Retail banking is being sharply impacted by unprecedented shifts in consumer behavior. This transformation so far favors the powerhouse “Big Four” banks and innovative challenger digital banks.
The top four national banks now capture 51% of new checking customers. And among consumers that opened a new banking account during the pandemic, 18% did so with a challenger bank, according to research by Cornerstone Advisors.
What this means is that the historic advantage that regional, superregional and community institutions enjoyed of banker-centric, local customer relationships is rapidly eroding. Responding to the competitive pressure, traditional financial institutions are shifting investments towards building digital capabilities and features. But in many cases they are only filling gaps and striving for parity in what seems like a never-ending digital arms race where they never catch up.
Bank of America states that half of its retail sales are now conducted through digital channels. Digital sales at regional banks, by contrast, typically average between 23% and 30%.
Responses to the Competitive Squeeze
Progressive institutions aren’t standing still, however. They are pursuing strategies to differentiate and expand. Here a few examples of what institutions at the larger end of the regional scale are doing.
- Creating distinctive digital experiences. Huntington Bank has been widely acknowledged for its digital advancements such as Heads Up and The HUB, capabilities that amplify their brand promise of looking out for customers.
- Employing agile practices at scale to more rapidly innovate. Through their agile studio delivery model, U.S. Bank developed an award-winning mobile app with personalized insights.
- Targeted mergers to achieve greater scale. Truist, Huntington, M&T and PNC have all acquired banks (or merged), and are promoting enhanced digital experiences and capabilities as a value driver for the combined entity.
- Direct-bank expansion strategies. Citizens, KeyBank, and Fifth Third are all advancing targeted digital-first brands that build on strengths and expand the footprint for their retail and/or small business offerings.
Community banks and credit unions face an additional challenge: Almost all of them are beholden to one of a handful of bank technology platform providers to deliver digital innovations. These providers are scrambling to upgrade capabilities and differentiate their offerings. FIS, for example, has developed a new capability of personalized insights and automated savings integrated with their core banking platform.
- Lack of Personalization Puts Banks at Odds with Consumer Expectations
- Ally Bank Lab Builds Savings Features into App to Solve Pain Points
A New Basis of Bank Competition
One key factor hampering traditional institutions — including some of the largest — is that they have built digital product and channel capabilities largely independently from one another over the years. This has resulted in gains in individual channel metrics (i.e. channel sales, banker productivity), but not an optimal “blended experience.”
Rather than simply pursuing channel-specific advancements, the concept of “connected channels” offers a more integrated approach to delivering a blended experience. It relies on three foundational capabilities: customer transaction data, AI-driven analytics and process efficiency. The following action steps build on these capabilities:
1. Capturing customer intelligence wherever it happens, and sharing the data across both digital and banker channels. Advancements in data and analytics capabilities enable banks and credit unions to gather reams of useful information about customer behaviors. Using this institutions can understand customers’ cash flows and anticipate their needs, or see if they are better suited for another product. Changes in transaction behavior can also signal life event changes.
2. Promoting the optimal channel to accomplish the customer’s “job” or need. Based on the intelligence derived from transaction data and a customer’s preference for certain channels, banks and credit unions can determine the most appropriate channel with which to proactively engage a customer with an insight or suggested action.
3. Straight-through processing to complete the “job.” When delivering insights or suggestions, financial institutions need to ensure the channel used is capable of addressing the customer’s need with straight-through processing — i.e. without friction-creating handoffs.
It’s ironic to be using technology to improve relationship banking. But advanced data and analytics capabilities can help institutions get back to the basic tenets of local relationship banking: know your customer, value your customer and advise your customer.
3 Examples of Connected Channels In Practice
Let’s take three real-life consumer financial situations to describe how the connected channels approach works in practice to deliver a blended experience:
Situation 1: Cash flow issue. The financial institution identifies a customer who is likely to experience a cash flow shortfall in the next several days based on an AI model analyzing historical and scheduled transaction activity and patterns.
Action: Digital outreach. Proactively deliver a personalized insight through the digital channel flagging the possible cash flow issue and offer solutions (transfer money in, unsecured line, overdraft protection) to resolve the problem.
Learn More: What’s the Future for Overdrafts?
Situation 2: Home improvement need. Recognize disproportionately high spending at home improvement merchants and an external mortgage held outside the institution.
Action: Digital + banker outreach. Proactively deliver an insight through the digital channel recognizing the home improvement underway and offer a remote appointment with a banker to discuss options. In parallel, send the insight to the banker for proactive human outreach.
Situation 3: Change in income source. A consumer’s income source changes with a commensurate increase in deposit amounts.
Action: Banker outreach. Share insight from your CRM with a relationship banker to enable them to reach out to the customer. Proactively offer the customer a free financial checkup with a financial advisor to discuss investment opportunities, 401k rollover, etc.
From our research, 55% of the top 40 North American banks are either in production or in process of implementing some form of personalized interactions in the digital channel. The next big step, however, is to create connected channels that can deliver a truly blended experience such as those just described.
Regional and community institutions that adopt this capability can change the basis of competition, shifting away from a digital arms race and back to proactively understanding individual customer needs and acting on their behalf. It’s a competition that forward-leaning financial institutions, regardless of size and scale, are well poised to win.