The music industry demonstrated that just because customers used to consume a product or service in one way, doesn’t mean that method will remain the preferred means of consumption forever. With the advent of the digital, on-demand culture, customers now expect all services, including banking, to be available anytime, anywhere and from any device.
Sony introduced the Walkman in the late 70s, revolutionizing the way consumers accessed and listened to music. Music became portable; wherever you went, your favorite songs could go, too. For years, Sony was the biggest consumer electronic firm in the world; in fact, it was buying up Manhattan well into the 90s.
Then, in 2001, the way we consumed music was once again transformed … this time by the iPod. For a mere 99 cents, you could buy any track off of any album and listen to that song repeatedly. You could create playlists of your favorite music from a variety of artists without ever having to change a cassette tape. The iPod was smaller, sleeker and more engaging. The Walkman soon became a thing of the past.
Most recently, the music industry has been revamped by subscription services like Spotify and Pandora. Instead of paying per song, consumers can simply pay a monthly subscription fee and have access to virtually any track they want, delivering on-demand service from anywhere, anytime and on any device.
Competing on Speed and Convenience
This shift from the Walkman to Spotify is a very telling one – consumers have been conditioned that they should be able to access whatever they want at a moment’s notice, and from any device and location. This expectation has been reinforced by powerhouses such as Amazon and Netflix, providing a tailored, digital and swift customer experience unlike anything we’ve seen before. And now, the banking industry is being challenged by this paradigm, as well.
In the wake of this shift in expectations around accessibility, alternative lenders have entered the financial services scene. These new players have recognized that consumers’ primary concern is now speed and convenience, even ahead of cost. By using automation to render instantaneous decisions and expediting access to funds, these third parties have seemingly preyed on consumers’ desire for instant gratification.
Arguably, consumer decisions weren’t always made with the utmost responsibility and the cost of funding was often unnervingly high, but consumers seemed willing to overlook these factors – at least in the beginning. Some believe that we are now observing how these players may carry more hype than substance. For some, their methods – unchanged – cannot last forever.
Success Depends on Getting Basics Right
Despite the perceived overnight success of alternative lenders, this industry is in a downturn. Some alternative lenders are plagued with scandal and are experiencing a vast amount of pain. C-suite executives are stepping down amidst accusations of improper lending practices, stock prices are plummeting and chargeback rates are rapidly rising. Why? Because the model was always flawed.
Alternative lenders’ cost of funding is around six%, while banks’ cost of funding is around .7%. That means the banking industry can lend money out at about the rate that these third parties take money in.
While speed and convenience certainly do outweigh price, cost isn’t an insignificant factor. Consumers can only endure the high cost of funding for so long; as the initial benefits of expedited funding are elapsed and borrowers are left with excruciatingly high rates, loan pricing is becoming a major roadblock to success.
Credit quality and the selling of loans are also increasingly becoming larger issues, as alternative lenders’ decision-making criteria fails to meet appropriate standards. For example, some of these entities actually use social media to determine if a borrower is qualified for a loan. So, they access the person’s Facebook or Twitter to better understand underwriting – perhaps not the most sound method to decide something as significant as whether or not a prospective borrower is granted access to funds.
To top it all off, the regulatory burden will inevitably catch up with some of these lenders. While alternative lenders have historically been proud of their lack of regulatory oversight, federal regulators are taking an increasingly closer look at the space, asking questions about these players’ transparency, lending practices and level of consumer protection. Soon enough, they will have to account for the same standards as banks, costing a considerable amount of time and money.
Fusing Technology with Responsible Lending Practices
Alternative lenders won’t necessarily crumble altogether – some will survive, some will reappear in different forms, and some will attempt to re-position themselves as technology providers to banks. But, at the end of the day, banks can do it better, and quicker.
Now that alternative lenders have had their 15 minutes of fame, it’s time for banking to heed the valuable lesson that these players, and the music industry, have presented – to pay careful attention to shifting customer preferences. The banks and credit unions that are meeting these evolving preferences, digitally engaging customers and streamlining processes while remaining compliant, will reign supreme against alternative lenders, and any other third party that threatens the customer relationship.
Bankers proactively preparing for the future are embracing business process re-engineering. Financial institutions are examining their internal processes and evaluating how to transform those processes to be as convenient, efficient and digitally optimized as Spotify or Amazon while still meeting compliance standards.
For example, by fusing new technologies with responsible banking practices, savvy banks are delivering the advantages of an alternative lending strategy without the risk. Banks that incorporate automation to run requests against their existing, proven credit policies, are streamlining the lending process, expediting consumers’ access to funds and meeting evolving demands.
New Marketing, the Cloud and Millennials
Another common practice of banks working to secure their competitive position is adjusting the way they interact with customers. The digital age has changed the way we think about communities; they’re no longer comprised of courthouses and town squares, but rather, they’re found online. The financial institutions that recognize this and have adjusted the way they offer products and services are succeeding in attracting and retaining consumers, solidifying a strong customer base for years to come.
Communities have also moved to the cloud. The cloud has changed how financial institutions operate, securely store and manage data, and deliver valuable customer service. Banks that are embracing cloud technologies are reducing operational costs while increasing flexibility, scalability and regulatory compliance.
The agility of cloud-based systems enables banks to effectively keep pace with market changes, nimbly adjusting to any shifts in their business needs. Of course, not all clouds are created equal; bankers must practice due diligence before selecting a cloud partner to trust with their business processes and customers’ sensitive data.
To help grow and manage these initiatives, forward-thinking banking organizations are recognizing the importance of attracting and training new talent. Baby boomers are retiring and millennials now make up an increasingly large portion of the workforce – and, they understand the importance of digital engagement.
Millennials will be valuable in meeting evolving customer preferences, largely because this generation grew up in the digital age. They will be instrumental in developing strategies to attract millennial customers, who will soon outspend boomers for the first time. By prioritizing the development of the next generation of employees, banks are wisely investing in their own future.
With an exciting yet challenging path ahead, banks must be mindful of the lessons learned in other industries when preparing for the future, ensuring their institutions are not only offering the products and services consumers want, but offering those services the way consumers want them. The good news is, many banks have already recognized this, and are taking steps and revamping processes to meet consumers’ shifting needs.
Banks that invest now in delivering an efficient, digitally engaging experience similar to Spotify will be well-positioned for decades to come.