Legacy Banks Are Threatened – Unless They Fight Back

Leading financial institutions still have the opportunity to create a new kind of bank, one that is more than just what the new challengers promise.
Vincent RyanOctober 21, 2019

This summer, online-only banks from Germany and the United Kingdom began operations in the United States, offering streamlined digital apps, simplified fees, and supposedly great customer service.

Yet in reality, these neobanks are red herrings, deflecting American banks from the real challenges and changes on the horizon, ones that could put many legacy banks out of business.

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On the one hand, traditional large banks have no one but themselves to blame for creating an atmosphere in which newcomers like Germany’s N26 and Britain’s Monzo could make inroads. Sky-high fees, lackluster customer service, and self-inflicted scandals have done much to sully the reputation of the nation’s financial services leaders.

But despite the missteps, leading financial institutions still have the opportunity to create a new type of bank, one that is more than just what the new challengers promise — a sophisticated app that simply allows a customer to check one’s balance, pay no ATM fees, and split a bill.

By 2030, 80% of heritage financial services firms will go out of business, become commoditized, or exist only formally but not competing effectively, according to Gartner. They’ll struggle because of young upstarts that have learned how to utilize digital tools to reinvent the notion of what a bank can be.

A bit of hyperbole? Perhaps. But the trends are there. Companies and institutions have learned that to survive they must pay attention to the consumer, learn what they want as individuals, not a group — and figure out how to give it to them.

Decades ago, consumers still were able to experience the personal touch, through interactions with local shops and shopkeepers who knew them, their likes, and proclivities. But exploding populations and the dominance of retail by chain stores made that personal touch nearly impossible. As a result, consumers have put up with declining customer service: one reason for the growth in online retailing is that a shopper can escape the poor service experience entirely.

Connected Banking

To increase sales, retailers are always trying to “upsell” consumers, personified by the “Do you want fries with that?” catchphrase. Asking everyone the same question, whether it’s about food or the availability of a low-interest college loan (typically splayed across an ATM screen), provides little value to either the customer or the company.

Customers want to interact with an individual, a website, or an app that understands who they are, what they want — which may be a package of goods and services — and offers it to them at just the moment they’re looking to buy.

While retailers at the vanguard of customer centricity are moving in this direction, legacy banks have mostly failed to do so. It’s not for lack of customer information, as banks hold enormous amounts of customers’ transaction data as it relates to purchases, loans, and personal financial health.

Just as a perceptive waiter may offer a customer a certain wine based on the food and the knowledge of that diner’s wine style, so too can banks hyperpersonalize one’s financial experience. They can offer products and services that each individual customer is likely to want, based on their needs, rather than simply serving as a repository for cash or a place to deposit a check.

The move toward hyperpersonalization will be easier for banks in the U.K. and Europe, where Open Banking mandates make it possible for third parties to access banking customer data. While that isn’t the case here, banks still have the opportunity to embrace connected banking, in which they use open APIs, and then partner with third parties, to offer products and services that will keep customers and increase sales.

Knowing More

For banks, hyperpersonalization will increase revenue by $300 million for every $100 billion in assets, according to the Boston Consulting Group. The firm found that 66% of consumers want their banks to be more like Amazon, showing them relevant products and services, or even act as a personal shopper, bringing them offers that they never would have considered.

In a hyperpersonalized world, banks will connect the dots with data to offer more customized experiences. They will check with review sites to know which products and services customers like. They will look at, for example, the length of time customers have lived in their homes and use credit card information to see if furniture was recently purchased to get a good idea about one’s desire to move.

Banks will become aware of process bottlenecks that are angering their customers and be able to take proactive steps when they become aware of them. By knowing the customer, tellers and customer service reps will be able to suggest products and services that are of specific interest at the right time.

Much of this will be powered by harnessing the power of the billions of devices that make up the internet of things. For example, banks could partner with third-party retailers who could provide special offers on merchandise as the potential customer was passing by the retailer’s store. The retailer would know what each customer was likely to be interested in, based on past purchase information fed to it by the partner bank.

Trust and Choice

We’re still in the nascent stage of this transformation to a hyperpersonalized banking experience, with much work to be done. Banking product and channel silos need to be broken down. Existing employees need to switch to a customer-centric mindset, and new employees anxious to work in this kind of environment may need to be hired. And, crucially, to earn the digital trust of consumers, banks need to demonstrate that they will always protect and secure customer data.

Despite these hurdles, banks don’t have to pursue big bang transformations to make progress. For instance, they can start small with customer analytics solutions that offer pre-built, banking-specific use cases to allow progress to happen sooner.

While legacy retail banks lag behind other retail businesses in making the transformation to a digital-based, hyperpersonalized environment, they still have several advantages over the online-only upstarts.

Even with their misgivings, customers still prefer and trust traditional banks more to manage their money. In a recent study, 51% of consumers surveyed by Business Insider said that if they were to switch banks, they’d go to one of the top-10 traditional banks. Only 9% would choose an online-only bank.

And even while retailers are abandoning shopping malls and closing brick-and-mortar locations due to the online retailing onslaught, banks with a physical presence give customers choice and the ability to interact with a live person. According to JD Power & Associates, banking customers that routinely use both branches and digital channels are more satisfied than ones who rely solely on online services.

Senthil Gunasekaran is global head, corporate & business development, for TCS Digital Software & Solutions Group.