The banking industry has undergone changes that have fundamentally altered the competitive landscape. Five megatrends have arisen to change banking in very significant ways, impacting internal operations, business models, and the customer deliverables of banks and credit unions. These trends require a significant paradigm shift away from “banking as usual.” They all are components of the digital banking transformation process – some being revolutionary while others are evolutions of trends already in process. Five major trends are the democratization of data and insights; an explosion of hyper-personalization; a shift from transactions to embedded engagement; the acceleration of automation; and the platform model reshaping banking.
A Cornerstone report shows that banks must increase their use of digital channels to keep pace with the changing customer preferences in financial services. The report identifies three key areas that banks should focus on to ensure they provide quality services to their customers. These include the use of peer-to-peer payments, social media platforms, and AI chatbots. P2P payments are rapidly rising in popularity. Social media platforms are expected to play a significant role in digital transactions, with 4.9 billion social media users worldwide in 2023. And AI chatbots a becoming a must-have support tool for the banking industry, as a growing number of digital banking users are interacting with their financial institutions via online chats.
Adapting to the speed and scale of changes in the industry may require banks and credit unions to ‘reset’ some of their strategic thinking. Rather than finding funds and getting executive buy-in for digital improvements, instead reset with a focus on APIs and their ability to open up new customer engagement channels. Rather than waiting for the latest word on open banking regulations, assume open banking will arrive this year and be prepared to deploy it. And finally, rather than basing payment relationships on volume, base them on data exchange and customer value.
Silvergate Capital’s recent disclosure of potential viability issues and the resulting regulatory investigations have led to a 47% drop in its stock price. The intertwining of mainstream banking and crypto-related banking is a key issue, with the use of a Federal Home Loan Bank program to boost Silvergate’s balance sheet potentially introducing crypto market risk into the traditional banking system. The company holds $4.3 billion in short-term FHLB advances and $2.4 billion in brokered certificates of deposit. It had to sell securities and derivatives to shore up funding amid a liquidity crunch among crypto firms holding deposits with the bank. This intersection between traditional finance and crypto may prompt regulators to reshape the industry, with central bank digital currencies and tokenized deposits as potential winners.
Gen Z may start out using their parents’ bank, but whether or not they stay there will depend on the quality of service they receive. A high-quality digital experience is a must, as are robust self-service options. But if they need more personalized help, they expect to be able to obtain it quickly, 24/7. This group also began thinking about building wealth and wealth management early in life. Many have multiple financial assets, including brokerage accounts, businesses they may own, and even crypto investments. They are eager to learn more about money management and are inclined to look first to their financial institution for help.
Transforming banking into new, digital ways of doing things can be described as the ‘IQ’ stage of transformation. Bank of America is now working to layer in an ‘EQ’ – emotional quotient – into the customer experience. Their head of digital banking and marketing finds himself spending more time thinking about how customers feel. “Customers put a much greater premium on how your bank, as an organization, makes them feel. It’s almost like how a doctor with a good bedside manner makes a difference.” They have also moved beyond using personas for marketing and instead rely on behavioral analytics at the individual customer level.
