A leading social media company sees its average user spend about 50 minutes every day on its platform. This compares to the roughly 54 seconds per day that a leading global retail bank interacts with its typical customer, which arguably best characterizes the difference between engagement versus transactions. Beyond the sheer difference in time, it illustrates the challenge banks and credit unions face in a digital world. Not only do they compete with rival banking organizations, they compete for consumer time, engagement, and the troves of valuable data that come with it.
As banks increasingly reposition to a digital environment, they face the realities of today’s platform economy. As we enter 2018, seven of the ten largest global market cap companies are platforms, and all now offer financial services. These companies are highly consumer-centric, target specific customer segments with timely product offerings, and occupy a growing portion of a consumer’s daily life. In this platform economy, convenience, personalization, speed, and scale have proven to underpin value creation.
The risk for banks and credit unions is that the massive shift in value toward platforms is acting to diminish aspects of the financial services value chain. Much of the consumer data that banks and credit unions collect, for example, is transactional and may provide only a partial or incomplete view of the consumer. This makes it more difficult to provide ever more personalized and timely financial services. The evolution in banking should involve the understanding and relationship of a wide scope of data in the context of each consumer’s journey. That means a mortgage should not be viewed as a point-in-time transactional service but as a life event that encapsulates many other financial and lifestyle events that a bank should address.
All is not lost for traditional banking organizations, however. They have inherent advantages that can be exposed, albeit slightly differently, in a digital-first world. There is little doubt that digital banks will become mainstream—look no further than recent launches of digital-only brands by large incumbent banks in the US and the traction of challenger banks in the UK—and we expect engagement and open banking to be a major part of this shift in 2018.
A Shift from Transaction to Engagement
The traditional bank or credit unions business model relies on one-way value creation – product development, distribution, and sales and marketing – all aimed at customer acquisition. Platform-based models, however, are two-way. Customer and member acquisition is often just the starting point, and data from platform/consumer interaction and third-party participation are then used to assess and address consumer behavior and changing demand to continuously refine product development and distribution.
As digital banking continues to evolve, strategies will need to consider this two-way continuous value creation and data collection. After all, credit decisioning, wealth management, and lending methods are data problems—and are increasingly not one-size-fits-all problems. To address this, banks need to transition from a point-in-time transactional data mindset to an all-encompassing engagement mindset. This will surely involve the use of artificial intelligence, machine learning, and advanced analytics, but these technologies all first rely on the right sets of data.
This shift to a two-way model to rapidly iterate and personalize products based on consumer data may be one of the larger adjustments a bank makes in its journey to digital, but it is a critical aspect to move to an engagement approach in order to avoid being relegated to simply a transaction facilitator.
Banking Beyond the Branch Walls
Platform economics also rely on open models. Financial services firms that begin to open their models and make data available to third parties may find unforeseen synergies with partners, cost efficiently address niche markets or previously unaddressed customer segments, or develop new consumer-centric digital experiences and services.
Digital banking revolves not just around the core financial service provided, but also the range of services and the manner and ease at which they are provided. Addressing the intuitive experience of a digital bank app is what most banks focus on today. In 2018, expect them to expand their focus to a broader set of services to more broadly engage consumers and increase the appeal of a digital bank.
To remain relevant in this digital environment, banks and credit unions are likely to expand beyond their traditional branch walls. Due to one-off data sharing arrangements, select banks moving forward with open source approaches, or an expanding set of public application programming interfaces, the surface area of how financial services are delivered is growing. Banking organizations will play a major role in this evolution and should increasingly take advantage to deliver a broader set of services – which may include third-party services – to their consumer base.
Finally, one major reason why large technology platform companies have entered financial services is to provide convenience to their customers (e.g., providing payments or credit directly on the platform or in-app). It is not just the range of services, but also penetration. In certain countries, notably China but also India, tech platforms not only handle a wide variety of financial services, but also have established significant share. Banks that embrace consumer engagement and open models will be well positioned to provide a breadth of personalized financial services to better meet changing consumer demand trends. And open models go a long way in the context of providing convenience, personalization, speed, and scale that are expected by today’s digital-first consumer.