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Strategic choices for banks in the digital age

Financial services companies find themselves at an important crossroads. The Corona crisis has accelerated the move towards digital products and services. Unfortunately, digital is also the place where new competitors in the form of FinTech companies has cropped up and where traditional retail banks find themselves challenged when it comes to customer experience. Banking, financial services and insurance (BFSI) players need to make strategic decisions about the role they are going to play in the future of finance and what technology they will employ to harness that strategy.

What does banking in 2025 look like?

When was the last time you visited a bank branch? Do you even remember when that was? Most daily bank transactions such as payments or fund transfers have already been digitized decades ago, and nowadays opening or closing accounts, taking a loan or a mortgage are primarily performed online, without any face-to-face meetings with a bank employee. The move from physical to digital is just one of the evolutions that make top brass at banks take strategic decisions. While no one has a crystal ball to predict the future, some trends are clear.

Omnichannel

Consumers have grown accustomed to accessing information whenever they want, wherever they want and through the channel that is most convenient for them at that moment. To cater to the needs of consumers, banks are presenting the same functionality through different channels and an omnichannel approach. This requires an underlying infrastructure that can support these channels and the customer journey. The omnichannel strategy applies not only to banks, but also to insurance products, as research reveals.

Hyper-personalization

One size does not fit all, one-size fits none. Closely connected to the omnichannel idea, consumers expect retail banks and other financial services companies to know who they are and adapt the customer experience to their particular wants and preferences. Thanks to big data and Artificial Intelligence (AI), banks can micro-personalize by proactively promoting services based on past spending patterns or even on the customer’s location.

Broader portfolios

To modern consumers such as Generation Z or Millennials, banking is no longer a separate activity, but something that is embedded in their lifestyle. Digital natives are busy people, both professionally and socially. They have little time and require convenience every minute of the day. You are fans of ‘one-stop-shopping’ to get many things done in a short time span. This encourages banks to broaden their portfolio of services with nonfinancial offerings from third parties, effectively building digital ecosystems of services.

Tighter regulation

As more services are moving online, the threats to integrity of transactions increase, for instance through Man-in-the-Middle or Man-in-the-Browser attacks. Governments are imposing ever stricter regulations on banks and other financial institutions to prevent money-laundering and other suspicious activities. At the same time, consumers want to become the owner of their data again, demanding tight protection of their personal details. The evolution that gave rise to GDPR and Anti-Money Laundering (AML) regulations looks set to continue.

Banking 2025 will look very different. Omnichannel strategies, broader portfolios and a personalized approach will be key factors in winning and retaining banking customers. On the other hand, banks will also need to comply with tighter regulations.

What are strategic choices for banks?

These future scenarios prompt anyone responsible for the growth and profitability of retail banks and other financial services companies to rethink their strategy. Just digitizing their products and services by launching a mobile app will no longer suffice. Implementing a digital banking platform is not enough for banks to call themselves truly digital. Strategic choices need to be made.

What stage of digital maturity?

Retail banks are all digitizing, but different banks find themselves in different stages in their digital transformation and digital maturity. TrustBuilder developed a Maturity Model that places financial services firms in five stages of digital maturity. While it is quite OK for banks to choose to remain in one specific stage, it is clear that marketplace thinking is more likely to lead to greater profitability. Recent research confirms that over 80% of BFSI firms are already investing in digital ecosystems or marketplaces. At each stage of maturity, other challenges occur and may prevent organizations from delivering the service expected by customers, or prevent them from moving up the maturity model. A maturity assessment helps identify and clear these obstacles.

Lead or follow?

Participating in a marketplace is one thing, leading a digital ecosystem is quite another. For retail banks, and for any other organization that builds a digital ecosystem, keeping the contact with the customer is crucial. You may have developed the perfect application for consumers, but if they are accessing your service through someone else’s digital ecosystem(s), these customers may never know you are the owner of this perfect service. And you may never know who all these users of your system are. The biggest financial gains, clearly, are to be made by the organization that has proximity to the end-user.

Build or buy

As banking systems become a suite of services that are proprietary and third-party applications, the bank’s technology landscape will become more complex. For decades, banks have kept development of all systems in their own hands, sometimes building applications that were also commercially available. Banks are now reconsidering this because it becomes too difficult to stay on top of all technological developments and remain educated on every new technology. Build or buy may still be the question, but the answer should be ‘buy’ most of the time if banks don’t want to risk being left behind.

Strategic choices are being forced on banks. How fast do they want to move up the digital maturity curve? Digital ecosystems are a given, but banks can opt to be a follower, or to be a leader in the ecosystems race. Strategic IT choices follow: should a bank build its technology stack itself, or turn to commercial off-the-shelf solutions?

Digitization and open banking

We live in a world of open collaboration and digitization – and that is a good thing. Innovation happens faster when bright minds from different organizations work together and by setting up networks between companies, information flows faster. This creates situations in which the same two companies can at the same time be competitors, partners or even entertain a customer-supplier partnership. This creates a win-win situation, especially for the consumer, who gets a bigger freedom of choice and better services.

Where banks were silos until a few years ago, they are now getting more connected to each other. That is also the principle behind financial aggregation and open banking. With financial aggregation, banking customers can consult their accounts at one bank through the apps of another one, and – in the case of payment initiation services – make transactions through a second bank. The goal of this type of service: make life as easy as possible for the customer.

Open banking is meant to increase competition between banks, by making them share data and work together but, at the same time, it provides more transparency to the consumer. EU regulations like PSD2 and equivalents around the world (called Open Banking in the UK, the customer data rights project in Australia) improve customer convenience and forms the basis for collaboration between traditional banks and FinTechs through digital ecosystems.

Digitization and open banking offer both opportunities and challenges to banks. While digitization helps improve customer experience and creates new revenue sources, it also brings increased competition and bigger technology investments.

How to improve customer loyalty in banking

With so much competition going on between banks and entrants like FinTechs, differentiation becomes harder for banks. Earning customer loyalty is crucial for banks going forward, with a lower cost to serve and higher revenues as returns of that loyalty. According to often quoted research by Bain, a 5% increase in customer loyalty leads to a 95% increase in profit. Digital technology can go a long way in helping banks improve customer loyalty.

Digital onboarding

Why is it so easy to sign on to a social media platform and so difficult to open a new account at a bank? Although banks have made great progress on that front, digital onboarding is still not the norm at many financial institutions, and paperwork still reigns. By making it easy on consumers to sign up to new services, retail banks will increase customer loyalty and prevent churn. Identity and Access Management (IAM) can help make the process of digital onboarding easier.

User experience

Customer centricity is an imperative for any organization bent on improving customer loyalty. Banks and other financial institutions need to put the customer central in any action they undertake, offering the right services at the right moment in the customer journey. It is often thought that airtight security and great customer experience don’t go together, but they can. Secure customer experience should be the norm for any banking platform.

Protection of data

Offering the right protection is highly appreciated by customers. That’s why customers don’t mind step-up authentication that imposes an extra layer of security, e.g. for the transfer of larger amounts of money. This may seem at odds with the service value of user experience, but consumers know that there sometimes is a trade-off to keep their data safe. With high-profile data breaches getting a lot of press coverage, consumers appreciate it when their data are not suddenly wide open.

Offering the right mix of services

Modern consumers prefer one-stop-shopping that lets them combine different purchases. Banks offering the right mix of services at defining moments in peoples’ lives can count on customer loyalty. After all, what’s easier for a customer buying a house than getting a mortgage, insurances and perhaps even utility services all from one source. That’s the beauty of the evolution towards microservices that forms the basis of digital ecosystems. Banks that know their customers well, will be able to pick and choose from third-party services to assemble a portfolio of services that best suits the personalized needs of its clientele.

There is a clear correlation between increased customer loyalty and profitability in banking. Enhanced customer experience, for instance through easier digital onboarding and offering the right mix of services, will help tie consumers to banks. And protecting customer data is a must.

What do customers need from banks in 2025?

Banking is quickly turning into a utility. Just like you expect the light to always turn on when you flick the switch, or water to start running when opening the tap, financial services need to be always available. This is what American Banker calls ‘invisible banking’. Thanks to technologies such as IA, voice recognition and cloud computing, banking services will be accessible through any channel the consumer desires.

As more interactions are being automated, consumers may also expect their bank to assist them with their financial management. Financial education is becoming part of the curriculum at schools, but making it too easy for people to spend money may lead to financial mismanagement and debt accumulation. A recent survey shows that over half of people regret purchases made easy by ‘buy now, pay later’ platforms, turning these services into a ‘buy now, regret later’ experience. Based on their knowledge of customers, their purchasing patterns and spending limits, banks could step up and advise consumers on how wise certain purchases are. Preventing clients from taking out easy loans may seem customer-unfriendly at first sight. Yet it may increase customer loyalty in the long run.

By 2025, customers will require even more convenience from their bank, coupled with solid financial advice based on their spending patterns and financial bandwidth.

Step into the transformation of open banking

Making the bank digital or tuning in to Banking 4.x, is not an exercise easily or quickly completed. Rome wasn’t built in a day and transforming into a digital bank will certainly not happen overnight. It’s a long-term transformational project that requires the involvement of senior management, a good dose of change management and making the right technological choices.

Identity and Access Management (IAM) is a crucial element in delivering on the promise of banking transformation. An IAM solution like TrustBuilder.io Suite offers an end-to-end solution that combines customer experience and airtight security, while also providing the right connections to Identity Providers and Solution providers that are needed to build a robust digital ecosystem.

Interested in finding out how TrustBuilder can help? Request a demo or contact us.