Staying relevant in banking
As financial services have become increasingly fragmented and commoditised, banks need to digitise their service model and reinvent their product development to stay relevant.
During recent years, negative or low interest rate levels have created generous venture capital funds supporting fintechs and their rapid growth in the Nordics. Fintechs dedicated to changing the way people and business interact with money, equipped with a modern tech stack, significantly lower cost-2-serve and sky-high motivation among their employees to gain foothold in the highly regulated and historically isolated market for financial services.
Fintechs have succeeded in standing out from traditional banks through customer-centric digital experiences that increase access to and understanding of financial services – along with cheaper and transparent pricing. This is combined with a focused go-to-market strategy that typically either aims to serve an underserved customer segment or has a product focus to innovate the outdated.
Fintechs are allowing customers to cherry-pick the products and services that match their needs, thus causing a debundling of financial services. It is also resulting in a change in customer behaviour among retail and business customers – as customers break with the traditional mantra of “one bank for life” and start changing banks more frequently while having several banks at the same time.
The market for venture capital funding has cooled off and in Q2 2022, we saw funding drop by 22% quarter-on-quarter (the second largest decline in a decade), while new unicorn birth rates have dropped 43% year-on-year. As the period of negative interest rates and “free money” is coming to an end, venture capitalists will be focusing on profitability and driving fintechs towards profitable growth.
Historically, fintechs have had limited impact on the balance sheets of the traditional banks , but as their focus starts to shift from growth to profitability, this will change. Because even though many fintechs are aiming to establish new revenue sources, the classic revenue streams in financial services are up for grabs in a zero-sum game. Fintech’s growth in profits will come from an increasing share of wallet from existing customer segments or by catering to more profitable customer segments – at the expense of traditional banks.
As the debundling of financial services continues, the traditional banks will experience more transactional customer relationships and less customer loyalty – leading to the commoditisation of their products and a greater focus on price from customers, with more customers accustomed to high-quality digital customer experiences.
To stay relevant, traditional banks need to invest more in innovation and differentiation. They need to assess the market for customer and technological trends and decide whether to build their capabilities and product offering, partner with fintechs to be part of the disruption of the industry or buy and integrate fintech players to increase their customer base and broaden their product offering.
If nothing else, the traditional banks should start learning and adopting the following:
Fintechs are flat organisations based on autonomy, few processes and with an extreme urgency to deliver everything yesterday. Many dedicated, hardworking and talented people are doing all they can to succeed. Therefore, it is crucial to have a strong customer vision that inspires, motivates and – most importantly – sets the direction throughout the organisation, allowing everybody to understand how their work contributes to the larger whole. The vision is the North star of the company and must ensure that the constant flow of deliverables adds up to something meaningful that makes a real difference for the customer. Traditional banks lacking a customer-oriented vision need to focus on customer problems, the market and technological trends and figure out what they truly wish to achieve as a business. Once they have established their vision, they need to start evangelising it, taking the time to translate it into every part of their organisation.
Financial services is the industry with (by far) the most comprehensive data foundation, and as global technology firms have established, high customer expectations towards digital experiences using data and analytics are no longer an option but an expectation from customers. Fintechs have realised that their data foundation is a goldmine and the key to providing personalised and seamless experiences at scale. At the same time, they have the luxury of crafting digital-first experiences from scratch, going deep in terms of how they can utilise data to:
Traditional banks have a unique opportunity to crack the hybrid service model – leveraging their expert advisor capabilities and footprint in the necessary touchpoints while truly stepping up their digital experience to guide customers in meeting their everyday needs.
Product-market fit and strong differentiation requires an in-depth understanding of a clearly defined target audience. It is the result of difficult “where to play” and “how to win” choices, in which you are selecting who you are here to serve and – equally importantly – who you are not. Many fintechs start out by catering to underserved segments, segments that traditional banks are having a hard time making profitable. Fintechs can do this, as their cost-to-serve is substantially lower, but more importantly it is a great opportunity to gain a foothold, customer traction and prepare to scale into other product domains or customer segments. Not making choices makes it extremely difficult to set yourself apart from everyone else and in many cases, if you aspire to be everything for everybody, you will end up being nothing for nobody. In a market under consolidation and with increased commoditisation, traditional banks need to choose to stand out to stay relevant.
Fintechs realise that products and features are only interesting for customers in relation to the job the product or feature help getting done. Nobody cares about bank accounts, credit cards or home insurance – they care about receiving their salary and being able to put money aside for the future, buy the things they need/want and have a sense of financial security. Fintechs’ product development is rooted in the jobs customers need to get done, solving their problems and helping them realise their desired outcomes. They know that their customers will not be loyal towards their products, but to their ability to constantly help them get things done – faster, better and cheaper. Traditional banks have started to adopt many of the agile principles in their product development, but to a large extent fail to prioritise the right things – and instead succeed in building the wrong things faster. Instead of filling their roadmaps with agendas and promises from senior stakeholders, banks need to start building for their customers and prioritise innovation.
It is very simple: customer focus is extremely important and must be deeply embedded in all functions in the organisation. At fintechs, everybody is urged to read all customer feedback from Trustpilot, Appstore and Communities, listen in on customer dialogues in customer support and take part in customer interviews. Fintechs are learning the hard way that every customer interaction matters, that the patience and tolerance of customers is very limited when trying new things and there is little room for friction and waiting time. If the waiting time in customer support is too long, you need to have “all hands on deck”, and everybody needs to drop what they are doing and help out (this is also a great way of learning more about customers – and gaining huge respect for the work done by customer support). For traditional banks, this starts in the meeting rooms by encouraging conversations that revolve around customers, building a mindset where “it’s all about them” (customers problems, experiences) instead of being “all about us” (internal processes, stakeholders, organisation, tools). For inspiration, Amazon have chosen to always leave one empty chair in meetings – reserved for the customer.
The banks of the future need to succeed in providing their customers with a sense of trust, confidence and empowerment. This requires having a solid customer-centric vision, making strategic choices that differentiate you from the competition and having a customer-obsessive culture and the processes, capabilities and empowerment to deliver the products that customers love. And crucially, it requires banks to gain the ability to utilise data and analytics across all touchpoints with their customers.
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