Digital payoff

The global banking sector is in good health, with assets, profitability and capitalisation all having materially increased since the global financial crisis. Add the prospect of rising interest rates and relaxed regulatory pressures, and the retail banking industry appears in better shape than it has been for some time.

The landscape is changing, however. Technology, demographics, customer expectations and new competitors are forcing traditional retail banks, credit unions and mortgage lenders to change their business practices to avoid being left behind.

Forces of technology

Digital banking has transformed the way bank services are delivered and consumed. Bank of America announced in 2018 that, for the first time, deposits made through smartphones and tablets outpaced those made through branches.

And according to EY, 85% of banks say that implementing a digital transformation programme is a near-term business priority. The investment in technology to drive efficiency, manage evolving risks and capture growth opportunities will be critical for sustainable success.

The emergence of non-traditional disrupters means banks, credit unions, mortgage lenders and insurers have been forced to turn to big data, machine learning and advanced analytics to offer more directed product placement and capture new customers. Underpinning these goals and challenges is the need to make investment decisions based on real-time, granular data. The appetite for this type of intelligence varies depending on the size of the institution: larger institutions have developed sophisticated analytics while smaller ones require a synthesised view.

The traditional model of keeping all data in-house is being turned on its head. Peer contributed data exchanges are being formed across the financial services world and having access to this data will give retail banks important insights on price elasticity, market share, revenue enhancement, cost containment and more, helping them make better investment decisions faster. Open Banking in the EU, a regulation that allows the use of open application programming interfaces (APIs) to enable third party developers to build applications and services for banks, is a clear example of how this data and technology transformation is having a direct impact.

Demographics and customer expectations

Ensuring the best customer experience in the multi-channel world of brick and mortar branch, online and mobile banking is critical. The emergence of non-traditional banks is driving market opportunity as innovative, fast-moving lenders like Quicken, Freedom Mortgage, PennyMac and Nationstar have rapidly taken share from traditional mortgage banks. Quicken surpassed Wells Fargo as the single largest mortgage originator in the US, largely due to its customer experience.

Consumer loyalty to big bank brands has diminished and satisfaction with mobile and online functionality has decreased. Only 28% of US consumers say the experience they receive from their bank’s branch, online and mobile channels is seamless, according to Accenture.

New competitors

Consumers are willing and desirous to transact digitally, and nimble non-banks like Quicken have used technology to enhance the customer experience and reduce costs. Innovative fintech companies like Blend promise to make transactions faster and more consumer friendly, especially in the face of new regulations. These technologies offer the potential to jump ahead of incumbents with lower costs and superior customer experience.

The net result is that traditional models face significant margin pressure and must adapt or risk being left behind. And this is happening across lending, with companies like SoFi using these technologies to disrupt student lending, personal loans and other markets as well.

As consumers are forever wedded to their smartphones, the banking sector has changed forever. Matching attractive rates with the speed and execution of world-class, multi-channel customer experience are table stakes for retail banks worldwide.

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