Digital transformation
Many firms understand the need for digital transformation but struggle to implement it effectively. In a global survey, McKinsey & Company found that 87% of firms pursued digital transformation in the past two years, but captured only 31% of the expected revenue lift and 25% of cost savings. McKinsey identified six essential capabilities for successful digital transformation: creating a transformation roadmap, having access to talent, adopting a new operating model, building a distributed technology environment, embedding data everywhere, and unlocking adoption and scaling. Top performers, according to the survey, often focused on customer engagement and innovation strategies rather than operational efficiency. Tech was cited as a key differentiator by the majority of these firms. Not investing in core capabilities and failing to focus the effort on a specific journey were identified as common mistakes.
Digital services
Consumers want a blend of traditional banking services and tech-enabled offerings from digital banks, according to a Marqeta report. Despite the growing popularity of digital banks, 37% of consumers still wish to maintain relationships with their traditional primary financial institutions. The study indicates that the future of banking will likely consist of a hybrid model combining traditional and embedded financial services. Integrated payments allow for smoother checkout experiences and multiple payment options, and have become a major part of the embedded finance sector with 76% of consumers preferring purchases through retailers’ mobile apps. PayPal (which also owns Venmo) dominates peer-to-peer (P2P) payments and was used by 88% of consumers in the past year. For primary account providers, 81% of consumers use a traditional bank while 37% also use a digital-only bank in addition. Traditional banks still have advantages, but must continue to innovate if they want to avoid seeing their customer base continue to erode.
Data/analytics
Understanding and managing consumer data has become a key aspect of successful marketing strategies in today’s data-driven economy. There are six types of data that can help create targeted, personalized marketing campaigns: consumer behavioral data, digital marketing insights, loan and deposit activity, credit data, loan application data, and competitive data. Data-driven strategies can make marketing more strategic, cost-effective, insightful, and capable of generating high-quality leads. An omnichannel acquisition strategy driven by quality first- and third-party data can provide personalized and optimized experiences for customers across multiple channels.
Customer acquisition
Deposits are once again attracting attention as consumers look for higher returns on their investments, but success in capturing those customers will depend on marketing effectiveness and the bank’s digital account opening process. Research from Oliver Wyman shows that only 30% of potential customers visit a bank’s product page and only a small fraction of those complete an account application. Banks need to reinforce their brand’s digital presence and optimize their search engine performance to capture these high-propensity consumers. They also need a mobile-optimized account opening that takes under five minutes and doesn’t require a visit to a bank branch. Other preferred features by customers include the ability to receive push notifications during the application process, chat with a live agent, and fund a new account with a debit card or transfer from an existing account held elsewhere. Considering the average cost to acquire a new customer is around $200, an efficient online account opening process with high conversion rates and minimal abandonment is key to ensuring the effectiveness of customer acquisition efforts.
Regulation
US banking regulators have issued their final guidance on how banking organizations should manage risks associated with third-party relationships. For banks, the principles-based guidance expects them to assess risks from third-party relationships and conduct due diligence accordingly. While the regulatory compliance responsibility lies with the banks, contracts should clearly specify the obligations of both parties regarding compliance with laws and regulations. Smaller banks won’t have a reduced regulatory burden, even though they can use external services for due diligence. Oversight of subcontractors remains vital. For fintechs, the guidance sets a higher bar for risk management and compliance in bank-fintech partnerships. Fintech activities on behalf of banks will be subject to regulatory examination and oversight. Fintechs should align policies and procedures with the guidance and proactively identify and address gaps. Both banks and fintechs should get ahead of the guidance and close any gaps in their risk and compliance programs, as the regulators will hold them accountable for any lapses in bank-fintech relationships.
Digital banking
Many traditional banks are launching independent, digital-only brands to stay competitive given the threats posed by digital banks and fintechs. These digital spinoffs enable banks to extend their reach beyond geographical limits, target niche banking sectors, and cater to specific demographic groups at a significantly lower cost. They also provide a platform to test new technology capabilities and product offerings without the risk of tarnishing the main brand. Successful offerings tested on these digital platforms can be integrated into the traditional bank’s products and services. However, launching a digital-only brand can present challenges, and banks should ensure leadership support before proceeding.
Industry news
Goldman Sachs is reportedly in discussions with American Express about its Apple credit card and other consumer-focused products associated with Apple. Any transfer of business would require approval from Apple. If the deal goes through, it could result in fewer merchants accepting the card due to American Express’ smaller reach compared to the current issuer, MasterCard. The consumer-facing Marcus division of Goldman Sachs, which manages the Apple card, could be impacted. Goldman CEO David Solomon stated that the bank is exploring “strategic alternatives” for its consumer platform businesses but expressed a commitment to growing its relationship with Apple. Goldman Sachs has been working to expand its consumer-facing operations since the launch of its Marcus high-yield savings accounts in 2016 and its credit card business in partnership with Apple in 2019. However, it has encountered setbacks, including the reported sale of GreenSky, an installment lender acquired in 2022.
Strategy
Customers Bank’s CEO Jay Sidhu believes that the ongoing trend of large banks like Bank of America and Chase expanding their branch networks should not sway smaller banks’ strategic focus. Instead of increasing their physical footprint, these smaller banks should prioritize catering to their customer’s needs, investing in their business banking services, and expanding their digital capabilities. Sidhu predicts a reversal in major banks’ strategy over the next decade, where they will divert funds from branch expansion to other priorities and reduce their physical presence by up to 50%. Therefore, the emphasis for banks, particularly smaller ones, should be on enhancing customer service and digital offerings, rather than increasing physical branches.
