Continued Thoughts on Digital Banking
I sincerely hope that you’ve been enjoying Mike Gordon’s recent posts on the changing landscape of banking in the digital world. (If you missed them, please bookmark this post and click this link to read them before continuing any further.) Mike has done a great job of outlining many of the macro-level changes afoot among the banking industry leaders, the innovators and the smaller local lenders as they respond to customer demands and competitive pressures in a time of rapid acceleration of mobile computing and personalization of services available in finance. Mike deftly explores how the responses may vary by institutional types along with his insights as to why the digital approach most often aligns with the customer population that typically defines their respective markets.
I recently ran across an excellent thought piece from Alex Johnson and Darryl Knopp of FICO, based on a session they presented (virtually, of course) at an American Banker’s Digital Banking 2020 conference in December and was struck by how well it complemented Mike’s posts at a more tactical and granular level. The executive summary of their session, entitled “The 11 Commandments of Digital Banking”, can be accessed here (Download Executive Summary). I think that you will agree that Alex and Darryl’s “commandments” are well reasoned and thought provoking in the way that they articulate the customer experience requisites of our times, well punctuated with humor and the obligatory TikTok reference our pop culture demands. Coupled with Mike Gordon’s overviews of the current landscape, these pieces give us a lot to think about how well we are doing with regard to transforming our own businesses to better serve our customers and keep up with the times.
Please drop in a comment to let us know how your own digital transformation is going. We would love to hear from you.
While digital banking has been on the upswing for many years, the COVID 19 virus has changed its trajectory. While many consumers prefer conducting banking transactions from their phone or computer over making a trip to their local bank branch and dealing with the lines at teller stations or drive-up windows, the pace of adoption has lagged expectations until the recent crisis.
Digital banking can have slightly different meanings depending upon who you are speaking with. For contextual purposes in this blog series, consider digital banking to be the movement of the traditional banking activities that were historically performed when a customer physically went inside of a bank branch to now being performed online through a web browser or a mobile phone. These activities could include:
- Check Deposits
- Money Transfers
- Bill Payment
- Account Management
- Application Submissions for Financial Products
Most commonly, the digital banking experience occurs at a traditional bank that has augmented its branch services with online and mobile tool options. However, new entrants into the financial services market have created digital-only banking where no brick and mortar branches exist, and all transactions are performed electronically.
This move towards digital banking reflects a broader societal trend of conducting more transactions in a self-service mode, which has been advanced by the younger generation who are more comfortable using technology to conduct business. However, not all banks embrace digital banking with the same mindset. Some larger institutions see digital banking as transformational, envisioning a new overall model for conducting business with less bricks and mortar and more ancillary revenue generated by the online transactions. For the most part, smaller players have taken more of a “follower” position, providing basic mobile and online banking functionality that meet a minimal bar for a modern bank but nothing that serves as a marketplace differentiator.
The COVID-19 pandemic has greatly accelerated the adoption of digital banking apps, with the clear expectation that, even if it were to end, many consumers will no longer go back to the physical branches like they did in the past. The J.D. Powers’ 2020 Retail Banking Satisfaction Study found that:
- 36% of respondents plan to use more online tools to do more of their banking
- 20% plan to go to their bank branch less often
- 24% plan to use mobile payment apps to make purchases in stores more often
- 18% plan to use ATMs less often out of concern over spreading the COVID virus
The large, national financial institutions envision digital banking as being a fundamental competitive differentiator that they need to continuously build upon. Leveraging technologies that include artificial intelligence, data analytics and advanced fraud detection will provide some of the avenues they seek for further enhancing the experience and convenience to their customers.
The smaller community banks and credit unions have used their local commitment and high-touch approach to provide a different option than offered by their bigger rivals. This distinction is being highly compromised by the reluctance, if not inability, to go into a physical branch for the foreseeable future. To compensate, these local players are looking to find ways, such as mobile account access, to adapt to the current trends and situation, while still providing an attractive alternative as they have done in the past.
Digital-only entrants seek to capitalize on consumer preference changes shifting towards online and mobile devices, making a bet that the future of banking does not require any physical presence. They see that customers are increasingly willing to switch banks for digital features and thus strive to provide the optimal digital experience. Their target market focus are millennials who embrace technology and who are rapidly becoming the largest consumers of financial products.
In my next three blogs, I will provide: 1) insights into what the largest players are investing to further transform the digital banking environment, 2) strategies that the smaller traditional players are taking to compete effectively in the changing landscape and 3) the differentiation strategy that the newer, digital-only entrants are employing to gain some market share and how well it’s working.