Banking on Digital Simplicity

To survive the litany of unrelenting challenges facing the banking industry, financial institutions must urgently pursue a strategy built around digital simplicity.

Banking providers must dramatically improve the customer experience through greater efficiency, quality and speed by concentrating on their digital and data analytics capabilities.

In short: Simplify.

This mandate for digital simplicity is the central insight emerging from the research in Boston Consulting Group’s sixth annual review of the industry.

Unfortunately, making banking easy isn’t easy. It’s an exceeding complex and potentially painful process to transform a legacy institution into a truly digital competitor — one where the experience feels intuitive, simple and seamless from the consumer’s perspective. BCG says most banking providers today have a long way to go to overcome the sources of friction that presently degrade their customer experience.

According to BCG, change will be required across the entire organization — much easier said than done. Agile approaches to development are needed in order to design and adopt fresh ways of working. cross-functional teams of personnel responsible for product development, marketing, operations, legal and compliance, IT and testing must be deployed, working in shorter cycles, to reduce time to market. Scarce entrepreneurial talent must be attracted and retained, and a program of culture change must be implemented to embed a digital mindset that supports organization-wide collaboration and risk-taking.

Using the Customer Journey to Create Brand Differentiation

BCG notes that consumer expectations have been increasingly influenced by the advances of digital pioneers in other sectors — innovators like Amazon, Netflix and Über. Consumers now expect quick and convenient service from their banking providers as well, through simple, intuitive interfaces. But they also expect human interaction when they need it. This is what BCG likes to call a “bionic” banking experience, one that combines both digital and human elements.

The emergence of innovators like Apple Pay and Google Wallet are changing the competitive landscape for banking providers. New products and payment technologies are impacting the relevance of traditional institutions and threatening their customer relationships. Unless they act, banks and credit unions face an increasing risk of commoditization; consumers will begin to regard banks as little more than public utilities, a trend that will exacerbate downward pressure on margins and undermine pricing power.

BCG says the best way for banks and credit unions to avoid this fate — to differentiate its offerings and value — is to provide a superior customer journey. Digital technologies and data analytics represent a significant opportunity for banking providers to (1) not only to better meet the needs of their customers, but (2) also to lower their costs and increase efficiency. In BCG’s experience, enhanced digital capabilities drive substantial and measurable improvements in banks’ financial and operational performance. these benefits can include boosting revenues per customer by 50%, increasing customer penetration by 30%, and reducing operating costs by as much as 20%.

BCG’s findings reveal that multichannel customers have higher expectations than single-channel customers, so they are more challenging to serve. They demand that their banking experience be simpler, quicker, more integrated and more personal. Financial institutions that get it right for this demanding group are more likely to get it right for the rest of their customer base.

The Five Levers of Operational and Digital Excellence

BCG says retail banks and credit unions must master the five levers of operational and digital excellence — the best practices and success factors BCG has identified through their annual bench-marking study, and through their experience working with financial institutions.

1. Financial Performance. BCG says institutions with the best financial performance show not only higher net-interest margins but also higher non-interest income per customer. Operating expenses per customer are another important variable, driven largely by lower personnel and IT costs.

2. Customer Service and Sales Excellence. According to BCG, leading institutions need to provide effective sales and service across all channels, seamless transition between channels, and easy-to-buy, easy-to-sell, easy-to-service products that are immediately functional.

3. Efficient and Effective Processes. Successful institutions develop processes that are simple and fast, using automation, paperless processes, workflow tools, and automated task management. The goal is not only to reduce costs but also to deliver an excellent experience for customers.

4. Streamline the Organization. The strongest institutions create an organization that is truly customer focused, with a high proportion of customer-facing roles, and that has lean back- and middle-office functions. These banks eliminate multiple layers of management, bringing executives closer to the front line.

5. Underlying Capabilities. Leading institutions are reducing complexity and building capabilities in digital channels (for example, by offering a rich set of functions for mobile devices), using digital technologies to automate end-to-end processes, and building capabilities in data management and analytics to better serve customer needs.

Going Digital Doesn’t Mean Going Branchless

Banking providers have been encouraging consumers to adopt digital- and self-service channels for some time now. Many financial institutions are offering incentives for using direct channels. More than half of the banks participating in this BCG’s survey reported that they reward customers for using direct channels. For example, some provide higher interest rates for savings products that are set up and administered exclusively online.

In BCG’s study, two out of every five new accounts at leading banks were sold directly — outside of branches.

Conversely, a third of participants said that they use negative incentives like charging a fee for a transaction that could have been conducted via a direct channel but instead was undertaken in a branch. BCG says the best banks are also encouraging customers to use mobile by developing functionalities specifically for that channel.

Despite the growing emphasis on direct channels, BCG says branches still constitute a critical component of banks’ interactions with customers. While customers increasingly demand digital features as a basic requirement, they still want personalized, face-to-face contact at certain points in their banking relationship. Again, this is what BCG calls “bionic banking” — a combination of both digital and in-person delivery channels.

In response, BCG says financial institutions are trying to maintain their distribution reach while reducing their distribution cost. They are reducing the density of their branch footprint, experimenting with lower-cost formats, developing video capabilities, and deploying hub-and-spoke models (main branch “hubs” with full service, and smaller “spoke” offices focused on self-service).

Going forward, BCG expects to see a wider variety of formats such as trans- action-only “light” branches, increased variation in hours and staffing profiles, paperless services, remote support from specialists through videoconferencing and pre-booked appointments.

The objective is to create a seamless multichannel experience, facilitating natural customer pathways between channels without the need to repeat actions or enter the same data twice and with all the required information available regardless of channel.

The Four Requirements to Achieve Digital Leadership

The competitive standards for operational and digital excellence are becoming more demanding, and the table stakes are rising. In the next few years, the disparity in performance between leading banks and laggards will widen. To keep up, BCG says banking providers will need to succeed in four primary areas:

1. Understand, strengthen, and deepen customer relationships. Move from being product-centric to become customer-centric. Consider extending offerings to include nontraditional services through digital platforms.

2. Reimagine customer journeys from front to back using digital technologies. Understand natural customer pathways across channels to overcome hidden customer compromises and frictions. Include middle and back offices in digital roadmaps.

3. Create agile, simple, and highly collaborative organizations. Build a digital-ready culture. deploy cross-functional teams that work in short cycles. Become more comfortable with making decisions amid uncertainty. compete for scarce entrepreneurial talent.

4. Enhance digital capabilities. Fail fast and fail cheap, and build digital capabilities through direct experience.

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