Digital Trends in Retail Banking - The European Experience

 On a recent visit to Europe I was pleasantly surprised to see how broadly merchants accepted ApplePay.  Most major grocery store chains, cabs, small coffee shops and others accepted this payment vehicle which is still struggling for wider acceptance in the US.  Europe and other continents have been ahead of us in some banking services, and learning from their experience can help us with more effective introduction of digital enhancements to Retail Banking.

This article is not about preaching.  It will not tell you how widespread the digital experience is across industries, nor will it warn you that staying on the sidelines might mean extinction. My goal is to inform you of recent global developments that are likely to hit our shores soon.

The framework for this discussion is a Global Retail Banking Report issued by the Economist’s Intelligence Unit.  The Report identified four key statements that shape the digital experience in banking over the coming years:

1. Platformization (AB: the word itself tells you where we’re going) of banking and other services through a single entry [point will steer the market

2. More payments will flow outside traditional banking networks (with PayPal, Alipay, Apple Pay etc. named as the most likely winners in this space)

3. Retail banking will be at least 80% automated with branches acting as information and engagement hubs (AB: they are also advertising banners and a major factor in perceived ubiquity)

4. Retail P2P lending will be freely available via banking platforms.

These statements form the context for the strategic priorities of the respondents to the Economist’s survey:

1. Improving product agility (52%)

2. Migrating client usage from physical to digital (45%)

3. Cutting costs (45%)

4. Launching API-based open banking strategy (32%)

The strategic implications of these assessments, made by our brethren outside the USA, are profound.  Some say “If you don’t have a digital strategy, your bank is already dead”.  I’m not in that camp, but time is running out.  How can you combat the anonymity of the digital channel as a community bank?  A few business models come to mind.

Market-focused

Community banks, by definition, are not global.  They are identified with a specific market niche and develop their customer loyalty there.  The niche doesn’t have to be small, nor must it be geographically bound.  City National, now a part of RBC, took its entertainment strategy beyond Hollywood to Dollywood, Nashville, Atlanta, Miami and NYC.  First Republic, a wealth-oriented bank, has been growing rapidly and organically by catering to wealthy mortgage seekers, and Northern Trust is also well knows for the market focus.  Further, digitization does not imply lack of personal touch or contact.  Some banks operate a highly decentralized model based on local managers and staff with real decision-making authority.  Their customers will benefit from improved digital accessibility as well, especially as it is not designed to cut costs or replace human contact, but to facilitate human interaction without the need for physical proximity, as well as to respond to the self-service preference of a growing segment of customers.

Market-focused banks can and should utilize data mining and other analytics to distribute among their bankers on the ground or on the phone.  They can personalize customer contact using the data.  For example, if a customer abandoned a loan application, human contact can be used to offer some friendly assistance.

Product-focused

Prepaid cards have been the core product for several banks around the globe, from Monzo in the UK to several banks in Africa.  The prepaid card providers are already adding features that mimic bank accounts, and Monzo now has the authority to offer checking accounts. Some providers drive mobile ATMs to oil rigs and other migrant-staffed locations every pay day to facilitate banking, and others, such as M-Pesa, are phone-based using QR codes for money transfer and other banking services.

Fight the apps on their turf

Open banking based on APIs (application programming interface), which allows diverse software components to communicate – can be a threat to banks, but can also be a great asset, masking some of the core system weaknesses most of us experience.  Banks need to get in on the action early to ensure they have the precious customer data that comes with the apps, leading to unique customer insights that add value to the customer in future interactions.

There are numerous paths to successfully leveraging APIs, and they are not necessarily size-bound.  The secret to success is ensuring that platforms, APIs and infrastructure work together.  This is a very tall order for most of us.  FIS, FiServ and Jack Henry all have issues with open API support, although they are moving in that direction.

The challenges associated with this noble goal are significant; some say they are insurmountable.  Yet we must be reminded that we already enjoy our customers trust, and that much of the data and necessary connections to make this linkage work are already in place or available for sale.  More than 60% of the world’s population over the age of 15 already has a depository institution relationship.  Through their checking account banks have unique and invaluable insights into their financial and everyday lives.  We use the data to detect suspicious activity as we speak, and we can leverage it further to meet customer needs on their terms.

When asked, “What are your main concerns in relation to API-based open banking?”, 40% of the respondents named “Lack of C-Suite understanding of the issue”.  Customer data security concerns was a close second.  Most banks are well on their way to handle customer education, but not enough are working on educating their executives.  “Beam me up, Scottie” is today’s reality to many, and we should all experience it to appreciate the endless possibilities and new worlds opened to us today.

My recommendation:  Issue an Amazon Dot or Alexa to every director and senior executive in your bank.  Have them bring back to you at the next meeting their top three uses of the device; is it news?  One-Hit Wonders? Or the weather report?  These devices demonstrate the technology leaps already in place today, and, at least for me, opened my eyes to what our customers experience and expect today.

Some banks are in process of connecting to Alexa.  This is not my point.  Whether you use the device for banking services or not, it is the device’s amazing capabilities that are the eye-opener, as well as its willingness to say “I’m still learning” when it doesn’t know the answer (I almost wrote “she”, which tells you everything…).

The role of the branch

The Economist report states, “Branches are disappearing quickly”.  The ratio of branches per 100,000 of the population fell by 44% in Norway and 65% in Finland between 2010 and 2016.  The volume of Swedish currency has been halved over the last decade, and many shops do not accept cash and coin anymore.

These are indisputable facts, but we are not Sweden.  We have 325 million people vs. their 10 million, and, as we all know, scale does matter.  I wouldn’t bury the branch or cash yet.  Cash usage is very regional.  In India, for example, 96% of all transactions are done in cash.  When the government eliminated low denomination currencies in an effort to collect more taxes on traceable transactions, the country was brought to a standstill.  ATM lines were interminable, and the desired transformation altogether didn’t materialize.

Further, customers are wary about security.  It’s no surprise that the #1 digital investment in the banking world is cyber security, and the investment is far greater than that of improving digital delivery capabilities.

So let’s not sing the Requiem for the Branch yet, but initiate a parallel path for the digital, self-service bank for non-value-add transactions across the board, as well as utilize technology to streamline the back office for improved efficiency while streamlining the customer experience.

Conclusion

• Doing nothing is not an option

• Scale is relevant but not a barrier in the FinTech partnership world

• Build the strategy first and then execute

• Watch what’s happening outside the USA for harbingers of things to come

• Play to your strengths, mission and vision; be who you are on a digital platform

• Marry the human and digital experience to create a winning combination that is distinctly your bank!