The Weekly Extract: October 22, 2020

  • Cassandra Stumer
  • October 22, 2020

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

This week we look at the acceleration of embedded finance as another reason for FIs to begin their digital transformation. Finally, we highlight advice to community banks and CUs from speakers at Lightico’s latest digital summit.


Embedded Finance

At Extractable, our team is built around the idea that banking’s digital transformation will mean better banking. That’s why we couldn’t agree more with Eugene Danilkis’ article in ITPortal titled, “Digital banking means better banking for billions of people.” Danilkis is the Co-Founder and CEO at Berlin’s Mambu a SaaS banking platform that support the likes of N26, OakNorth and ABN AMRO.

Danilkis reminds readers how we banked just 10 years ago:

“In 2010, payments took days instead of minutes to clear; no one had heard of a banking app, let alone installed one on their phone; retail banks relied on high-street branches; fraud mitigation was manual, based on rules; and data was heavily siloed in departments, slowing decisions and stopping it from being used to reduce risk.”

The picture that he paints about the future of banking would likely make some legacy bankers unhappy. “Ultimately, we’re heading towards banking as a utility. It won’t matter whether the financial services are provided by a telco, retailer, bank or another kind of company.”

All is not lost, however. Danilkis notes that it will be “how banking and banking-like services are integrated into our lives or businesses that counts.”

How is this good news? It is“good news for customers, who get more suitable products and services and a better experience right at the point where they need it. It is also good news for national economies. A dynamic banking sector with carefully focused regulation and many, rather than a few, very large players is more stable. If one or even a number of banks becomes distressed, there is less risk of systemic failure overall.”

Many recall their first time using the Uber app. The experience of paying for a taxi ride was made frictionless thanks to the mobile app. No more fumbling for a wallet or searching for cash. That was the tip of the iceberg for what is called Embedded Finance.

Yulin Chung, Business Analyst at AQR Capital Management, in an article for Finextra defines embedded finance as:

“integrating a financial service or technology with a traditionally non-financial service, product, or technology.”

Embedded finance represents better customer experiences and an opportunity for non-financial organizations to “provide extra products or services that are related to their primary product,” notes Chung.

As an example, she mentions that “Tesla offers car insurance through its proprietary car sales program, monopolizing most (if not all) of the possible profits from a given customer when they’re looking for an electric car.”

Chung sees this trend as yet another reason for FIs to transform their business models. She adds that, “banks and insurance companies will need to adopt embedded finance or be replaced by more agile competitors,” particularly those that are focused on specific use cases.

Danilkis sees that the future will be bright for “banks willing to adapt their thinking and take a digital approach.” Further, “by being able to leverage their balance sheets, they also have a distinct advantage over neo and challenger banks when it comes to navigating a rapidly evolving market.”

The commodization of banking basics, can result “in an environment that enables the next wave of innovation.”

FI executives worry about Google, Apple, and Amazon entering banking, but don’t seem to be worrying about the move towards embedded finance that is being facilitated by the very same technology players. In case you haven’t heard us say it before; the time to address your digital strategy is now.


How Smaller FIs Stay Competitive

Recently, Extractable participated in Lightico’s Digital Banking in a Post Pandemic World Virtual Summit. As a recap to the Summit, Lightico’s Leor Melamedov wrote an article summarizing the view of some of the panelists on “How CUs and Community Banks can stay competitive in a digital world.” I was fortunate to be one of the four featured speakers.

Melamedov notes that:

“speakers were very impressed by how credit unions and community banks rose to the occasion and became more responsive to consumers’ digital needs.”

She also refers to a recent Lightico study that “revealed that these institutions punched above their weight and are positioned to stay competitive, with rankings similar to digital-only banks and behemoths like Capital One and JPMorgan Chase.” Melamedov adds, “Others felt that most smaller banks are still lagging when it comes to innovation and agility.”

While many smaller organizations have performed well during the pandemic, many smaller organizations still hesitate when it comes to innovation and digital strategy. Melamedov quoted Extractable, noting that the issue is not one of resources but strategy and leadership. A go-to example is Radius Bank.

As described by Ben Gran and Daphne Foreman in an article in Forbes, Radius Bank was founded in 1987 and operated “as a traditional brick-and-mortar bank until they closed their branches in 2012 and went completely digital.”

Radius has now become a “leading online bank and it’s being acquired by LendingClub, a fintech company that issues personal loans online. This is the first time that a fintech company has acquired a regulated U.S. bank. The acquisition was announced on February 18, 2020, and is expected to close within 12 to 15 months, allowing Radius to expand its product and service offerings.”

While not every small organization can be or should be a Radius Bank, it has been Mike Butler’s leadership as CEO, and the strategy followed by his team, that successfully transformed the bank. Extractable CSO Alex Jimenez was quoted:

“Community banks are still too focused on say, next year’s budget or the next cycle. They’re not focused on where they’re going to be in five, ten, or twenty years. And that needs to change if they want to still be around at that time.”

Melamedov quotes another presenter, Customer Service & Experience Expert Shep Hyken, “Credit unions and community banks ultimately target a specific type of customer that wants more than a transactional relationship with their bank. And these smaller institutions pride themselves on the relationships they build.” Hyken warns that these organizations should not “jeopardize this human element, and find themselves disconnected from their customers.”

He also counsels smaller banking organizations to not let shortcoming in technology capability get in the way:

“You have an advantage as a small bank and credit union that they (large banks) don’t, and that’s the relationship you have with your customers.”

Bill McNulty, Operating Partner at Capita One Ventures, addressed the technology question. Melamedoc quotes him:

“the biggest albatross around the credit unions and community banks is that they’re dependent on the core provider for access to any updates in their systems. The real leaders in the credit union and community bank space have decided to do it themselves, or go to a FinTech company that can do it better and faster than any core provider.”

Melamedoc also highlights Rich Corriss, formerly from JP Morgan Chase and now Director of Customer Success at Lightico. Corriss focused on the human element that has made the pandemic response a success for many FIs:

“Particularly good managers are inspiring their agents to be the customers’ hero. As a result, these agents start to feel the real impact of their work and exhibit greater motivation to serve customers well, and with care and understanding. This is a positive trend, and the credit unions and banks that are managing to inspire this dynamic are seeing the customer relationship blossom. And that’s what’s needed most in our remote environment.”


3 Steps to Increasing Customer Engagement and Improving CX

There is no shortage of advice for FIs at this critical moment in history. This week in The Financial Brand, discussions largely focused around increasing digital engagement as COVID-19 and flip-flopping shelter-in-place orders extend into the 9th month.

Puneet Chhahira, Head of Marketing and Fintech Engagement at Infosys Finacle, writes that FIs can regain their edge lost by the pandemic “by better understanding the customer, providing personalized insights and suggesting next-best actions.” He adds, “Leveraging the power of various digital technologies, a bank or credit union can replicate this process endlessly in any given population.”

To do so, Chhahira recommends a three step process:

  1. Leverage Data to Achieve Customer Understanding at Scale
  2. Personalize Insights Across the Customer Journey
  3. Help Customers Complete Next-Best Actions

Concerning data, Chhahira notes that banks and CUs “have access to an abundance of information.” Adding that, “By using this data effectively, financial institutions can get to know a customer intimately for a fraction of the time and money they would have spent in a branch, at a scale and depth that was unimaginable even a few years ago.”

Chhahira notes that personalized insights are the next key. “When all financial institutions offer pretty much the same services on the same channels, however, it takes a special effort to stand out. This is where personalized insights come in.”

Finally, it isn’t simply to make an offer of next-best product, but to “make it easy for the customer to follow through. This means eliminating friction from the customer experience, providing the necessary resources (data, tools, links, helpdesk) to support the decision and, where possible, automatically triggering the action.”

Chhahira points out that:

“The focus should not only be on digital self-service but also on assisted channels. Financial institutions should digitally augment call center agents, relationship managers and customer-facing staff to enable them to have productive conversations.”

In the second article, The Financial Brand’s Editor, Bill Streeter, calls for FIs to “look for new ways to improve CX by giving consumers more control, increasing collaboration between humans and AI, and baking innovation into their DNA.”

Streeter refers to Accenture’s Banking Technology Visions 2020 study that notes that many FIs “might play it safe — failing to see demand for change, or being risk averse — are irrelevant in a world going through overwhelming transformation in such a short time.” The trends accelerated by the pandemic must be dealt with by all organizations.

Like Chhahira, Accenture recommends that FIs must improve engagement. Streeter writes that black-box personalization “is common in the banking industry.  But it leaves consumers feeling ‘out of the loop and out of control’ over what is offered to them in terms of products and messaging — just the opposite of what personalization should be. Instead, personalization needs to encompass customer participation in some fashion — what Accenture calls ‘customer agency’.” Accenture notes that there are “Two things are needed for banks and credit unions to get personalization right”:

  1. Use consumers’ own data to help them make better and more informed choices.
  2. Allow consumers to customize their own products within parameters set by a financial institution

Accenture also sees AI as “a banking disruptor.” However, the approach should be focused on “explainable AI” (XAI), “in which the output of previously ‘black-box’ systems is de-mystified.”  Streeter quotes Alan McIntyre, Accenture Senior Managing Director:

“Making AI explainable turns a human-AI interaction into a relationship.”

Agility is also highlighted by Accenture. Streeter writes “during an analyst presentation, a Bank of America executive disclosed the astonishing fact that the bank had made more than 800 enhancements to its mobile banking app over the course of just eight months since the start of 2020.” McIntyre asserts:

“We believe that banks should not allow ‘the perfect’ to be the enemy of ‘the good’ in rolling out their omnichannel strategies.”

Finally, Accenture recommends “creating innovation DNA” into the organization. The report is quoted to say, “yesterday’s expectations for innovation are out the window. Even though the stakes for innovation in banking were rising even before the coronavirus arrived, now a true culture of innovation is a matter of survival through, and beyond, the pandemic.”

Streeter writes, “For midsize and community institutions, McIntyre’s advice is to choose their vendors well.”

Again and again, a focus on customer experience design driven by data has proven crucial. Unfortunately, many organizations don’t have their data house in order, and fail to boldly address customer experience design. Now more than ever, FIs will have to regain their edge in order to survive COVID-19 unscathed.


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