Financial institutions actually can turn on a dime. The push came from COVID-19. As social-distancing mandates drove consumers online in record numbers, banks and credit unions rallied a heroic response. Along with the near-instantaneous shift to digital came a change in consumer demands. Users didn’t just want to check their balances and transfer funds; they wanted to do everything they once did in the branch from the safety of home. There was a sudden and urgent need — not in 2030, but right now — to accelerate digital banking innovation.
Just in time, it would seem. Because the challenges to the incumbents have never been greater. Embedded in those challenges are tremendous opportunities for the banks and credit unions that wish to take up the gauntlet. Some were prepared for the digital switch, others not so much. The financial institutions that lost the most ground were those with limited or underdeveloped digital capabilities.
According to Jacqueline Vose, head of client experience and community banking at Coalition Greenwich, the path to true north is clear: “Even before the pandemic, the industry had divided into two groups with a widening gap between them: leaders and the rest. Over recent years, leaders had embraced that banking is increasingly a technology and data business and had prioritized the investment spend and cultural change required.”
So the question arises: How can banks and credit unions of all sizes prepare to compete in the digital future?
Digital Banking Innovation
It starts with assessing the competitive challenges and understanding how to leverage the most important technological innovations to deliver a user-centered online experience. Technology is not just a tool that facilitates speedy transactions. Rather, it can be optimally leveraged to provide entirely new and innovative ways to deepen banking relationships.
Traditionally, smaller banks and credit unions outperform the big guys when it comes to customer service. Yet in 2020, according to a J.D. Power survey, this was not the case. Respondents favored large banks due to the strength of their digital offerings. Clearly, the future is in re-creating a superlative customer experience via digitalization.
Economic pressures in the banking sector are fierce, and they will remain so in the foreseeable future. Fortunately, there was a stronger-than-expected economic recovery. In its wake, the big banks are swimming in cash as they wait for the return of qualified borrowers. Still, competition in the banking industry was on the rise before the pandemic, and the competitive landscape today is more crowded than ever. With challenger and neo banks nipping at their heels, banks and credit unions need digital capabilities like never before.
Digitalization is a double-edged sword. For one, it makes it easy to switch from one service provider to the next. Banks and credit unions, however, can use those same technologies to attract and retain good consumers. In today’s competitive environment, a great digital customer experience is not just a nice-to-have; it’s a business imperative.
Vose adds that digitization is the strategic option. She says, “Banks and credit unions face one clear threat: underinvesting. By underinvesting in digital, they risk being leapfrogged in all areas of banking.”
We Are Here. Now What?
Now that the users have arrived online, what’s next? The app itself is just table stakes. The next iteration of the digital revolution will be driven by innovation that is intensely customer-centric. Analysts expect a compound annual growth rate of 13.5% in online banking over a seven-year period, reaching $31.81 billion in 2027. It’s a sure bet that there will be some new digital offerings in there somewhere. If your bank or credit union doesn’t have them, the competition will.
Of course, users want efficiency. They also want a seamless experience across all channels, from the ATM to the website to the app, without setting foot in a branch. The most progressive financial institutions will cultivate personalized relationships through digital channels. Now is the time for innovation.
But the issue is not who can come up with more bells and whistles. It’s whether incumbents can develop the products and services that engage and delight users. It’s about leveraging existing technologies in more creative ways to enable capabilities that your users don’t currently have. One thing is certain, according to Vose:, “Innovators will outpace others in market share growth, value-added advice, and efficiency.”
The Next Frontier: Digital Innovation in the Banking Sector
In preparation for the future wave of digitization, banks and credit unions must shore up their digital strategies and find ways to engender loyalty, deepen relationships, and capture a larger share of wallet. There are three main areas to consider as part of the strategic effort.
In 2020, 86.5% of Americans used their mobile devices to check account balances. Bank of America led the pack with 30 million active mobile users. It doesn’t stop there, however. More users expect full functionality on their phone or tablet, even the ability to filter transactions. Increasingly, users are not logging onto their computers or laptops, preferring to complete every transaction on their mobile phones.
Bank and credit-card users may use six or more channels to access their financial institution: branch, contact center or phone, ATM, website, mobile, and online banking. But institutional silos create friction. A user may bounce between the app, the website, and the call center just to get their routing number. If one department owns the website and another owns mobile banking, the user may have a disjointed experience.
Instead, the organizational structure should prioritize the customer experience, placing greater emphasis on user needs rather than the organizational span of control. An end-to-end customer experience requires central ownership, creating greater agility and allowing the institution to respond quickly to the evolving market.
According to the EY Global FinTech Adoption index, fintechs have done a number of things well. They’ve gone from being scrappy industry disruptors to being a critical part of the banking ecosystem. They are accelerating the transformation to digital and fostering collaborative innovation in the financial services sector. Whether consumers realize it or not, three out of four are already using money transfer and payment fintech solutions. At Lumin Digital, we offer the fastest, most efficient way for banks and credit unions to build the type of personalized, data-backed experiences that users demand.
The banks and credit unions that will perform best over the next few years are those that understand where the sector is headed. There are several key trends in the digital banking space. These trends will help determine how institutions invest precious resources, improve their service offerings, and successfully serve their users in the post-pandemic era.
Regulators expect you to know your customers. Well guess what? Consumers expect the same. According to a 2018 Accenture survey, 91% of consumers are more likely to do business with brands that recognize them, remember them, and provide relevant offers and recommendations. They are looking for solutions that help them, for example, monitor expenditures, save money, take remedial credit actions, and change bad spending habits. Seventy-eight percent of adults want advice from their financial institution. Personalization helps financial institutions retain users and grow relationships through every stage of life.
Banking isn’t much fun for many people. Autonomous finance uses artificial intelligence and machine learning to automate financial decisions. Based on the user’s transactions, for example, the system could decide to recommend recurring payments or a credit line. Autonomous finance can help users manage money intelligently and replaces in-branch cross-selling.
Open Banking and APIs
Open banking gives third-party financial service providers access to the user’s banking data. It uses application programming interfaces (APIs) to facilitate the use of, for example, flexible, income-generating investment vehicles. Although capabilities differ from one country to the next, open banking can enable unique collaborations and diversifications in financial institutions of every size. It changes the paradigm on the volume and type of data that can be shared. It will likely facilitate an increasing number of innovative digital partnerships between incumbent banks and fintech partners.
Peer-to-Peer Payment Solutions
During the pandemic, people didn’t want to handle dirty money or even pull out a credit card. Peer-to-peer (P2P) payment apps took off. Although not a new trend, P2P continues to grow in popularity. These apps, like Square Cash App, Venmo and PayPal, can do almost anything a bank can do. They have the potential to siphon off consumers from banks and credit unions or even keep them from ever becoming so in the first place. P2P solutions are being used to send money to friends, split a restaurant check, buy fast food, and even receive relief checks. Some even offer lines of credit and allow users to maintain a balance.
Accenture reported in 2020 that many banking CEOs believed that the first few months of the pandemic could have been a lot easier had they had more workload in the public cloud. Cloud computing has been around for a while, but for banks the uptake was incremental and mostly private. With the pandemic, there was a massive shift in 2021 toward public cloud computing. Also, by 2021 cloud computing has become increasingly scalable, standardized and accessible. Using the cloud, banks could deploy innovative and agile solutions more quickly, eliminating data silos and physical servers and the associated risk in the process.
According to the FBI, cybercrime has increased up to 300% since the start of the pandemic. These risks are increased by the enthusiastic adoption of Internet of Things and 5G technologies. Financial institutions will make heavier investments in cybersecurity. They will look more closely at third-party collaborations to ensure that they have trusted partners who have robust security protocols in place. Also, banks and credit unions will rely more heavily on AI technology and machine learning to detect onboarding, loan and payment fraud with near real-time precision.
The Future of Digital
Despite the unbundling of products and services, consumers of all ages continue to want one-stop shopping and trusted financial relationships. Through the use of emerging technologies, banks and credit unions have an unprecedented opportunity to transform themselves for the digital era.
Digital banking is not only the future, it is the current reality. The next generation of consumers has an entirely different set of expectations surrounding their financial needs. As digital technology continues to evolve and the competition intensifies, the future belongs to those financial institutions that are willing to evolve as well.
Now more than ever, collaboration and strategic alliances are fundamental for innovating the future of digitization. We’re Lumin Digital. We can help you build a cloud-native digital banking platform that offers the agility you need in today’s competitive environment. Contact us for a demonstration. We’ll show you how you can elevate your users’ experience.
Pamela Fay is a business, financial, technology, legal and lifestyle writer, whose work is informed by over 20 years of strategy, leadership and organizational development consulting for Fortune 500 companies.
American Banker – Customer Satisfaction with Big Banks Increasing During Pandemic
Allied Market Research – Online Banking Market Size, Share
Accenture – Accenture Pulse Survey
Geniusee – Top 10 Digital Banking Trends
Intone Networks – Cybersecruity Trends in Banking 2021