According to research by Galileo Financial Technologies in collaboration with Datos Insights, the fragmentation of banking relationships is changing the competitive dynamics of the banking industry. Consumers are flocking not only to the largest banking organizations but also to digital-only organizations.
In most cases, consumers aren’t closing existing relationships. Instead, they are building their own suite of financial products and services from multiple providers, making it more challenging than ever for traditional financial institutions to build a comprehensive relationship.
Fragmentation of relationships is particularly evident among Gen Z and younger millennials. On average, these digital natives use more than six financial tools or services, and more than half of these relationships are outside their primary financial institution. Of special concern is the significant fragmentation of banking relationships among older millennials and Gen X respondents as well.
Like their younger demographic peers, these older consumers also hold more than six accounts, with half outside their primary financial institution. According to the research, while ‘convenience’ was mentioned as a significant reason for this fragmentation, this did not relate to geographic convenience but to the ease of opening and using the financial service at the time of need using digital channels. As digitally enabled neobanks and fintech firms offer contextual financial services at the customers’ fingertips at the moment of need, it becomes easy for consumers to choose their unique set of financial service providers.
Legacy financial institutions must continue to evolve to meet consumers’ changing needs. This includes creating new products and services and delivering these solutions in a more personalized and contextual manner at the time of need.
The Ongoing Shift to ‘Big 4’ Banks
While there are still more than 9,000 banks and credit unions in the U.S., the Galileo research found that the ‘Big 4’ banks still have a significant portion (38%) of the consumer market. Not only do these banks have massive reach due to their physical presence, but they have also responded the fastest to the shift in preference for digital-first solutions.
Surprisingly, 66% of the Gen Z segment have their primary banking relationship at a Big 4 or super-regional bank, while older millennials and Gen Xers are the biggest users of online banks.
The good news is that the research found that consumers are generally satisfied with the experience they receive from their primary financial institution. The bad news is that many consumers still don’t think their primary financial institution understands them, is innovative, has good rewards, or is adept at delivering solutions on digital channels.
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The Satisfaction Paradox
One of the report’s most interesting findings is the evidence of a “satisfaction paradox.” The vast majority of consumers (85%) report having a positive experience with their primary financial institution, with 80% saying their bank or credit union is helpful when they need assistance.
However, this surface-level satisfaction masks some concerning trends for traditional financial institutions:
- 22% don’t agree that their primary financial institution meets all their product needs
- 33% don’t feel their financial institution understands their needs or offers personalized service
- 40% don’t view their primary financial institution as innovative or cutting-edge
- 47% are unsatisfied with the rewards and incentives offered
So, while consumers may be generally content, there are clear gaps that create vulnerabilities and opportunities for competitors to steal market share.
Data-Driven Engagement and Personalization is Expected
Consumers expect their financial institutions to know them, understand them, and reward them with proactive advice on improving their financial wellness. This requires using both internal and external data and insights to create meaningful engagement across the entire customer journey. As opposed to sales-related messages, consumers expect empathy from their financial institution at every touchpoint.
While the Galileo Consumer Banking Report found that the majority of financial institutions are meeting the basics required from a banking relationship (trust, safety, and product assortment), many banks are still falling short of expectations in understanding needs, being innovative, and offering advice. This is even though 83% of consumers are willing to share personal insight in return for personalized experiences.
According to Accenture, 91% of consumers are more likely to shop with brands that provide offers and recommendations that are relevant to them. While 63% of those consumers surveyed Galileo believe products offered to them are tailored to their financial needs, more than 30% said they don’t feel offers are tailored to their personal financial situation. Interestingly, older generations feel less well-served than younger generations despite financial institutions most likely having a greater reservoir of insights on these older customers.
Consumers Want Ease of Engagement
Not surprisingly, the Galileo report confirms the critical importance of robust digital banking capabilities. 72% of consumers log into their accounts via mobile app at least monthly, with 60% doing so weekly. This compares to 66% logging in via computer monthly and 44% weekly.
Importantly, 60% of consumers say they prefer to do all their banking without any human interaction. This highlights the need for banks to expand their digital self-service capabilities across a wider range of products and services. It also emphasizes the need to rebuild new account opening and loan application process for a digital-first consumer, with an emphasis on simplicity and speed of execution.
Despite this trend towards digital engagement, 33% of consumers still visit a branch at least monthly, compared to only 19% who call customer service monthly. This suggests many customer needs still can’t be fully addressed through existing digital channels. The question is whether the consumer ‘wants’ to go to the branch, or whether they are required to use a branch due to the friction in existing digital experiences.
Given these sentiments, financial institutions should be aggressively pursuing more ways to build meaningful engagement on mobile devices by leveraging virtual assistants that go beyond existing chatbot interactions. These virtual assistants must move from reactive engagement to anticipating more complex needs using available data and insights. This will help to retain existing relationships while decreasing the risk of fragmentation flight.
Generational Nuances
The report highlights some important differences in banking behaviors and preferences across generations:
Gen Z: While often assumed to prefer digital-only banks, many are actually using traditional banks as their primary financial institution. However, they use the widest array of financial tools and may be the hardest to retain in a single ecosystem.
Millennials: This generation spans both digital natives and those with more traditional banking habits. They are the most likely to have used a virtual assistant for financial activities.
Gen X: Often overlooked, this generation represents the largest share of digital bank users. They are also on the cusp of receiving a massive wealth transfer from Baby Boomers.
Baby Boomers: Still control the majority of wealth, but that’s changing rapidly. Banks must be prepared for how money will move as the great wealth transfer accelerates over the next 5-10 years.
Looking Ahead
Looking ahead, financial institutions that can successfully blend the convenience of digital banking with personalized, empathetic service will be best positioned to thrive. This will require not only technological investments but also a shift in mindset towards truly understanding and anticipating customer needs. As the great wealth transfer from Baby Boomers to younger generations accelerates, banks must be prepared to adapt their strategies to retain existing customers and attract new ones in an increasingly fragmented and competitive landscape.