The Extract: Changing Consumer Behaviors and the Need for Financial Institutions to Adapt

  • Alex Jimenez
  • March 04, 2021

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

This week, we look at changing consumer behaviors and the need for financial institutions to adapt. We also examine how China has become the leading eCommerce market in the world.

Consumer Behaviors Demand Transformation

On last week’s Extract, I brought up a story of a bank exec who once said, “People want to do business with people, not machines,” to explain why digital would never replace the human touch. Unfortunately, I have some bad news for this executive: As Chandra Steele notes in PC Magazine, “the majority of people would rather leave their finances in the hands of artificial intelligence.” Steele references a study by Oracle and Financial Expert Farnoosh Torabi that found some surprising results following the impact of COVID-19:

“Of consumers and business leaders, 67% trust a robot more than a human to manage finances. When considering their own finances, 53% of consumers felt that a robot would do better than they would, and even more (63%) said they would trust them more than a personal financial advisor.”

Surely, bankers would find this at odds with their own thoughts? Surprisingly, they were even more pro-AI: “Business leaders who face the responsibility of shepherding the fortunes of others were even more eager to employ robots in making financial decisions. They put a robot’s judgment over their own 73% of the time and over their finance teams 77% of the time.”

Steele quotes Torabi saying, “Robots are well-positioned to assist — they are great with numbers and don’t have the same emotional connection with money. This doesn’t mean finance professionals are going away or being replaced entirely, but the research suggests they should focus on developing additional soft skills as their role evolves.” 

Now, I’m the first to point out that attitudes don’t always translate to behavior change. After all, it is a well-documented fact that many opinion surveys suffer from all kinds of response biases. That said, if people’s attitudes towards the use of technology for finances following COVID changed, has their behavior followed suit? According to Will Lasala, Director of Security Solutions at OneSpan, “While increased adoption of mobile and digital banking channels had already been on the rise, adoption has been greatly accelerated by the pandemic, with the majority of U.S. adults today using online (73%) or mobile (55%) banking channels.”

Similar rates of adoption are quoted by Garret Reich in an article in The Financial Brand, showing that research from JD Power, Credit Karma, Lightico, ABA, and Juniper Research found that behaviors and attitudes towards finances have been altered by COVID.  Reich notes, “Despite the many innovative technologies blanketing the banking industry, some consumers continue clinging to the traditional in-branch experience they are familiar with. Roughly one in ten Americans still rely on their local branch as the primary channel for their banking needs, even if they supplement that with digital tools.”

Are these the people who won’t “do business with a machine?” Reich shares data from Credit Karma that suggests that only 24% (of the 10% of the population) are people that are “more comfortable dealing with financial matters in person.” The remaining 76% cite issues such as ease of use and security as barriers to adopting digital. Given that digitally-minded organizations are already tackling these issues, legacy financial institutions cannot just rest on serving these people.

So, the question remains: Will legacy banks and credit unions be left to fight over the 2.4% of people that “won’t do business with a machine?”

The Digital Transformation Imperative

For nearly two years, I’ve been quoting a study by S&P that found a wide gap in mobile banking capabilities between the average of the top four banks (Chase, Citi, Bank of America, and Wells Fargo) and the rest of the industry. The gap is wider between those four banks and organizations under $50B in assets (or the majority of the number of banks and credit unions).

I share this with financial institutions regularly and they tend to agree that there is a gap there and it continues to grow. However, the focus on digital banking continues to lag amongst the industry. Many of us thought the silver lining to COVID would be a sense of urgency growing within laggards in the industry. However, I’m still waiting to see signs of it. I thought I had finally found it in an article by Jim Marous, Co-Publisher of The Financial Brand, where he shares some of the findings of his 2021 Retail Banking Trends and Priorities Digital Banking Report. In it, Marous writes, “The need to remove friction from the customer journey was viewed (by FI Executives) as a more important trend in 2021, as was the need to support digital payments as consumers stopped using cash. There was also a realization that integrated delivery of services across channels was an imperative that can’t be ignored.”

However, Marous points out that these new priorities have resulted in a de-prioritization of use of data, advanced analytics, and innovation compared to previous years. Marous writes, “there was very little difference between big and small institutions in their perspective on trends for 2021.” His take on this change is that “lower than expected prioritization of the need for better use of data and advanced analytics, digitizing back-office processes, and investment in innovation could derail many digital transformation efforts.” Organizations seem to miss the point that to improve the customer journey (their top priority) they need better data and analytics, processes, and innovation.

We see that a small number of organizations – made up of most of the large banks, some of the regionals, and a smattering of community banks and credit unions – are leading the banking industry in digital transformation while the rest of the industry continues to implement change at the edges. Moreover, COVID has accelerated the speed of change for the leaders while the rest remain at the same speed as before.  According to a cross-industry study by Accenture shared by Vala Afshar, Chief Data Evangelist at Salesforce, “Relying on a strong digital core to adapt and innovate at lighting speed, leaders are growing revenues 5x faster than laggards today, versus only 2x faster between 2015 to 2018.” Accenture estimates that the leaders in each industry account for 10% of the organizations.  

Is your organization within this 10%? If not, reach out to us and we can help

The Future of eCommerce Is Already in China

Not long ago, I was in a heated debate with a banker on Twitter (is there any other kind of debate on social media?). He spoke about the supremacy of American technology and how the Chinese have built an economy based on nothing but cheap manufacturing and copying the West. My push back was that those days are long gone. China, regardless of what you think of its government, has quickly moved from a manufacturing-based economy to a knowledge-based one. Within eCommerce, financial services, and fintech we have seen China build powerful companies like Alibaba, Tencent, and Ping An that dwarf any fintech in the West.

According to an article in Fast Company by Michael Grothaus, “China is set to become the first country in history that will see a majority of its retail sales conducted online instead of via traditional brick-and-mortar stores.” While we might be tempted to attribute this solely to COVID, it is also due to China being able to leapfrog the West in building digital infrastructure from the ground up. 

We may also be tempted to say that China isn’t alone in moving consumers to digital commerce. However, Grothaus says,

“But while China will see a shift to a predominantly e-commerce-driven retail sector, other countries are nowhere close to crossing the 50% threshold. South Korea is in second place, though e-commerce retail sales will only account for 28.9% of all retail sales in the country in 2021. America is even farther behind. Its e-commerce retail sales will only account for 15% of all retail sales in 2021.”

Ethan Cramer-Flood explains further, stating, “China seemingly reached a behavioral tipping point over the past few years, wherein eCommerce enthusiasm accelerated rather than leveled off. While the pandemic did not create this trend, it certainly buttressed it, and China’s most recent eCommerce boom did not decelerate even after the country got a handle on the virus and the economy fully reopened.”

Cramer-Flood describes how China has gotten to this point, given that “ten years ago, eCommerce’s share of total retail in the US and China were nearly identical (4.9% and 5.0%, respectively),” pointing to:

  1. The emergence of Alibaba as an easy to use eCommerce platform, followed by
  2. The rise of digital payments by platforms like Alibaba’s Alipay and Tencent’s WeChat Pay.
  3. “An inconvenient, non-customer-centric, and often confrontational in-person shopping culture.”
  4. A nearly limitless supply of low-cost delivery services.
  5. The huge adoption of smartphones.

All of these factors got the ball rolling. Iteration and innovation in the space have taken eCommerce to the levels we see today. The forces now impacting growth, beyond COVID, include social commerce (including WeChat Mini programs), Pinduoduo (group buying social networking), and live streaming commerce. Expect these factors to start changing behavior in the West as well.

Cramer-Flood further notes that America’s lead in consumerism will soon be in the past, remarking that, “despite the US remaining just ahead of China in overall retail sales ($5.506 trillion versus $5.130 trillion in 2020), China will outpace the US by nearly $2 trillion in eCommerce this year.”

I’m sure we’ll examine China’s lead in fintech sometime in the future.

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