The Weekly Extract: February 2, 2021

  • Alex Jimenez
  • February 05, 2021

The Weekly Extract is a condensed roundup of digital experience news for financial services institutions, and our take from San Francisco. 

This week, we look at the state of AI in financial service. We also delve into the continued need for digital transformation in the industry and the resulting digital banking adoption that is driving it.

Artificial intelligence in financial services

Most organizations we communicate with about their digital transformation plans see AI as the one technology bringing direct impact to the business. In the past FIs have focused the deployment of AI into areas like risk management, fraud reduction, and underwriting. Now the interest has changed towards improving customer experiences. However, results still seem to be far out. Judging from our own experiences, we don’t see the level of personalization that the big banks say they have.

In an article in Entrepreneur by the Cofounder of Gramener, Ganes Kesari, it was not surprising to read a McKinsey survey found that:

“Only 8% of firms had practices that enabled them to adopt and scale AI.” 

In fact, Kesari notes that some situations may not warrant the use of AI at all. Those situations include:

  1. When simpler solutions will get the job done.
  2. When you don’t have enough data.
  3. Where AI is still in experimentation.
  4. When the costs outweigh the benefits.
  5. Where you need understanding and empathy.

Kesari recommends that organizations step back and take a look at the company’s strategy before jumping to AI as a solution. He asserts that as an organization, you should:

“Look at all the tools at your disposal, starting with the simplest techniques. As you move up in complexity, balance the simplicity and effectiveness of outcomes.” Once AI is chosen, “ensure that you have the right data, the needed budget, and the appropriate level of human intervention to make it work.”

Assuming that an organization is further down in the adoption of AI, Adam Lieberman, Head of Artificial Intelligence & Machine Learning at Finastra, writes in an article in Finextra that AI faces immediate challenges and problems that must be addressed. These include:

  1. Retraining models for the post-pandemic world. Existing models, such as those in use for fraud prevention or underwriting, will need to be re-trained to take into effect the pandemic. 
  2. Increased use of synthetic data. As organizations expect more and more out of models, the need for more data increases. Third-party organizations that produce cleaned-up data sets from real-data are becoming more important.
  3. Focus on eliminating bias in AI. Black-box models are finally being questioned. Regulators are expected to focus on proving how models work. The need for explainable AI (XAI) is increasing.
  4. Rise of application. Like in all other areas of software development, platforms are becoming more popular in AI. AI that can be developed by users, instead of programmers, will increase the use and misuse of AI.
  5. Importance of GPT-3 in the quest for general AI. OpenAI’s GPT-3, a language model that uses deep learning to produce text, is finding more and more applications in the past few months. Lieberman expects financial services to be one of the adopters of this model.

We think AI will transform the financial service industry more than any other technology. As FIs gear up to implement AI, they should heed Kesari’s warnings. Organizations should always beware of shiny new object syndrome.

Partnerships for digital transformation

There is a perception in the industry that the pandemic has accelerated digital transformation in financial services. We have been saying that the acceleration has actually been in consumer behaviors, not in the services offered by FIs. Forrester’s new report The State of Digital Banking, 2021, supports this view. According to an article by the report’s main author Aurelie L’Hostis

“Only 35% of global purchase influencers at banks see accelerating their digital business as a high or critical priority over the next 12 months. Digital transformation is trumped by competing short-term goals and imperatives such as reducing costs, improving the ability to innovate, growing revenue, and improving products and services.”

This is a worrying trend particularly for those organizations that have delayed their digital transformations. As we have said several times in this space, the gap between the digital-enabled organizations and purported “fast followers” and laggards is growing daily.  Unfortunately, most of the laggards are community banks and credit unions. There will come a time when no amount of investment is going to move these organizations to parity, let alone pass the digital leaders.

While there is still an opportunity, FIs need to find ways to begin transforming, as noted in an article in MIT Technology Review. The article quotes Michael Fei, SME banking CEO at OneConnect Financial Technology, an associate of Ping An Insurance: 

“Banks usually have very rigid systems and procedures. For instance, if you want to launch a new product you have to follow the process, and it takes at least six months. In the age of digitalization, this doesn’t work, as customers want things immediately. This has put huge pressure on these financial institutions to build agile operations and systems to be able to respond to the needs of their customers.” 

The issue isn’t just technology but a lack of deep customer knowledge. Tan Bin Ru, CEO of Southeast Asia for OneConnect notes, “Now that everything is digital, financial institutions are realizing how little they knew their customers.” 

Organizations are looking at “hyper-personalization tools, to understand what products to offer” and that requires more technology. Tan adds, “since the digital journey is such a long process, a lot of banks feel they need to look at 15 to 20 FinTech [options] to piece together their journey, but the more players they have, the more risk there is.”

Instead of building these operations and systems, the article recommends that organizations look to partner with firms that have such expertise. Companies like Extractable can help an organization to define the overall strategy grounded on deep customer knowledge, and to forge partnerships with the right technology companies without having to boil the fintech ocean.

The future of digital banking

As noted above, the pandemic has resulted in changing behaviors by banking consumers. A recent study by Chase of their digital active customers found some interesting facts. Namely: 

  1. More than half of new digitally active customers are over 50
  2. Fraud alerts, electronic bill payments, and mobile deposits are their most important digital banking features
  3. 54% of consumers say they use digital tools more than they did in 2019
  4. 80%t reported they prefer to manage their money digitally with 30% signed up to P2P payments
  5. 84% are using Chase’s autosave feature and 40% expect to save more in 2021

Allison Beer, Head of Digital at Chase, is quoted in an article in Forbes, “The pandemic has demonstrated that digital banking is essential for consumers of all ages to confidently manage their finances.”

Having the appropriate digital functionality to serve consumers is only part of the battle. Focus on the customer experience is key, as noted by Alex Kreger, UX Strategist and Founder of UXDA in an article in Forbes. Kreger sees a few “must-know digital banking trends that will upgrade the customer experience and lock in a digital banking leader’s position in the post-Covid-19 era.”

  1. Unlocking the customers’ hearts with value. As more organizations raise their UX game, firms need to go further to connect with customers.  Kreger offers “It requires that products not only be functional but also aesthetically pleasing and live up to the specific needs of the users to deliver an amazing customer experience.” He adds that societal roles are changing, “customers expect brands to build a community around a mission that inspires the world to become a better place.”
  2. Disrupting legacy. Kreger notes that there are “already some brave incumbents that have teamed up with tech and fintech companies and brought in UX experts to disrupt legacies and provide their clients with a whole new experience.”
  3. Being proud to stand out. Kreger suggests that organizations must have their own customer experiences based on brand values. “What will set successful FIs apart from hundreds of identical digital solutions is the ability to embrace the uniqueness of their brand and communicate it in a way that inspires their customers.”
  4. Empowering emotions as currency for loyalty. With a deep focus on customer experience, empathy and emotional connection come to the forefront. Kreger recommends that “the finance industry can embrace the elements of emotional, user-friendly design —animations, gamification, vivid colors, and micro-interactions — that speak to the users and evoke positive emotions.”
  5. Embodying a customer-centered culture. Most financial service organizations say they are customer-centered but don’t do the homework of actually listening to their customers. Focusing on NPS doesn’t make an organization customer-centered. Kreger defines customer-centered culture where there is a “focus on the customer at every level of the company, starting from business processes to team members, their duties, the ways these efforts are measured and, finally, the value that the FI delivers to its customers.”
  6. Uniting products into a holistic ecosystem. Most FIs have disparate digital experiences. Kreger advocates for a single experience that is a “holistic, digital product ecosystem that’s complemented by a proper UX/UI design system.”

We hope that the industry is listening to these voices. The importance of customer experience continues to get lost whenever financial services talk about transforming digitally. The focus cannot be solely on technology. Kodak had the technology. They didn’t have the foresight to deeply think about the customer experience of taking pictures.

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