The banking industry is undergoing a radical shift; a shift being driven by new competition from FinTechs, changing business models, mounting regulation and compliance pressures, and disruptive technologies.
With the emergence of FinTech/non-bank startups, the competitive landscape in financial services is changing, forcing traditional institutions to rethink the way they do business. To make the situation even more challenging for banks and credit unions, regulatory and compliance pressures continue to intensify. And if that wasn’t enough, customer demands are changing as consumers seek immediate and around-the-clock, personalized service. For banks and credit unions, driving customer retention and loyalty is more challenging than ever as customers seek the most convenient way to bank, with a plethora of options available via digital channels.
The impetus toward digital transformation through disruptive technologies will undoubtedly be challenging for many institutions who have operated with legacy technologies for decades. Yet, embracing digital transformation is a critical move for banks and credit unions that wish to survive and thrive in the current landscape.
Increasing competition
The threat posed by FinTechs, which typically target some of the most profitable areas in financial services, is significant. Goldman Sachs predicts that these startups could account for upwards of $4.7 trillion in annual revenue being diverted from traditional financial services companies.
These new industry entrants are forcing many financial institutions to seek partnerships and/or acquisition opportunities as a stop gap measure. However, in order to compete effectively today and survive over the long term, traditional banks and credit unions must learn from FinTechs, who have honed in on one important strategy that has been instrumental in their success: providing a simplified and intuitive customer experience.
Changing business models
The cost associated with compliance management is just one of many factors that is forcing financial institutions to change the way they do business. The increasing cost of capital combined with sustained low interest rates, decreasing ROE, and decreased proprietary trading are all putting pressure on traditional sources of banking profitability. Yet, shareholder expectations remain unchanged.
This combination of factors has led many institutions to create new competitive service offerings, while rationalizing business lines and seeking sustainable improvements in operational efficiencies to maintain profitability. Failure to adapt to changing demands is not an option, thus financial institutions must be structured for agility and prepared to pivot when necessary.
Regulatory compliance
Regulatory compliance has become one of the most significant concerns for financial institutions, as regulatory fees have increased dramatically relative to earnings and credit losses since the financial crisis. Ranging from Basel’s risk-weighted capital requirements to Dodd-Frank to FASB’s current expected credit loss (CECL), and the allowance for loan and lease losses (ALLL), maintaining strict compliance places significant strains on resources — and is often dependent on the ability to correlate data from disparate data sources.
Faced with severe consequences for non-compliance, keeping abreast of regulatory changes and implementing the controls necessary to satisfy those requirements has resulted in increased cost and risk without a proportional enhancement to risk mitigants. Overcoming regulatory compliance challenges requires fostering a culture of compliance within the organization while also implementing formal compliance structures and systems.
Technology is a critical component in creating a culture of compliance. In particular, technology that collects and mines data, performs in-depth data analysis, and provides insightful reporting is invaluable for identifying and minimizing compliance risk. In addition, technology can help standardize processes, ensure procedures are followed correctly and consistently, and enables the organization to keep up with new regulatory/industry policy changes.
Customer retention
Financial services customers expect personalized and meaningful experiences through simple and intuitive interfaces on any device, anywhere and at any time. Although customer experience can be hard to quantify, customer turnover is tangible and customer loyalty is quickly becoming an endangered concept. Customer loyalty is a product of rich client relationships that begin with knowing the customer and their expectations as well as implementing an ongoing client centric approach.
In an Accenture Financial Services global study of nearly 33,000 banking customers spanning 18 markets, 49 percent of respondents indicated that customer service drives loyalty. By knowing the customer and engaging with them accordingly, financial institutions can optimize interactions that result in increased customer satisfaction and wallet share, and a subsequent decrease in customer churn.
Bots are one new tool helping financial organizations deliver better customer service. Bots are a helpful way to increase customer engagement without incurring additional costs, and studies show that the majority of consumers prefer virtual assistance for timely issue resolution. As the first line of customer interaction, bots can engage customers naturally, conversationally, and contextually, thereby improving resolution time and customer satisfaction. Using sentiment analysis, bots are also able to gather information through dialogue while understanding context through the recognition of emotional cues. With this information they can quickly evaluate, escalate, and route complex issues to humans for resolution.
Technology
According to the 2017 Gartner CIO Survey, over 50 percent of Financial Services CIOs believe that a greater portion of business will come through digital channels, and digital initiatives will generate more revenue and value.
However, organizations using antiquated business management applications, or siloed systems, will not be able to keep up with this increasingly digital-first world. Without a solid, forward-thinking technological foundation, organizations will miss out on critical business evolution. In other words, digital transformation is not just a good idea, it has become an imperative for survival.
While technologies such as blockchain may still be too immature to realize significant returns from their implementation in the near future, technologies like cloud computing, artificial intelligence (AI), and bots all offer significant advantages for institutions looking to reduce costs while improving customer satisfaction and growing wallet share.
Cloud computing via SaaS and PaaS solutions enable firms previously burdened with disparate legacy systems to simplify and standardize IT estates to reduce costs and improve data analytics while leveraging leading edge technologies. AI offers a significant competitive edge by providing deep insights into customer behaviors and needs — giving financial institutions the ability to sell the right product, at the right time, to the right customer. Additionally, AI can provide key organizational insights required to identify operational opportunities and maintain agility.
Sustainable success in business requires insight, maintaining rich client relationships, agility, and continuous innovation. Benchmarking effective practices throughout the industry can provide valuable insight, helping banks and credit unions stay competitive. However, benchmarking alone only allows institutions to keep up with the pack — it rarely leads to innovation. As the cliché goes, businesses must benchmark to survive, but innovate to thrive, as innovation is a key differentiator that separates the wheat from the chaff.
Innovation stems from insights, and insights are discovered through customer interactions and continuous organizational analysis. Insights without action, however, are impotent, thus it is imperative that financial institutions be prepared to pivot when necessary to address market demands while improving upon the customer experience.
Financial service organizations leveraging the latest business technology, particularly around cloud applications, have a key advantage in the digital transformation race: they can innovate faster. The power of cloud technology is its agility and scalability. Without system hardware limiting system flexibility, cloud technology enables systems to evolve as your business evolves.
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