6 Ways Banks & Credit Unions Can Slay Their Digital Demons

Forces of change sweeping through the financial industry make the status quo entirely irrelevant. That's why banking providers that have done well in the past few years may be those most at risk for continued success. It's not too late to change, but the transition must follow a roadmap, or your organization will find itself lurching from one project to another.

Financial institutions face so many demands for change, that sometimes sitting back and waiting for it all to sort itself out is tempting, especially when profits and return on assets are strong.

That’s a temptation banks and credit unions must resist, however. Given the many shifts in competition, technology, and consumer and business needs and expectations, what’s the right path, then? What are the new strategic “must do’s” for financial institutions today?

There are six strategic factors for a community financial institution to thrive and remain relevant with consumers, small businesses, and even with employees and communities.

1. We’ve Met The Enemy… Is it Us?

At a conceptual level, most banking executives accept the need for change. But in a highly regulated industry steeped in rules and traditional processes, often using last-generation technology, true willingness to change is difficult, and actual change is very hard to pull off successfully. So, given recent economic and earnings improvements is it surprising some banking leaders may ask, “Why change?”

The flaw with that thinking, of course, is that the banking marketplace has changed. And it continues to change — seemingly almost daily — with the digitization of banking, the entry of skilled and agile competitors, and shifting consumer expectations, among other factors. To remain competitive and relevant, banks and credit unions must change as well, because their customers will expect and demand it. And if their current banking provider can’t deliver, individuals and businesses will go elsewhere.

“Simply accepting change isn’t enough to ensure future success. Financial institution leaders must be energized by change.”

Simply accepting change isn’t enough to ensure future success. Financial institution leaders must be energized by change.

Here a some specific recommendations on how to facilitate positive change in your institution:

Acknowledge the obvious. Be open and honest about change. It isn’t something most people are comfortable with and it’s imperative that managers discuss the natural and predictable discomfort all employees experience when faced with disruption.

Walk the walk. To feel comfortable with change, employees at traditional financial institutions must see managers and leaders making changes to their own roles and behaviors. That sends the message: “We’re all in this together.”

Accept mistakes. The number one fear of most employees is, “If I make a mistake, will I get fired?” Reaffirm to them that mistakes are a natural part of the digital journey. When managers create an environment where mistakes are used constructively as “teachable moments,” staffers feel less threatened.

( Read More: Combine Digital With Traditional to Regain Community Banking Mojo )

2. Why Simplicity and Convenience Move Market Share

Recent history proves that consumers shift their behavior when it is to their benefit, and will even put convenience above price, as can be seen with Amazon. Financial institutions are much less immune to consumer switching than they once were. When given a viable alternative, why would consumers seeking a mortgage, for example, put themselves through the tortuous process of submitting seemingly endless physical documents, and take a month or more to complete the loan, when they can do it in days? They won’t, which is why Rocket Mortgage is now the number one mortgage lender.

The same is happening in more and more traditional lines of banking business — credit cards, auto loans, small business loans, personal loans, and payments —enabled by digitization. As this trend becomes even more prevalent, customers will demand the same relatively frictionless experience from their bank or credit union, or they will go elsewhere.

Some large financial institutions and some progressive smaller ones already provide this level of customer experience, and it will be omnipresent within two short years, in our estimation. For the rest of the industry, the good news is that delivering a faster and easier customer experience doesn’t require expensive new IT systems. Cloud-based options and partnering opportunities are widely available now, even for smaller banks and credit unions. For many, a good beginning point is to optimize current workflows and better utilize existing technologies, which will start yielding real benefits.

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3. Redefine Deep Relationships

“The use of technology and human interaction are not mutually exclusive.”

Personal relationships have always been instrumental to community banking and credit union success. That hasn’t disappeared, particularly in regard to small businesses. But as retail customers continue to gravitate towards technology and remote delivery, how can banking providers maintain those personal relationships? The key is to rethink how “relationships” are defined and delivered. This means reevaluating your institution’s identity and culture, how you differentiate yourself, and how you add value to your customers. Moreover, the use of technology and human interaction are not mutually exclusive, as Umpqua Bank has demonstrated with its “Go-To” app combining mobile banking with a human connection for all customers.

4. The Efficiency Ratio As a Competitive Weapon

Many large institutions have strategically lowered their efficiency ratios into the 50s and 40s. The rest of the industry is now (or soon will be) competing against these leaner players and against the margin and pricing advantages that come with improved efficiency. So lowering your own efficiency ratio to remain competitive and profitable is a must.

“Banking has done a very poor job historically of demonstrating the value proposition it offers.”

Many banking executives assume this means cost-cutting. Actually, increasing revenues and yield — which comprise two-thirds of the resulting efficiency ratio — will produce the greater ratio improvement. Thus, focusing on adding real value sought by your customers — whether that be in real-time payments, or a simpler loan application process — and then charging a premium price for a premium product or service is essential. Banking has done a very poor job historically of demonstrating the value proposition it offers.

5. You Don’t Need to Compete On Rate

In their desire for growth, and to remain competitive, banks and credit unions often gravitate towards lowering loan rates and easier terms. The result, as one bank CEO recently characterized it, is “dumb loans.” Studies have shown that those who compete on price are, at best, middle-of-the-market performers, and often are worse. Instead, to seek sustainable performance, create real value and then monetize it through premium pricing, as noted in point four.

Consider this: If a bank or credit union’s staff are trained to be trusted advisors, it’s not unreasonable to win business with a 25-basis point premium on credit products over your competitors. Today, banking employees’ role is to educate and empower consumers to make a decision that’s in their own best interest.

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6. Don’t Let Staff Be The Weak Link

“The level of product knowledge at most banking touch points is insufficient to expand and deepen customer relationships.”

Many banks and credit unions maintain that their culture and customer experience philosophy centers around “advising and consulting customers” as opposed to “pushing products.” In our experience, however, the level of product knowledge at most touch points is insufficient to expand and deepen customer relationships. Sure, there may be a subject matter expert or two around to help answer customer questions. But even with the most basic consumer products, most branch or call center staff lack the product competence to educate customers effectively. This greatly reduces the institution’s ability to present additional products or services.

These employees should routinely be able to inform consumers:

  • What a product can do for the person
  • The features and benefits of a product (scripted “one-liners” can help employees position the value of the solution)
  • What documentation is needed from the customer

While the digitization of delivery channels opens exciting new opportunities to increase ease and convenience for our customers — which must be embraced — any organization is only as strong as its weakest link. Don’t let your staff be the weakest link in your efforts to expand customer relationships and not compete on price. Invest the time and resources to strengthen staff expertise.

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