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.

In my previous blog, I highlighted that different banking “personas” have differing goals with respect to digital banking.  The large, national financial institutions envision digital banking as being a fundamental competitive differentiator they need to continuously build upon.  The smaller community banks and credit unions are looking to continue to provide an attractive, local alternative like they have done in the past, while meeting the growing digital requirements within their budget constraints.  Meanwhile, new, online-only entrants are making a bet that their future banking clientele do not require any physical presence, particularly in the millennial market.

This blog delves deeper into the strategies and tactics being deployed by the first group, the large national players.  With the financial wherewithal to invest in new technology, these institutions strive to provide the widest array of banking options and features to attract and retain customers, while also improving efficiencies within their companies.

As early adopters of online and mobile banking services, the national banking institutions enjoyed an advantage over their smaller competitors when the pandemic hit and physical access to bank branches became limited.  Not surprisingly, the J.D Power 2020 Retail Banking Satisfaction Study found that these large financial institutions had both a greater penetration of digital customers and a higher customer satisfaction index of their customers, using more advanced online and mobile capabilities to achieve this advantage while increasing revenues, managing costs and improving service.

Many large national banks have increased revenues and grown market share largely by focusing on customer experience as an essential component in attracting clients from large and small competitors alike.  By increasingly using human-centered design techniques and mobile banking services to tailor technology to the needs of the customer base being served, these banks have rolled out highly effective online and mobile platforms that leave customers feeling good about their experience. This approach often includes faster onboarding, simplified payment processing, and easier access to account and transaction information with digital signatures and mobile check deposits reducing the need to come to a branch to create a new account or conduct many common transactions.

Reducing foot traffic into branches has not reduced the ability to grow revenues by selling more products, however, as the national players have increasingly leveraged artificial intelligence to mine their data to determine which customers are likely candidates to purchase certain products, and then following up with targeted online marketing campaigns to promote those products and make signing up quick and easy via online banking.

Despite the obvious technology costs of deploying digital banking capabilities, the large players have found ways to use digital banking to reduce two of their largest expenditures: labor costs and fraud losses.  Like most companies, the largest expense for a bank is their human capital costs.  Technology has successfully enabled the large financial institutions to serve more customers with fewer employees.

Using robotic process automation, more and more activities previously performed manually by bank staff are now computerized.  Chatbots and Voice Assistants are also being used to allow customers to get answers to questions or to process certain transactions with less need for interaction with a human employee. As an example of the magnitude of this labor cost reduction, in an interview with CNBC in October, 2020 Brian Moynihan, CEO of Bank of America (BofA), stated that through the adoption of technology, BofA has reduced its workforce in the past decade from 288,000 people to 204,000, a 29% decrease.

While the increased use of digital banking has led to efficiency in bank operations, it has also increased the risk for bank fraud.  Online and mobile banking provide new gateways for criminals to defraud businesses and consumers.  Fortunately, artificial intelligence and machine learning platforms have provided a means to combat these criminal activities and reduce the losses associated with bank fraud. As the sophistication of these systems have grown, they have become more equipped to recognize emerging trends and behaviors to identify additional transactions of concern.  In the past, one common mechanism to mitigate risk of a potentially fraudulent transaction was to simply deny an application. Today, using artificial intelligence, fraud losses are being mitigated with less impact to approval rates.

Finally, with respect to improving service, a growing trend particularly popular among younger customers is the concept of digital self-service.  Self-service is the ability for customers to get answers to questions and process transactions without the need to wait for a service representative to help them.  According to Salesforce’s “State of the Connected Customer”, 59% of consumers and 71% of business buyers say self-service availability positively impacts their loyalty.

Features like Frequently Asked Questions (FAQs), videos about banking products, or financially-related knowledge articles have been added to bank websites and mobile apps as part of this self-service.  Combined with Chatbots and Voice Assistants mentioned above, customers are now getting the answers they are looking for much quicker than they were when waiting for a customer service representative on the phone.

These digital banking technology investments have provided the large financial institutions a strategic advantage over their smaller, less well-healed competitors.  So, what are these community banks and credit unions doing to counter this advantage?  Stay tuned for my next blog in this series.

As digitization of the mortgage process (finally) gains steam, lenders need to start looking towards the future when everyone is digital. What will it mean for the industry?

An aspect of the digital process that is often overlooked is that an increase in digitization is equal to a decrease in interpersonal connectivity. Insofar as that interpersonal connectivity is what binds a borrower to a loan office or lender, what will provide that binding compound in the future?  How will you make your brand stand out?  What will make a borrower come to you versus the next lender in their google search?

Quicken took a very forward thinking, positive step when they introduced Rocket Mortgage to a huge audience via their super bowl ads.  Many people now equate a digital or online experience with “Rocket Mortgage”, similar to how a copier is called a Xerox machine or a tissue a Kleenex.  Only time will tell if that sticks, but it is definitely a presence in the market today that everyone has felt.

The commoditization and loss of a personal interchange is not new.   People used to visit a specific gas station because they trusted a brand or liked “Jimmy” and thought he was a nice guy that always did such a great job cleaning your windows (remember when that happened!?!).  Consumers developed a personal relationship that drove what gas station they visited most frequently.  Today, almost all gas stations require little to no interaction with a person, with their credit card machines at the self-serve pumps (except in states like NJ, but that’s another story). People most often simply buy based on price and convenience.  If you asked people what brand gas they bought most recently, many would not know the answer.  Today, the competitive landscape for gas stations is therefore very much price based.  The competition is made more intense with the sharing of data via apps like GasBuddy, so people can easily compare prices in their area and pick their vendor for the next fill-up.

With digitization and the increasing popularity and use of Day 1 Certainty and Loan Advisor Suite functionality accelerating the process, getting a mortgage from Lender A or Lender B will not differ much at all for most borrowers.  They will select based on price and convenience.  Depending on the results of their google search, it may end up being more of the latter than the former. Standing out amidst commoditization will then be critical to survival.  How will you be found by a potential borrower?  Why should they apply with you versus another lender?