Historically, banks and lenders have been decentralized by products and services. This could be systems, departments, and processes. If you wanted to take out a home mortgage, you talked to one person. If you wanted to open a checking account, someone else. If you were looking for financial or advisory services, teller and branch services, or commercial banking, it was divided up by departments or product lines.
While this allowed specialists with specific expertise, it also created silos within organizations that reduce opportunities to cross-pollinate and cross-sell. Because a customer engaged the bank independently for services, there was never a priority on building deeper relationships.
Most legacy systems weren’t built to capture every consumer touchpoint to provide a fuller picture of customers. Yet, consumer technology and Fintech companies — unburdened by legacy systems — have been able to take a more customer-first and holistic approach to the customer experience. This is forcing banks and established financial institutions to compete differently.
The Biggest Threat to Traditional Banks
It’s not gone unnoticed. A study by HFS Research of banking executives indicated that the largest threat to traditional banking operations was new entrants to the market. 42% of execs chose new digital and online startups as the biggest competitive concern. When asked what it would take to compete more effectively, bankers said it would take redesigning strategy to create a comprehensive customer engagement strategy that spans digital and physical channels.
Here’s the kicker, though. That research is from 2018. Yet, most organizations have still not made the transition.
The World Retail Banking Report 2022 found that 95% of executives believe their current approach and tech stack are unable to optimize the data necessary for customer-centric growth. Consumers are feeling it, too. Nearly half of those surveyed said their current banking relationships were neither rewarding nor emotionally connected. This creates a significant opportunity for new entrants and a major concern for traditional banks.
Consumers Are Unbundling
As banks have focused primarily on products, consumers today are now finding it easy to unbundle — especially when they can find better rates for high-interest savings accounts online, lower mortgage rates from online lenders, or more flexibility in wealth management. Without a relationship with their current bank, consumers are incentivized to shop around.
43% of Americans, for example, say they would shop online for financial products and services. They may or may not even shop at their current bank.
Certainly, the past two years of the pandemic have diminished the relationship as well. Consumers quickly adapted to doing business online and had less personal contact with anyone in physical locations.
As consumer demands evolve, how quickly banks can change from product-centric to customer-centric will likely determine how successful they can be in today’s digital environment. If banks want to retain customers and grow business, change is essential.
The Challenges to Creating a Customer-Centric Strategy
Beyond legacy systems and processes, banks today have three significant challenges they must address:
- The inability to personalize products and services leads to undifferentiated offerings
- A lack of understanding of the complete customer and their finances
- A disconnected experience across products
These challenges limit the potential of banks to maximize customer lifetime value (CLV) and expand relationships to provide a complete financial solution.
Banks Must Reverse the Current Model
The Economic Intelligence Unit (EIU) surveyed 300 senior bankers and found that 81% said banks must differentiate themselves on customer experience instead of projects and locations.
To compete effectively, banks need a deeper understanding of customers’ total financial picture to create personalized value propositions in an integrated approach. Rather than putting client offerings, core products and services, and value-added capabilities at the core, they must pivot to putting customer needs, personalized lifestyle services, and need-based financial solutions at the core of their business.
Organizations will also have to shift their thinking from financial models that emphasize line-of-business (LOB) profitability to a model that focuses on revenue models built on customer needs. This shift is crucial to expand customer relationships and thwart competitive threats.
Time is not on the side of traditional banks. Online lenders, wealth management, and increasing investment options are siphoning customers away. Neobanks continue their assault on legacy bank customers, growing from 14.4 million customers to 24.9 million in 2022 — a 72% increase in just two years. Further, these digital online-only banks are forecast to add another 14 million customers by 2025.
Even amid these warning signs, digital transformation isn’t happening quickly enough. Customer financial data in most banks remain siloed, painting an incomplete picture of financial portfolios and preventing financial institutions from leveraging customer relationships.
Banks that fail to adopt a customer-centric model are risking their long-term future. Making the change will require a complete re-evaluation of the customer relationship. Further digital transformation will need to capture every touchpoint and allow for deeper personalization.
The Window for Change Is Closing
For banks, there’s an urgency to change that increases almost daily. Nearly two-thirds of banking executives believe the current branch model is reaching an end. Sixty-five percent say physical branches will all but disappear within the next five years.
For traditional banks, this means being in danger of losing that customer connection and losing their competitive advantage against their online-only competitors, who will have years to continue to refine their customer-centric approach without the burden of evolving legacy systems.
Banks can no longer be just banks. They must be customer-centric brands.
Hakkoda Can Help
Hakkoda helps banks take control and leverage their data to become customer-centric. No matter where you are in your data journey, we can help you update or replace legacy data and analytics platforms. Contact Hakkoda today and let us show you how we can help accelerate your digital transformation to compete more effectively.