Say goodbye to a year like no other. Kick off 2021 and beyond with Extractable’s round up of the past year’s trends in FinTech, Banking and FiServ.
In January 2020, most expected another year of incremental change in financial services. In early March, Extractable prepared a presentation to kick off a conference.
When the conference finally took place, digitally, in the Fall we dusted off the deck and found that it was no longer relevant.
In the interim months, the COVID-19 pandemic had changed consumer expectations nearly overnight. In tandem, business models used industry-wide were no longer viable. Organizations leading in digital transformation stood ready while the rest floundered.
Look back at the trends that dominated an unprecedented year in financial services. Discover how the industry will approach the acceleration of digital transformation and future-proof for disruption in 2021 and beyond.
1. A new urgency in digital transformation
In April, the acceleration of digital transformation swept the industry: “Do we need to accelerate our transformation?”, “can we afford to delay our digital transformation?”
“Looking ahead, those that will survive will be those that have diversified with more digital services. Customer trust is the real test – banks that actively help their customers combat the crisis will be rewarded with increased loyalty, whilst those who don’t go the extra mile will inevitably suffer the most.”
In October, we saw that Kent was dead on. Edmund Lawler in an article in BAI’s Banking Strategies, gives a few examples of smaller FIs that have been able to easily pivot due to digital strategies that were in place prior.
NBT, a $10-billion-asset community bank based in Norwich, New York. NBT “rapidly and efficiently transitioned to a nearly all-digital operation, says Joseph Stagliano, executive vice president and president of retail community banking.” Lawler quotes Stagliano:
“We established a very robust technology roadmap seven or eight years ago, with a focus on the customer experience, the employee experience and the digital branch experience.”
2. Neobanks take center stage
As the pandemic drove many people to stay at home, and many banks temporarily closed branches or limited hours and services, a large number of consumers turned to digital banking.
At the beginning of the pandemic, many in the industry were ready to bet that neobanks were finally going to have their day in the sun. It hasn’t turned out exactly as expected.
In the U.S., neobanks in general have continued to underperform, particularly compared to the large national banks. Neobanks did see an increase in customer acquisition in 2020. However, the question remains whether these new customers see neobanks as their primary bank.
There is one standout — Chime. Chime’s success hasn’t been credited to customer service, as every other bank and neobank touts. Chime’s achievement as winning neobank could be credited to what Shevlin called “featurization.”
3. Digital banking experience lags
If consumers didn’t switch en masse to neobanks, what did they do? They turned to their bank or credit union’s digital banking. In large part, consumers found the experience lacking compared to the experiences offered by other industries.
The gap is more pronounced for community banks and credit unions, who rely heavily on identical digital experiences from the same banktech providers.
According to an article in DBusiness Magazine:
“A series of new studies of bank and credit card mobile app and online users released by J.D. Power, find that ease of use, speed, and accessibility of common features are the variables shared by the best-performing digital platforms.”
The study found that national banks have higher satisfaction than regional banks “with a higher expectation for proactive guidance and help and a higher expectation for advanced digital capacities.”
4. Partnerships grow among FIs, Fintech and Big Tech firms
When the U.S. Government introduced the PPP loan program, fintech lending firms complained that they were shut out of the process. Others, like Kabbage, capitalized on the opportunity to partner with legacy FIs to provide PPP loans.
“Many banks rushed to onboard new fintech vendors that provide customer due diligence, loan underwriting, and other services needed to swiftly get funds to small businesses harmed by the coronavirus pandemic”.
Later in the year, we saw the partnership between Google and several legacy FIs, from community banks like Seattle Bank, to CUs like Stanford FCU to the megabank Citibank, for the Google Plex account.
“[Clarke] believes the partnership continues a trend seen in the Apple Card partnership between Apple and Goldman Sachs and more, towards collaboration… ‘Collaboration is critical for the future,’ she says. ‘No firm is going to do it alone.’”
We expect that 2021 will bring more partnerships throughout the industry.
5. Increased investment in artificial intelligence
Throughout 2020, we noted an increased desire, on the part of banks and credit unions, to invest in Artificial Intelligence (AI) and Machine Learning (ML). As discussed in an article in Techiexpert, AI is being used by many banks to reduce costs, improve efficiency, but also “in establishing a strong connection and trust between customers and banks.”
For example, the article references a recent interview with Casey Royer, Executive Director, Personalized Experience Management USAA. Royer describes how USAA is using “AI to broaden banking offerings, make their operations more effective and efficient, and offer greater value to their growing customer base.” Among the activities that AI facilitates at USAA are fraud prevention, ID verification, and customer care.
“The use of artificial intelligence (AI) and machine learning (ML) is evolving in the finance market, owing to their exceptional benefits like more efficient processes, better financial analysis and customer engagement.”
He notes that a “prediction of Autonomous Research, AI technologies will allow financial institutions to reduce their operational costs by 22%, by 2030.”
While efficiency is certainly important, much of the focus we hear about, even as we face a new recession, is how AI can improve the customer experience. Raj concludes that:
“As the market continues to demand easier and faster transactions, emerging technologies, such as artificial intelligence and machine learning, will remain crucial.”
We agree that AI/ML belong in all organizations’ digital roadmap. Ignoring its benefits will continue to widen the capabilities gap between forward thinking FIs and the so called “fast followers.”
6. A new focus on customer experience
More FIs are understanding that consumer behaviors are changing and were changing even before the pandemic — underscoring the importance of user experience (UX) in digital banking. Alex Kreger, UX Strategist & Founder of UX design agency UXDA, notes in an article in Forbes that FIs aren’t approaching UX appropriately.
As we recommend, a company’s overall strategy must define digital transformation. UX design on its own isn’t digital transformation. Kreger writes, “it’s faulty to assume that outstanding UX is the only element FIs need to gain success.” He adds:
“Behind every digital transformation success, there are a number of unique factors that impact the customer experience. User interface design is only one of those.”
Another common mistake that Kreger, and Extractable, see regularly is cognitive bias. Kreger writes, “finance professionals create a digital service that they believe is easy and pleasant to use, while customers are confused by its complexity.”
Just applying beautiful design without understanding the customer’s viewpoint is missing the point of UX. This is exacerbated when we apply our conscious and subconscious assumptions.
On the other hand UX cannot be outsourced entirely to UX designers that lack financial expertise. Kreger asserts:
“the success of a financial app depends not only on the designer’s skills but also, most importantly, on an in-depth understanding of the specifics of financial products, business strategy, marketing, psychology, human behavior and digital technology.”
Kreger also warns of “over-featuring.” FIs have the misconception that:
“the more functions we provide, the better the user satisfaction. Actually, it’s quite the opposite. When customers are faced with confusing options, this leads to decision paralysis, causing the customer to quit without taking action.”
To address these and the other errors Kreger details, he recommends FIs focus on customer emotions. He writes,
“For years, banking has been perceived as a very serious institution. The world is changing, and people seek an emotional and personal connection to their services. Banking is no exception. Humans are emotional beings by nature and will demand products that evoke positive emotions.”
We are hopeful that many FIs are finally noticing the role of design in all experiences.
7. Shift from digital to mobile-first
A few years ago, future-minded bankers began to talk about moving from branch-first banking to digital-first banking. In some ways that thought seems a bit quaint today with many of us unable to visit a branch amidst the COVID-19 pandemic. Digital leaders, like Bank of America, Huntington Bank, Provident, and USAA, have reaped the benefit of not only moving to digital-first but mobile-first. The results of such a switch are covered in a FinXTech and Bank Director study focusing on the role of mobile apps driving sales in banking.
The report notes:
“The value proposition for mobile is easy to appreciate. Take a growing channel, use it to attract mobile users — who have been shown to be the stickiest, most active and most profitable customer segment for a bank — then subtract all the money not being spent completing transactions through less-efficient, physical channels. The result is increased revenue and savings.”
Bank of America reports that during the second quarter of 2020 “almost half (47%) of all sales at the bank now take place over (digital) channel(s) — of that, almost 60% of digital sales were completed on a mobile device.” US Bank says that “46% of loan sales occur digitally.” The report adds that “evidence suggests that the uptick in digital adoption will have staying power within banks and among consumers.” The report notes that proactive advice “helps to build trust with the customer and drive them to take advantage of other features.”
Our own Chief Data Strategist, Mark Ryan, is quoted:
“A lot of banks are implementing features to help with financial planning, but they are not thinking about how visitors adopt these functions. It’s often surprising to see financial institutions invest significant budgets in features such as expense categorization, only to find that 5% of the app users are utilizing it.”
Bank of America continues to invest in their mobile-first strategy. As noted in an article in American Banker, BofA’s Personal Assistant “Erica” is rapidly gaining popularity. The article notes, “Erica now has 16.7 million users; 6.4 million of those customers started using it this year. During the past eight months, BofA developers programmed Erica to understand more than 60,000 coronavirus-related terms and questions.” Further, BofA has also released a new feature within Erica called Spendpath. “An Erica insight now tells you here’s the rate you’re spending, [and] if you’re spending at a higher clip than normal you might want to know that so you can rein it in before the end of the month.”
2021 will bring more capabilities to mobile banking that branch-focused community-based FIs will not be able to match.
8. Personalization defines who wins and loses in 2021
While on the topic of Erica and personalized digital experiences, our discussions with banking executives this year most often covered the need to “humanize” digital experiences. Bankers know that they have a lot of customer data but how can they use it to offer a personalized experience?
“It is easy to get sucked into bright and shiny solutions without real data and information to back up the decision. The good news is that your institution most likely already has the data needed to make sound digital decisions that add the most value to your customers. Using data you have, your financial institution can provide account holders with a customized, relevant and improved digital experience”.
Craig recommends “Setting small objectives can ensure you find the right data set to support your institution’s goals and narrow in on your unique market opportunities. Taking baby steps can help ensure everyone is on the same page about who your institution is, where it is now and where it is going.”
She also notes that partnering with fintech firms can help FIs access and use that data quicker than trying to build capabilities in-house.
9. Pressure mounts on digital account onboarding
“Organizations that did not have an end-to-end digital engagement capability (without branch support) were caught off-guard, forced to take initiatives that may have been further down the priority list and move them to the top. The almost instantaneous shift to digital and remote engagement had most organizations dealing with unforeseen challenges as digital use and call volumes skyrocketed. In many instances, customer experiences suffered.”
As we noted in an article in Bank Director back in December of 2019:
“In a prospective relationship, nothing is more important than the initial experience. A growing number of potential customers are engaging with a financial service company for the first time through a digital application process. This makes the initial experience a microcosm of the failings of legacy financial service companies during their digital transformation.”
FIs need to reimagine the digital account application process, and not just merely digitize their existing branch processes.
10. Acceleration of contactless payments
Among the impacts of the pandemic are the changing consumer behaviors around payments. Last year we discussed roadmaps with many of our clients and noted only a smattering of them examining contactless payments.
The consensus for contactless payments in the US has been that adoption was slowly growing but that it would take a long time to reach a tipping point. A year ago PYMNTS published an article that asked “Is The US On The Verge Of A Contactless Surge?” While they presented a positive outlook on adoption, there was no prediction on a specific timeframe.
With the pandemic, the outlook has changed. PaymentsJournal Podcast interviewed Tina Giorgio, President and CEO, ICBA Bancard and Sarah Grotta, Director, Debit and Alternative Products Advisory Service at Mercator Advisory Group.
At the onset of the pandemic Mastercard found that contactless transactions grew twice as fast as non-contactless transactions at grocery and drug stores. Reports from Visa indicated that 31 million Americans used a Visa contactless card or a digital wallet in March 2020, up 150 percent since March of 2019. Grotta noted:
“I think what’s also really interesting is that Visa has noted that there have been more cards being used in a contactless environment than wallet. So for those thinking that cards might be a stepping stone to wallets, maybe that’s actually the case,” stated Grotta, “that might suggest [to issuers] that if you haven’t put a plan in place for contactless, you might want to start thinking about it.”
Stephanie Walden writing for Forbes notes that post-Pandemic Americans will not “want to handle wads of cash and coins that have been touched by hundreds of strangers.” The same applies to touching point of sale devices and handling over cards to salespeople.
She notes that, Accenture lists a “strong push toward a cashless society” as the No. 1 potential long-term impact that the pandemic may have on global payments processes.
She adds that “MasterCard polled 17,000 consumers in 19 countries and found that they perceive contactless payments as the cleaner way to pay.”
Walden summarizes the opportunity “from tap-to-pay debit transactions to no-touch ways to pay for public transit, the current landscape is fertile ground for contactless technology to take off.”
In the past several months, it has been said that digital transformation across all industries was accelerated anywhere between 3 to 10 years. While this might be true in the expectations of consumers, the reality is that financial service companies cannot — and have not — suddenly upgraded their systems, business models, and culture to fast-forward 5 years ahead.
The challenge moving forward in 2021 will be to catch up to consumer and business expectations at warp speed.
Need help keeping pace? Contact us to discuss your digital strategy roadmap in 2021 and beyond.