustained effort within a bank to ensure all the digital consumer’s needs are being met.
The engaging bank changes its core business model to suit the modern consumer’s and ecosystem’s needs. It responds to changes in the marketplace and technology with agility, incorporating the latest innovations to provide the best service to its customers and partners; it constantly evaluates its B2B partnerships, not only from a profitability standpoint, but also from one of the customer journey; it produces tailor-made solutions. When a bank becomes an “engaging bank,” it becomes a more attractive option its clients, whether that be end consumers or potential partners.
Institutions that don’t make the shift toward becoming an engaging bank risk being disintermediated by new industry entrants and the partnerships they form, as well as losing touch with their consumers, ultimately resulting in fewer customers and a downturn in revenue.
An engaging bank, on the other hand, is better prepared for the future. It’s ready to respond to the ever-changing demands of end consumers, it’s ready to engage in partnerships to produce innovative products and services and, as such, it’s ready to navigate new industry disruptions.