Various pundits have predicted massive drops in the number of traditional U.S. financial institutions. I have been in banking for over 35 years and have never subscribed to these periodic “hockey stick” predictions of a sudden and dramatic drop in the number of community and regional institutions.
With the advent of digitization, however, and its adoption by non-traditional lenders and the largest institutions combined with its slow embrace by community and regional players, such a drop-off is now within the realm of possibility.
If more traditional institutions don’t take immediate and aggressive actions, they will share the same fate as many retailers, media companies and even taxi cabs.
This Is What You’re Up Against
A recent personal experience demonstrates the point emphatically. When I needed to refinance my primary residence, I decided to start the process simultaneously with a traditional financial institution and Rocket Mortgage, the mobile brand of Quicken Loans. The goal was not only to refinance, but to see what insights I could gain and share with my bank and credit union clients about the customer experience differences between the two lenders.
The differences became apparent quickly and dramatically.
The traditional lender requested eight documents, all hard copy. Rocket asked for only three documents, all easily obtainable digitally, while also pulling a few other documents from elsewhere on the web. Rocket also offered me a rate 12 basis points lower than the traditional lender.
The choice was easy.
After that, Rocket had a completed appraisal report in my hands within seven days. I received an email daily with a link to a personalized web page, showing me clearly the status of the refinancing and the next steps. They were ready to close and fund within 15 days.
After closing, I received a slick and personalized email and video explaining the onboarding process. So fast, so easy.
With apologies to my many banking acquaintances, but I will never consider financing a mortgage with a traditional lender again. This is what all banks and credit unions are now competing against.
Not Just Fintechs and Megabanks
Such slick user experiences are not limited to mortgages or to fintech competitors. Live Oak Bank, focusing on SBA niche lending, also competes on the basis of speed and ease of use. Both Rocket Mortgage and Live Oak are the largest lenders nationally in their respective lines of business.
“Non-traditional competitors are coming after every single LOB that banks and credit unions offer.”
— Joe Cady, CS Consulting Group
USAA Federal Savings Bank, the ninth largest financial institution in the U.S. with only one branch office, has digitized all of their line-of-business platforms and deployed innovative technology. As a result of this and other factors, they have become a perennial J.D. Power award winner for customer satisfaction.
The impact of these and many other tech-driven lenders, once just a nuisance to traditional banks and credit unions, is now becoming real. Over 50% of personal loans and mortgages are now done by non-traditional players. Even more disconcerting is the realization that these new competitors are coming after every single LOB that banks and credit unions offer, eventually making significant inroads unless the incumbents respond quickly. There is no place to hide anymore.
Paralyzed By a Pair of ‘Fs’
So what are bank and credit union leaders doing in response? Not nearly enough, nearly everyone agrees, including the bankers themselves,
During a roundtable at a national banking conference, the almost unanimous view among the CEO participants was that bankers are suffering from “the two Fs” — fatigue and fear. Fatigue from living through the past decade of recession, increased regulatory scrutiny, and intensifying competition. Fear of not being able to keep pace with technology (and the corresponding expense), or to be able to compete effectively against new non-traditional players that use speed and ease-of-use as competitive weapons.
There are various reasons for a lack of adequate response by many banks and credit unions. Foremost is that they are back making money, and that is always a dangerous thing, as complacency sets in. Many CEOs have personally admitted to me they are waiting to either retire or sell their institution, and will leave it “to the next guy or gal” to deal with. After all, there are substantial risks and costs involved with transforming an institution. Over the short term, it’s much easier to do nothing.
As Ray Adler, CEO of BTI Growth Advisors, observes: “Too many senior bankers are closed-minded and resting on their decades of experience. We’re in an era where our years of experience are as much a liability as an asset.”
The Risks of Doing Nothing Are Greater
The competitive threat will only become more impactful as time goes on. Even if the fintechs stumble, as some predict, the largest banking institutions will only increase their lead in competing on speed, ease, and efficiency. For any institution to delay taking appropriate steps to transform will only risk greater irrelevancy among your customers. Moreover, “leaving it to the other guy” is doing a huge disservice to your customers, employees, and communities.
The risks of under reacting are far greater than the risks of a digital transition. Yes, there will always be consumers who want that personal touch and relationships — they comprise about 30% across most industries. But that means 70% of your customers are in play.
- Traditional Bank Stakes Its Future on Daring Digital Strategy
- If You Launched a New Bank Today, What Would It Look Like?
How to Meet This Singular Challenge
So how should banks and credit unions respond to these challenges? First, recognize that a long-term commitment — spanning several years at least — will be required.
Most important, however, is to shift your focus from digitization (which is actually the means to the end), to faster and easier banking (which is the true end that consumers care about).
For smaller institutions, who have cost concerns, becoming faster and easier doesn’t necessarily mean adding exotic new technology. Often, efforts can begin with better utilizing current technology and optimizing customer experiences and work flows, which can yield substantial speed and ease-of-use improvements.
Any successful transition effort begins with a plan. That may seem obvious, but several studies show that only between 17% and 38% of organizations have a digitization strategic plan. Lack of a comprehensive plan usually results in the piecemeal efforts often found in financial institutions, simply tacking on mobile and online banking products, for example. This frequently falls short.
“Absent a plan, digital transformation is like trying to piece together a puzzle without the puzzle box picture for reference.”
Absent a plan, digital transformation is like trying to piece together a puzzle without the puzzle box picture for reference — very difficult!
An effective plan for digital transformation should include the following:
- A diagnostic phase to determine the institution’s aspirations and needs.
- Reconciliation with customer requirements and key questions.
- Prioritization of specific strategies and tasks to improve speed and ease in targeted areas of operations.
- Monitoring to measure results and make adjustments as needed.
Most critically, every CEO, executive manager, and board member will need to provide real leadership, foresight, and courage to do the right thing.
Organize your executive team. Put a plan together to become faster and easier, speedier and simpler. Then inculcate that vision throughout the institution, and execute that plan with a passion. Your near-term relevancy and success requires it. There really is no other choice. And it can’t wait any longer.