10 new rules for banks in the digital era

    Etienne Goffin
    Etienne Goffin

    Traditional banks are beset from all sides by disruptive threats and challenges. In this article, we want to examine some of the more pressing considerations from two lenses: behavioral and economic. With respect to the former, digital technologies have drastically affected how customers think about, interact with, and expect from their financial service provider. With respect to the latter, a host of external pressures and new opportunities are forcing banks to revaluate their core business model and products. Consequently, we have developed the following ten rules. The first five are driven by behavioral insights, while the other five are driven by economic insights.


    1. Help customers control their impulses

    Numerous surveys show that consumers are more impatient than ever, and more likely to engage in impulse shopping. This is likely attributable to the immediacy and accessibility afforded by mobile phones, which have been linked to impatience and the inability to delay rewards. Financial services need to offer services to help consumers resist temptation and monitor their finances in real time. Movenbank offers fantastic tools to help customers reign in their impulses and track their expenditures.

    2. Commit to transparency

    According to a recent ‘Trust Barometer’ by Edelman, financial services are the least trusted sector (trailing such sectors as energy, food and beverage, and technology). To redeem consumer confidence, banks need to offer products that are clear and transparent, with systems that are intuitive and easy to understand. A prime example is the insurance start-up Lemonade, which restricts their cut to a flat 20% fee, reducing or eliminating distrust and conflict in the claims process.

    3. Expand your feature set

    Consumers are now closer than ever to their banks, thanks to the speed and ease with which they can interact with their provider via mobile applications and online banking. This proximity also means that they are looking at financial services in a more detail-oriented way, and have place a greater priority on secondary services (i.e. integration with social media, loyalty systems, etc). Given the rise of WeChat in Asia, a monster app capable of everything from social media to a range of financial services, banks need to start thinking about expanding their range of products beyond core functions.

    4. Consider using peer-to-peer information

    Consumers are increasingly seeking information from third-party sources (e.g. friends and family, expert reviews, forums), and surveys indicate that consumers are often more likely to place trust in a peer rather than an expert or representative. As a result, banks need to adapt to this change in information channels. Fidor Bank in Germany and the UK as well as Commonwealth Bank in Australia are two such banks that have recognized this, and both offer clients the opportunity to seek the other customers for advice, thereby staying in the conversation.

    5. Keep messaging innovative and brief

    Consumers not only have shorter attention spans (by some estimates shorter than that of a goldfish), they are also more prone to distraction from secondary devices or screens. However, not all is lost: Research by Microsoft indicates that although multi-taskers have shorter attention spans, these brief periods of focus are capable of increased encoding and emotional connection. Consequently, messaging needs to brief, and cater to consumers’ propensity to task-switch by strong calls to action and integrated multi-screen campaigns.


    6. Keep trust as the core value

    Trust is the core foundation of banks’ business model. Several elements indicate that confidence in banks remains fragile. Market capitalizations have melted in the last decade and banks struggle to return to pre-crisis levels. Contraction of the interbank market follow a similar trend. Bank runs are a serious threat for the weakest institutions. Banks have three main means of action to build trust: risk management, fraud prevention, and established strategy. Political risks such as Brexit should be factored in (e.g. contingency plans ready for each electoral outcome). Phishing scams and bogus boss frauds must be tackled (e.g. detecting unusual transactions before they are executed). Strategy cannot give the impression that the bank has been taken by surprise (e.g. sudden staff layoff because of the ‘unforeseen’ digital transformation). Big data can be used to mitigate risk, detect fraud, and adjust the strategy.

    7. Boost automation to streamline the costs

    The financial crisis has weakened the balance sheet (non-performing loans skyrocketed) of most banks. Stricter regulations (e.g. Capital Requirements Directives – CRD4) have increased the amount of regulatory capital that banks must keep aside. Low interest rates have eaten up the intermediation margins and reduced banks’ profitability. In this context, banks have strong incentive to boost automation in order to streamline the costs. For instance, robo-advisors and digital wealth-management are cheaper and more efficient than their human counterparts. This will free human resources for more valuable activities.

    8. Beware of the new gatekeepers

    New gatekeepers are trying to place themselves between the banks and the customers. For instance, digital wallet, bank account aggregators, loan comparison platforms and super-apps are getting serious traction in preparation for the implementation of the new Payment Service Directive (PSD 2) in 2018. Banks will soon lose the ‘monopoly’ they have on their customer’s account information and related payment services. They will struggle to remain the first in the customer journey and face fierce competition from fintechs.

    9. Take advantage of the ‘data’ power

    Banks collect huge amounts of data such as purchase history, transfer statements and profile data every single day. The analysis of such information can improve customer satisfaction (e.g. personalized product offerings, improved investment advice, enhanced credit scoring), operational efficiency (e.g. high-frequency trading, dynamic risk management, refined customer segmentation) and regulatory compliance (e.g. fraud detection, automated reporting). Banks are increasingly using data to generate business. For instance, leading American banks are selling consumers’ shopping data to retailers and they are also analyzing debit and credit card transactions to reshape their future strategies. The convergence of machine learning, IoT, cloud, and big data will create new opportunities for banking analytics.

    10. Challenge everything you know

    Because of all the technological changes, everything you know may become mysterious and unpredictable. Even what bankers know best: money. In its digital form, it makes anonymity and secrecy nearly impossible. Therefore, a switch to a completely digital fiat currency would give more power to both fiscal and monetary policies by making it impossible to avoid taxes and negative interest rates. This radical scenario, unlikely but technologically feasible, would change what banking is all about. Closer to us, we see that current developments transform many key aspects of the economic reality such as work, ownership, trade, and politics. Thus, banks will have to adopt a new mode of thinking.

    New conditions create new rules

    Banks are going through a profound redefinition of their business model as a result of evolving consumer behaviours and new economic conditions. The whole market is changing rapidly. This leaves incumbent banks with no other option than to invest in their own disruption. The ten rules above aim to help banks get a clear vision of the future of their industry and their role in that future.


    Authors: Justin Saddlemyer and Etienne Goffin

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