As one of the earliest adopters of information technology, financial institutions used to be at the forefront of technology waves, from mainframes to client server, from branches to ATMs, from passbooks to cards. However, the rate of change in consumer technology is such that many banks are struggling to keep up. They are not alone. Digitization has successfully re-invented the customer experience in many industries – travel, hospitality, entertainment and retail – disrupting the incumbents in the process. Today’s bank customers expect their financial institutions to incorporate digital capabilities and offer innovative and more customer friendly services.
For banks, it means more than customer satisfaction as many industry experts have pointed out the tremendous benefits that digitization can bring to financial services. A recent McKinsey report outlined how adopting a digital model could reduce capex by 75% and opex by 55% when compared to a traditional operating model. Clearly, the new approach can dramatically lower costs.
But that’s not all. As per BCG, banks that have embraced a customer centric, digital journey mindset have increased their revenues by 25% and their productivity by 20% to 40%. As per a PwC study, apart from the interest rate, the key features that make up a lender’s overall experience – such as speed, transparency, channels, and customer service – contribute more than 50% to the consumer’s decision-making criteria, i.e. customer experience accounts for 50% of the decision.
Despite this, banks have been relatively slow in rolling out integrated digital capabilities, especially in specific areas such as lending. In fact, a report from Bain & Company says that globally, banks can handle only 7% of the loan products digitally from end to end. This is quite surprising when one considers that lending makes up more than one-third of retail bank revenue. The reasons for this slow adoption include constraints posed by archaic IT systems, departments operating in silos, lack of awareness of the digital capabilities, past failures as a result of incorrect approach to digital, regulatory restrictions, security concerns and the inability to effectively map the advantages against the cost of digital. However, banks may be reaching the point of no return – where declining customer loyalty, increasing pressure on margins, the fast pace of technology advancements (the buzz has already moved from digital to artificial intelligence) are pushing customers to the growing array of available options including fintechs and new banks.
While it is true that the initial euphoria around fintechs sounding the death knell of banking has now fizzled into a more realistic expectation that banking isn’t going anywhere and fintechs have a lot to learn, this doesn’t mean that it is business as usual. Banks have realised that there is a significant gap between customer expectations and their existing level of services. While some view the need to bridge this gap as largely an opportunity, others still feel it is not really a necessity.
So how can the banks act before it is too late? Well, as they say – ‘It isn’t rocket science’, the key as always, lies in giving customers what they want – making lending service simple, fast and convenient. All that the customers really want is a pleasant experience – ideally personalized for their preferences, where they can buy without being forced to wade through a tide of paperwork, from a company that is available when and where they need them, through a process that is executed in minutes not weeks. And of course they want it to be low cost. While banks have their own perspective, perhaps they can learn from the experiences of others – from how fintechs have approached business innovation. It includes the realisation that digitization is not just about the front-end but rather it encompasses the complete redesign of the entire customer experience – from initial contact right through to the end of loan. Another aspect could be that a successful digital design has to be built outside-in and not inside-out. To serve the intended purpose, it needs to be well integrated across the complete end to end lifecycle.
The European retailer Valora sets a good example. Valora set up a fintech company called bob Finance to leverage new technologies and disrupt the Swiss personal loans market. Prior to bob Finance’s arrival, customers with small loans had to physically visit bank branches even for digital financial transactions. bob Finance changed this by providing convenient and efficient online access to loan products. The company automated their processes completely and became the first Swiss company to offer “on-the-go” loan products and short duration loans below $3,000 while maintaining regulatory compliance. Customers can now submit credit applications online using a variety of channels, without visiting the branch. With instant credit decisions, it takes only few minutes from application to payout which is a dramatic improvement on the five days, which the traditional process takes
While the fintech threat may not have been fully realised, the threat itself has not gone away completely. Customers are still clamouring for something new, and the fintechs have realised that even though it may not be possible for them to target the entire bank as a whole unit, they can still make inroads in specific areas of banking business – lending being one of them. As fintechs are backed by protagonists of innovation who want to make the most of technology, it’s only a matter of time before we see the next wave. If technology has taught us anything, it is that successive waves tend to get stronger and more refined. So this one may have a much bigger and faster impact – powered by technologies such as Artificial Intelligence, Blockchain, APIs, analytics and robotics. In all, there appears to be a widespread momentum around customer oriented, technology backed transformation and it does not look like it is going to fade out soon. Ignoring the signs or hoping the regulators will solve the problems are not likely to be winning strategies. Innovation from the ground up may be a winning strategy, but perhaps it is better to learn from others. While the road ahead for banks and FinTechs playing it out in digital may not be very clear, but it is certain that the real winner in this endgame will be the customer.
FFB is a not-for-profit platform that engages different types of financial institutions of the country; assist them in their journey to reach next level