In today’s tumultuous banking industry, a myriad of outsiders and new providers threaten to disintermediate legacy institutions. As KPMG puts it, retail banks and community credit unions are now operating in a marketplace that’s “under siege.”
So it’s no surprise that most financial institutions see the digital surge as a threat to their very existence. But KPMG says this is a strategic mistake. The banks and credit unions who will thrive in the digital economy are those who embrace the new realities that now govern a more dynamic financial industry. To organizations with the correct perspective, major technological breakthroughs and shifting consumer expectations shouldn’t be viewed as threats; they should be welcomed as opportunity — positive “enablers of change.”
In a 12-page white paper, KPMG outlines the following seven forces that will shape the future strategy for any traditional banking provider looking to plot their way forward through all this disruption.
1. The Big Shift
In one research project after another, Millennials have consistently demonstrated dramatically different buying patterns and expectations than previous generations. Millennials set the standards in digital channels, and now their preferences have been largely adopted by everyone else. This new Millennial standard represents the new “table-stakes” that retail banking providers must understand and adopt in order to win and retain relationships.
To better align the customer experience with this new Millennial mindset, KPMG says banks and credit unions need to perform customer outreach efforts, conduct focus group sessions, and assess experiences through customer journey maps. Doing so will yield a strategic blueprint that outlines the shifts your organization will need to make:
|Description||New Capabilities Needed|
|Allow users to access and engage banking services through all digital platforms.||Omni-channel delivery.|
|Offer customers customized products and services based on buying patterns, transactional data and in bank portfolios.||Advanced data and analytics and customer segmentation.|
|Offer customers product and service pricing based on user risk profiles, use patterns, and other characteristics.||Product- and price optimization models.|
|Review and make credit decisions as close to real time as operationally possible.||Advanced modeling incorporating enriched data (e.g., proprietary cross-departmental data or unstructured data)|
|Allow sellers and users to distribute and receive real time payments.||Faster payment technologies, consider fintech build.|
Read More: 7 Insights Into The Digital Generation
2. The New Competitive Reality
Competition is not a new concept for banking providers. But what KPMG says is unusual is the number and type of new entrants coming to take on the industry’s established players these days.
For every PayPal, Walmart and Amazon that you’ve heard of, there are hundreds of other lesser-known companies out there offering expanded connectivity and customer insights through new technologies, data and advanced analytics.
Mobile payment services such as Venmo and e-commerce companies such as Alibaba are completely redefining financial services in many different areas. They aren’t just raising consumer expectations by unleashing new technologies. They are forcing traditional financial institutions to reexamine their internal culture and corporate/HR strategies.
KPMG says smart financial institutions will rip pages from the outsiders’ playbook. These scrappy fintech challengers find success by fostering a culture that is innovative and inquisitive. They empower teams to research and invest in new technologies and data. And they keep an open mind to alliances and relationships with unconventional players. These days, you need to think like a startup… not like a bank.
3. Unstructured Data
Unstructured data refers to information that either does not have a pre-defined data model or is not organized in a pre-defined manner. Unstructured information is typically text-heavy, often containing a mix of dates, numbers and facts.
There’s a wealth of unstructured data that financial institutions could leverage, but KPMG says they will need new, advanced analytical tools in order to make any sense out of it.
KPMG says traditional institutions must learn how to combine information-rich data sources with advanced analytics to yield valuable insights into customer behaviors, preferences and life events. Armed with a more complete picture of their clients and segments, financial marketers will be better equipped to offer new products, improve margins, and reduce attrition. For instance, KPMG says banks and credit unions can leverage unstructured data for:
- Segmentation – Accurately predict customer behavior and buying patterns.
- Lead Generation – Predict and offer products consistent with life events (e.g. birthday, anniversary), asset ownership, and other buying behaviors.
- Credit Scores – More accurate credit scoring, improve reserve and loss forecast accuracy, predict and proactively manage credit events.
Employee compensation is a huge cost center for financial institutions, so anything they can do to cut labor costs helps build the bottom line. That’s why the entire industry is looking at automated algorithms, artificial intelligence and robotics. According to KPMG, using bots to automate processes can eliminate three to five full-time equivalent employees.
“There is a growing sentiment that all activities requiring a keyboard stroke, manual process, or repetitive activity will eventually be replaced by automated algorithms or robotics,” says KPMG. “And the cost to implement each bot is typically low, with numerous service providers out there focused on everything from journey mapping to design and implementation.”
KPMG says interest in digital labor has expanded beyond basic processes to include special use cases involving machine learning and cognitive thinking. For example, financial services clients are developing chatbots and other “thinking” assets that gather economic and social data to formulate customized marketing and service recommendations for consumers. Some banks are even exploring opportunities to leverage AI-powered natural language platforms like Amazon’s personal assistant Alexa to provide banking services.
5. Payments: Faster, Simpler Digital
Any talk about the digital economy will be inherently intertwined with a conversation about digital payments (think: PayPal, Venmo, etc.). Keep in mind that the aging payments infrastructure in the U.S. has remained largely unchanged since the first institutions started processing transactions back in 1791 — way overdue for an overhaul.
The future of digital finance will be built around mobile wallets and P2P payments. But in the Digital Age, “instant gratification” is the new norm. People won’t even wait two seconds for a website to load. That’s why financial institutions that hope to compete digitally must take matters into their own hands and figure out digital payments — immediately. They can’t wait for the government to formulate a plan, or for the industry to act en masse. KPMG says there can be no delay; every bank and credit union needs to figure out their own digital payments strategy… now.
6. Digital Strategy = Cyber Security
In the digital age, cyber security isn’t optional. It’s table stakes. KPMG says leaders at digitally-savvy institutions acknowledge the impact cyber has on nearly all components of their organization’s value chain — including onboarding, user authentication and account access.
“Discussions have pivoted to what was once viewed as science fiction,” says KPMG. “For example, banks — with help from clearing houses, governments, and technologies — are authenticating individuals through the use of portable identities. Credit card issuers are exploring smart cards that activate using biometrics, while others are looking at blockchain strategies.”
KPMG says financial institutions that design their digital strategy with an emphasis on security will not only be safer, but also better equipped to leverage innovative technologies to meet business objectives.
7. The Speed of Change
Disruption is coming… whether you like it or not. KPMG looked at how long it takes consumers to adopt to new technologies in music, video, and travel. They measured the time for mass adoption from records to CDs to buying music online; the time to adopt from VHS tapes to Apple TV and Netflix; and the time to transition from physical travel agents to booking travel online. Based on those statistics, KPMG estimates that it will take consumers 7 to 10 years to fully adopt digital banking. The problem is: we are already four years into that adoption cycle, leaving financial institutions as few as three years to prepare.
5 Steps for a Positive Digital Transformation
KPMG offers the following recommendations to financial institutions hoping to capitalize on — rather than be crippled by — disruption.
State Your Point of View. Do you believe that success with millennials comes from a relationship-based model or will Millennials continue to cherry-pick financial products and services from the lowest-cost or most convenient provider? The viewpoint you take will drive all your decision-making around your digital strategy.
Pick the Business Model That Will Work for You. Maybe you want to focus on increasing fee income or improving your ability to attract consumers using lower cost distribution channels? Will you focus on consumer experience?
Mind the Gaps. Once you have your point of view and your business model, it’s time to determine where the gaps are in the organization. If the goal is to improve consumer experience and engagement, then perhaps investment in data and analytics is needed. Or if you are trying to increase fee income, do you need to invest in an investment platform that offers robo advice?
Build or Buy? Determine how you will fill those gaps between the business model and your current capabilities. You can build it in-house, buy it, or partner with a fintech or other provider. Asking how important is implementation speed versus cost versus customization will help you pick the right option.
Create Your Own Innovation Center. Not every innovation is a good idea for every financial institution. Banks and credit unions are creating innovation centers in which they employ rapid prototyping to test which ideas are good and which aren’t. While the cost of an innovation center may be daunting to smaller institutions with more limited resources and budgets, consortiums of institutions are forming which allow smaller institutions to share the costs of innovation. Others are partnering with fintechs to conduct innovation research.