Digital transformation — one of the most popular buzz phrases in banking — is indeed underway.
At least with consumers.
Through the pandemic, many found their current banking provider wasn’t up to par. That didn’t bother them all that much, because they quickly found plenty of alternatives.
Forrester, the global market research firm, in its report on “The State of Digital Banking 2021,” said that Covid-19 accelerated consumer digital adoption, but the widely held belief that traditional financial institutions benefited from this trend doesn’t necessarily hold up.
“Disruptors are gaining ground, innovating around both customers’ and businesses’ needs,” said Aurelie L’Hostis, author of the Forrester report. “While a handful of leading banks are pushing ahead with their digital transformation, others are still struggling to create and execute a coherent transformation strategy.”
Chris Skinner, publisher of the popular Finanser blog, says banks and credit unions are wasting billions of the roughly $1 trillion they spend on digital annually.
“An Accenture study found that only one in 10 banks were committed to digital transformation,” Skinner points out. “Four in 10 were trying to transform, but had no cohesive strategy. Five out of 10 weren’t making any progress at all.”
Consumers Get Ahead of Banks
While the consumers’ new digital behaviors are here to stay, they are not necessarily going to maintain their new digital habits with banks or credit unions. L’Hostis says banks have never faced so much competition, particularly in the digital arena.
“New entrants such as fintech startups, big tech firms, and nontraditional competitors are quickly delivering on customers’ increasing expectations.”
But banks? Not so fast.
More than a third of banks globally don’t see any reason the pandemic should accelerate their organization’s digital transformation strategy. Instead these institutions have remained focused on more predictable priorities and short-sighted goals such as cutting costs and growing revenue.
Forrester acknowledges that branches remain “the dominant channel for account opening,” and convenient branch and ATM access is still an important attribute for some consumers looking for a new bank. But the pandemic impacted everything.
With fewer ways to interact with their bank, people found themselves going beyond just basics like account balances, turning to digital channels to research and acquire new financial products — often with alternative, non-traditional providers.
Will Traditional Institutions Keep Up With Consumers?
The most striking aspect of Forrester’s report is how much of the advance in digital banking has been led by consumers. In Forrester’s view, banks and credit unions were passive beneficiaries of the pandemic.
Covid-19 triggered a reduction in the usage of ATMs and cash. Fewer stores were open, and for many folks, touch screens and keypads were potential vectors of infection. Instead consumers found themselves utilizing digital payments — including contactless, mobile and digital wallets — and many for the first time.
According to Forrester’s research, one in every eight U.S. consumers used their phone — not a card — to make contactless payments in a store for the first time during the pandemic. Europe saw similar numbers, but in China, one-third of all adults made their first mobile contactless payment.
Traditional institutions can’t point at the growth of digital delivery channels as evidence of success with their digital transformation strategies. The uptick was almost entirely triggered by people forced to bank using their mobile phones, tablets and laptops.
“Banking is going through a period of unprecedented innovation,” L’Hostis notes in the Forrester report. “New players — including fintech startups and non-financial digital brands branching into financial services — are responding to changing customer expectations with faster, better, and cheaper services, altering the competitive landscape.
As Chris Skinner puts it: banking may be seeing a lot of innovation, but banks aren’t.
Forrester says fintech entrants such as Chime, Betterment, Robinhood, and Starling Bank are “disrupting nearly every aspect of banking, promising superior CX and offering a wide range of digital services.”
All this spells big problems for legacy banks, Forrester says.
Banks Obsessed with Technology Stall Digital Innovation
L’Hostis and Skinner agree that seeing digital transformation as “a technology challenge” is too narrow a view.
“Technology is the core infrastructure and tool behind digital transformation,” observes Skinner. “But digital transformation is more about culture and organizational change than about technology.”
“What I see is banks maintaining systems and approaches, but not innovating,” Skinner continues. “Why is this? Banks have had ‘Chief Innovation Officers’ and ‘Chief Digital Officers’ for years now. What are they doing? Where is the innovation? Where is the digital innovation?”
Somewhat ironically, Forrester says bank and credit union IT departments can often be the stumbling point for real innovation and meaningful digital transformation.
“Sadly, a majority of banks see digitization as primarily a technology problem, not an existential challenge to a bank’s continued relevance to its customers,” L’Hostis says.
Skinner said banks should try to meet customer needs rather than selling products. Products and services should be redesigned around customers’ needs and wants rather than the traditional emphasis on sales and revenues.
Alyson Clarke at Forrester says banks should act as advocates for customers.
NSF fees could be a measure of digital transformation. At around $35, are they the same as in the days when banks were returning paper checks back to customers? What does it cost to send an email informing customers they are overdrawn?
“It’s crazy that firms make so much money from overdrafts or late payments on credit cards,” Clarke says. “In some cases they are probably making so much money it is hard to wean themselves off. It’s like a drug.”
Indeed some new digital banks like Chime and Varo don’t charge overdraft fees.
“They are newer businesses and aren’t hooked on old fee types, the first fees as I call them, like overdraft and they don’t have the baggage,” Clarke added.
Which leads to a bigger question — are banks making too much money and is that the fault of regulators?
A few years ago at Money2020, Tim Chen, the CEO of Nerdwallet, said bank profits equaled $180 per household… every quarter — something he characterized as an outsize return for what are basically simple, and similar products.
As Mehrsa Baradaran explains in her book “How the Other Half Banks,” bank accounts are just too expensive with their NSF fees and minimum account charges, for many people.
Such rich margins afford fintechs and neobanks a large window of opportunity.
Brett King, founder of Moven and author of Banking 4.0 said that digital applications like M-Pesa in Kenya and Alipay and We-Chat Pay in China have expanded financial services to billions of people who never had an easy way to save or transact before.
“When it comes to financial inclusion,” King says, “Kenya has done more to improve the lot of its populace in the last 10 years the U.S. has in the last 50 through legislation like the Community Reinvestment Act.”