Changing of the Guard?
Just as Amazon and its erstwhile peers upended traditional retail buying, digital-only “neobanks” have been threatening to make monolithic financial institutions relics of the past. It’s a familiar story, and it is not unreasonable to think that the banking industry will indeed follow the same path of digital disruption trod by other industries.
However, that narrative may be a bit too pat. To be sure, the challenges of digital transformation in financial services are significant, but the industry has several characteristics that set it apart. In particular, it’s a market where consumer trust weighs more heavily than in other verticals. That gives traditional institutions a competitive opportunity—if they can both maintain that trust and manage to respond nimbly and strategically to changes in technology and their customers’ digital experience.
But incumbent banks should not be overly sanguine. Customer trust is a commodity that is hard to earn and easy to lose, and it’s not something any institution can take for granted. Moreover, the value of brick-and-mortar branches (and even ATMs) for everyday banking has diminished in the face of online banking and cashless payments. Even for more complex activities such as obtaining mortgages, customers increasingly expect digital-first models.
Change in Unexpected Quarters
Online-first and online-only banks are a particularly visible example of change in financial services, but digital transformation is affecting every part of the financial services industry. Even so, some incumbents are moving faster than others. As the author William Gibson observed at the dawn of the modern Internet era, “The future is already here—it’s just not very evenly distributed.”
With that in mind, here are five characteristics that separate the most innovative financial services businesses today.
1. They Put Technology Investments into Practice
In fact, some of the most meaningful innovation is happening in businesses that have been industry institutions for decades. Traditional firms such as Goldman Sachs, Citibank, and JP Morgan Chase & Co. are investing heavily in fintech startups, including significant numbers of outright acquisitions. And beyond financial investments, many of these leaders also are hiring aggressively in technology roles—nearly a quarter of the recent job openings at Goldman, for example, have been for software engineers.
These firms have adopted cultural and process changes that leverage these investments. Consider Agile, a software development methodology that features cross-functional teams comprised of a product manager, engineers, designers, marketers, compliance and risk-assessment staff, and others who are key to a project.
Agile has become popular because it enables companies to become more engaged with their users, since they get frequent feedback that can be quickly incorporated into upcoming releases. It also allows companies to be more nimble and react faster to changes in their industries—a McKinsey article noted that companies which embrace Agile see 27% higher development productivity.
2. They’ve Reorganized the Organization
Financial services companies that have embraced Agile typically allow flexibility in their cross-functional teams, with the number of people in any given daily stand-up increasing or decreasing as necessary. It can also be helpful to implement a central “control tower” team that coordinates the activities of multiple cross-functional teams and acts quickly to overcome roadblocks, such as potential regulatory problems or a looming shortage in data center storage capacity.
Citi, for example, has wholeheartedly embraced Agile, but as Don Callahan, Citi’s Head of Operations and Technology recently explained: “Agility is a lot more than how our developers approach an issue. ‘Agile’ now is a group of subject matter experts coming together from each walk of life—someone who is a true developer collaborating with someone who is a product manager who knows how to listen to the customer or the client.”
Callahan added: “We know we have to be mobile first, and we are doing a lot there. In order to be all-in on mobile, we have set up a ‘lean team’ in our Long Island City office, with about 100 people who are operating in a very Agile way. It doesn’t operate like a traditional bank; it is much more like a creative team. They are incorporating feedback, putting up designs on a wall, and testing directly with customers. They are experimenting and coding.”
Open work environments have also become popular for facilitating Agile software development, since they enable people to congregate and share ideas. Cubicles and private offices have been replaced by meeting areas with whiteboards and work tables, which help foster innovation and enable “happy accidents” in which people from different areas of the company have chance encounters that lead to fruitful discussions.
3. They Understand the Critical Value of Customer Engagement
Modern start-ups have an advantage because they build their services and apps with smartphone and smartwatch owners in mind from day one, but, as Callahan noted, it’s still possible for traditional institutions to go “all-in on mobile.” Doing so involves not only adopting Agile software development practices, cross-functional teams, and an open work environment, but also the principles of modern app development.
- Consider the onboarding experience: When new users install and launch your app, what happens? Designers and usability experts should be key members of the cross-functional team that creates the experience for new users. For example, they could consider the in-app flow one of two ways: persona-based, which focuses on why they’re using the app, such as college grads who want to start saving money for major expenditures; or job-based, which considers the role they occupy, such as someone running the finances for a small business.
- Choose a North Star metric: App launches are accompanied by reams of statistics about how people are using the product. Choosing a North Star metric to guide your development efforts helps keep your cross-functional teams focused on what’s important. For example, Airbnb chose nights booked while Slack zeroed in on the number of messages per user.
- Think about incentives: Gamification has become popular because it helps people quickly understand their progress toward a goal. For example, a user who sets a savings target could see a progress bar every time they open the app, which encourages them to keep working toward their goal.
- Inform and drive engagement: It’s critical for people to receive emails about problems like overdrawn balances and attempts to get into their accounts, but emails can also let them know about new features or simply nudge them to open the app again if they haven’t done so in a while.
Attracting and retaining customers is critical, considering the fact that most banks and credit unions need to retain new customers for at least two years before they’re profitable. Somewhere between 20-25% of new financial services customers typically churn in the first year, with half of those people dropping away within 90 days of opening an account. The cost of a new customer jumping to another financial institution is estimated at $750.
JD Power noted: “When customer expectations are not effectively met, the repercussions are likely to be felt for years to come—not only impacting customer attrition, but also advocacy and share of wallet.”
4. They’re Building Digital Marketing Muscle
In part due to the imperative to drive customer engagement, digital-only banks typically spend 25-35% of their operating expenses on marketing, according to McKinsey. “This is true even for legacy banks that create digital start-ups,” McKinsey noted, “since the new entities must clearly differentiate their brand and value proposition from the parent operations if they want to be successful. Digital-only banks will likely be targeting a younger, more digitally savvy customer.”
Across the financial services vertical, companies see four key trends guiding their marketing efforts as 2018 comes to a close, according to Adobe’s 2018 Digital Marketing Study that was reported on by The Financial Brand.
- Optimizing the customer experience: That’s the most important opportunity in the financial services sector, according to 28% of respondents. Adobe’s Chris Young observed: “Senior leaders must continue driving their organizations to make better use of data, and orchestrate experiences so that the right content is delivered to the right person at the moment it counts.”
- Personalizing the customer journey: Among respondents, 81% of them said that “optimizing the customer journey across multiple touchpoints will be very important in the next few years.” Young recommends that financial services firms create cross-functional customer journey teams that look at the customer perspective from every entry point across all channels to ensure a seamless experience.
- Adopting automation and personalization: Marketing automation and personalization were each cited by 62% of respondents as places where financial institutions plan to increase their digital marketing budgets, with marketing analytics (61%), social media marketing (59%), and content marketing (58%) close behind. Young said: “Financial institutions need to ensure they can surface the right data at the right time, so that their marketing communications become more relevant for customers and predictive of their needs.”
- Overcoming technology barriers: Adobe noted that just 7% of financial institutions have a highly integrated, cloud-based technology stack. Looking at the next three years, respondents cited three areas that are most likely to redefine banking: creating personalized real-time experiences; using AI and bots to drive the customer experience; and adopting new payment technologies, such as mobile wallets and e-receipts.
5. They’re Embracing the Cloud
Traditional financial institutions that are ahead of the technology curve are also moving away from maintaining their own physical data centers for a variety of reasons. For example, in 2016, Capital One said they would eliminate five of their eight physical data centers and start using Amazon Web Services (AWS) as their cloud computing provider for key apps and services.
Capital One CIO Rob Alexander said at the time: “We believe we can operate more securely in their cloud than in our own data centers.” In addition to security issues, which are paramount in an era of constant phishing and hacking attempts by bad actors around the world, moving to the cloud has other benefits too.
- Scaling products and services more quickly: Cloud service providers like AWS typically offer elasticity that allows their customers to quickly bring on more capacity as soon as they need it. If an unexpected usage spike happens, your users aren’t left staring at error messages when trying to access their accounts.
- Realizing significant cost efficiencies: The ability to pay only for what you need means that you don’t have to spend money on hardware, software, and support staff that might not be required for a while. And since cloud providers typically offer subscriptions, you can spread out the cost over time and have more money in the short term for marketing and other important needs.
- Attracting and retaining the best talent: Top-tier professionals often prefer to work at companies that are on the leading edge of technology, rather than at businesses that rely on outdated legacy systems. The ability to hire top-notch staff can give a boost to the cross-functional teams that are key to Agile software development. Citi’s Callahan pointed out: “I think to compete with start-ups, we have to make it exciting and we have to be purpose-driven.”
Cognizant of their need to carefully control access to sensitive data, financial services businesses are setting up hybrid models that are a mix of private data centers and private and/or public cloud. For example, new apps and services, especially customer-facing ones, will typically be set up in the cloud while legacy solutions can remain on premises until the time is right to migrate them too. It may not even make sense to migrate certain things, such as archival records, to the cloud.
There’s More to Do
As Adobe’s Young observed, “With consumers looking for their banking providers to be available everywhere they are—from mobile and desktop to new channels such as voice devices—the industry still has a lot of work ahead of them.” And digital transformation has made it increasingly easy for consumers to switch institutions.
Learn more about the experiences of financial services businesses in our latest guide for digital leaders in financial services. It gives a great perspective on how companies like Capital One, Guardian Life, and Goldman Sachs are embracing digital transformation and the cloud. They’re creating great customer experiences—and fighting churn—with innovative approaches to building customer engagement with their web and mobile banking, credit, and insurance apps.