The monumental shift to digital banking has revolutionized the financial services industry in many ways, but above all it has amplified consumer choice. Just a few decades ago, consumer choice was limited by geography. Unless you wanted to travel to another state, you’d have to go to your local bank or credit union and have a face-to-face interaction to get a loan.
Today, you can pull out your phone between walking from the grocery store to your car and get thousands of search results that show companies fighting to give you a what you want. In many cases, you don’t even have to meet with anyone in person to get approved. You can do it all digitally.
The implications of this shift to digital are groundbreaking. For the first time, innovative financial services companies across the entire nation (and beyond) can steal your account holders.
For instance, take a company like Lending Club, based out of San Francisco. If someone from Texas or Maine or Indiana wants a personal loan, they can apply on Lending Club and get it. Geography no longer matters, and that means that traditional financial institutions are at risk of losing account holders en masse to innovative players.
Some people might say that Lending Club represents such a small presence in the loan business that there’s no need to worry. However, it’s worth keeping in mind that when Netflix first started out — nearly two decades ago — Blockbuster said the same thing.
They said, “Look at that little startup. That’s funny they think they can compete with us.” This was also true of the publishing industry, where Amazon’s digital book sales took a major foothold. Even a large chain like Borders could no longer keep afloat. History shows that it’s unwise to ignore the trend toward digital services and the potential of ‘big bang disruption‘.
Fortunately for leading financial institutions, the future doesn’t have to echo Blockbuster.
Using Digital for Consumer Advocacy
For one, the industry’s regulatory framework keeps incumbents somewhat safe, as is evidenced by how difficult it is to obtain and maintain a banking license. (That said, banks and credit unions shouldn’t get too comfortable — even the highly regulated taxi industry is cracking under the pressure of consumer demand for digital services such as Uber.)
Second, leading financial institutions are starting to realize that they will win the future by becoming true consumer advocates. They know that in an era of amplified choice, the only way to rake in real profits is to adopt an advocacy model. They know that if they don’t fight to delight their account holders, someone else will.
The future therefore belongs to financial services companies that provide legitimate value on the digital front, whether that be through a way to open an account on a mobile device, a simpler loan application process, better account aggregation, tools that strengthen financial wellness, cross-platform technology, and so on.
The Digital Shift Beyond the Point of Minimal Viability
When there’s talk about how quickly this shift is coming, people sometimes say, “No offense, but we’ve been hearing this same story for 20 years.” They’ll mention that Bill Gates predicted something similar decades ago, and so far not much has changed. Sure, they say, some small banks and credit unions have been acquired and some branches have closed, but overall the industry hasn’t experienced any real revolutions.
These naysayers are misguided. First of all, they should recognize that the shift is already in process. For instance, Bank of America went from nearly 6,000 branches in 2010 to less than 4,800 branch today, and over the same time period, they went from under 7 million to almost 18 million mobile users. Those numbers are representative of a general industry trend toward digital as the primary channel.
But the biggest thing bankers need to realize is that everything is different today compared to 20 years ago. Today, cutting-edge companies have finally surpassed a point of minimal viability for previously unreliable and incomplete digital banking products. And history shows that when a product or service pass the point of minimal viability, big changes happen.
To illustrate, when the automobile first came on the scene in the 1890s, the critics scoffed at it for decades. They’d see car owners stuck on the side of the road, spending hours trying to fix their vehicle while they drove past in a horse and buggy. It wasn’t until the 1910s that cars started to pass a point of minimal viability, and then … everything changed.
What had been slowly building for decades — the promise of a reliable horseless carriage — passed minimum viability and then suddenly became widely used. Traveling via horse became a thing of the past, and cars flooded the nation.
The same thing happened with the adoption of mobile devices. Personal digital assistants and tablet computers hit the scene as early as the 1980s with the Organizer and the GRiDPad — products most people today haven’t even heard of. Even with the invention of the Palm Pilot and Microsoft’s Pocket PC, people didn’t collectively switch to mobile technologies.
That’s because the products hadn’t passed a point of minimal viability. It wasn’t until the invention of the iPhone and the iPad that consumers were willing to change their behaviors, and just like that, everyone had a mobile device with them wherever they went.
Today, industry leaders are passing the moment of minimal viability for digital banking services, especially the unrealized but game-changing ones like digital account opening, digital lending, digital payments and digital money management. For the first time, adoption of these services is set to explode.
That’s why funding for fintech companies has shot from under $2 billion in 2010 to over $12 billion in 2014 and the big banks are scurrying to invest even more. Venture capitalists can see that the time for fintech solutions to thrive is now. They know we’re on the cusp of something enormous.
The Time to Act is Now
Banks and credit unions can take advantage of this shift, but they need to pivot immediately, placing a strong focus on digital banking products centered on consumer advocacy. The days of squeezing account holders dry with fees and not helping them manage their financial lives are gone.
That mentality centers on short-term thinking and adversarial relationships. By contrast, surviving in the age of choice will require banks and credit unions to be on the same side as their account holders. That is defined as providing simple, valuable and easily accessible solutions that are in alignment with the consumer requirements of “Know me … Look out for me … and Reward me.”
Anything less, and your account holders will choose to bank somewhere else.