The entire financial services industry is undergoing drastic changes. New technology, increased regulation, and expansion of digital channels have come together to create a really interesting time for retail banks.

You know this already.

Perhaps the biggest challenge to face the industry is changing customer expectations. Financial institutions are finding themselves subject to the same expectations customers have when interacting with tech giants like Amazon and Apple. They want fast, simple, and easy user experiences. If retail banks can’t evolve to provide what customers have come to expect, they will be left behind.

It’s a “now or never” moment for banking. Our Chief Revenue Officer, Kevin O’Connor, spent 25+ years in the financial services industry. He felt so strongly about the immediate imperative for retail banks that he came to Vennli in order to offer a solution.

David Arnott, CEO of Temenos, has said, “The banking industry is undergoing a once-in-a-generation shift – a second big bang. What is encouraging [is] that banks appear to be both cognizant of the challenges ahead and making many of the right investments to be able to offer the customer-centric banking services to compete successfully in the future.”

Many have said that banking is about to have its “Uber moment.” Yes, it’s tough to be a retail bank right now, but it’s also ripe with opportunity. Those organizations that can overcome these challenges will thrive in the future.

The Challenges

1. Increasing Competition. Retail banking is more competitive than ever. Community banks, credit unions, FinTechs, and national banks are all competing for the same customers. Now that pretty much every aspect of banking can be done online, a banks’ target audience and competitive market are no longer defined by its geography but instead by banking regulation, technology, and advertising budgets.

Newcomer Azimo co-founder Marta Krupinska believes the industry is ripe for disruption due to consumers now feeling that they “have a right to choice.” When referencing her large, incumbent competitors, she says, “we can’t outspend them but we can out-think them.” Newer companies like Azimo are using data to analyze the customer experience and look for opportunities for growth. Retail banks need to adapt to this movement or be left behind.

2. Organizational Silos. PWC outlined that one of the challenges to retail banking growth is products have traditionally been launched and maintained in silos, leading to a fractionalized business model.

For example, credit cards are typically separate from personal lending. Online banking is often very separate from brick-and-mortar branches. While cross-selling is necessary for growth, there hasn’t been a systemic sales process to support it. It’s also inefficient to service each product on individual platforms.

These silos are slowing down retail banks’ ability to adapt to market changes. And while the costs of integration also seem high, experts agree that it’s no longer optional. In fact, it’s vital to improving the customer experience, which all signs are pointing to as THE key of future growth. Operational integrations that align around customers, not products, are essential to optimize efficiencies, reduce costs, and serve customers and prospects in a consistent way, regardless of channel. It’s essential to improving agility. Which brings us to…

3. Acting Fast. The financial services industry has historically changed fairly slowly. However, the past decade has seen a rapid increase in the pace of change, putting pressure on incumbent organizations to change their processes in order to be able to adapt more quickly. Banks that fail to do this will be left behind.

This is not just about executing strategy faster – it’s also about making decisions faster. In large, hierarchical organizations, decisions are often slower and siloed. To compete in the future, organizations need to develop systems that speed up decision-making. And cross-functional decision-making is faster when there’s…

4. A Single View of the Customer. Another key challenge is understanding the entire customer lifecycle across channels and products. In addition to driving better customer experiences, increasing loyalty, and reducing churn, this is also vital to identifying smart investment opportunities for innovation that will drive growth. To compete with new technology and market entrants, retail banks must use customer insights to drive strategic planning across the organization.

Money 2020 Europe, one of the biggest Fintech events of the year, took place this past spring in Copenhagen, Denmark with over 3500 attendees. The main theme carried through the conference was how companies are changing their approach to focus more on customers or consumers. Companies are looking to identify new processes and solutions that meet customer needs in innovative ways in order to compete in an increasingly competitive and quickly changing market.

However, this is further challenged by the quickly evolving forces of customer expectations, regulatory requirements, technology, customer demographics and segments, competitors, and economics. It’s a lot of data to obtain, integrate, interpret, and synthesize. Traditional, time-intensive market research can’t keep up with the needs for on-demand, real-time customer insights to drive fast decisions. New, innovative approaches are needed.

5. Innovation. Let’s be honest, FinTech startups are succeeding because they are winning when it comes to developing innovative ways to serve the customer better. They are developing new products and services that are adapted to serving customers in the current reality. On the flip side, traditional retail banks are often held back by a strong status quo and legacy systems.

This is changing, though. Banks are investing heavily in product innovation related to digital channels. In fact, 24% of the senior banker respondents cited product innovation as their number one priority. IT spending is exploding, but some banks have been less than impressed with the ROI they have experienced thus far. This is particularly important for smaller retail banks that can’t afford to keep throwing money at product development without seeing ROI. Therefore, they are looking for smarter ways to determine their investment strategies moving forward to minimize risk and reduce costs.
banking investment priorities

6. Cost Reduction. As regulatory pressures increase, banks are forced to spend a large part of their budget on remaining compliant and building more advanced information security systems. This is especially draining for smaller institutions.
top 3 banking investment opps
With what remains, as mentioned above, there are increased pressures to innovate in order to compete. Therefore, as you can imagine, banks are looking for every opportunity to reduce costs.

7. Improving the Customer Experience. In the Temennos study, 30% of bank leaders cited decreasing customer loyalty as their primary concern. It’s clear that the way to win market share (or even just to keep it!) is to deliver personalized, exceptional service. This requires understanding different types of customers – what is most important to them and how they make choices.

It’s the Age of the Customer, and today’s customer drives the banking process. Customers now wish to communicate and access information on their terms – across channels. Innovations in other industries have impacted customer expectations in the financial industry – they expect MORE. Customers expecting “non-traditional” service from banks is becoming the norm. Demographics are also quickly evolving, and, with them, customer expectations. Research by the EFMA and McKinsey showed that by 2020, 80% customers would fall into what they called the “self-directed segment,” stressing the importance of driving the organization towards meeting these customers’ needs.

8. Employee Engagement and Retention. When an industry faces external stressors such as the previous seven challenges, organizations will live or die based on the strength and talent of their people. Retail banking will need innovative thinkers to improve data security, develop new customer-centric solutions, market products to new customer segments, and remodel internal processes to improve efficiency. Talent will be actively recruited by competitors, so it’s important for organizations to understand their employee engagement and develop strong strategies to retain their top performers.

 

The future market leaders will address these challenges by driving business improvements through data and analytics. They will differentiate themselves from competitors by their ability to quickly turn customer data into actionable insights. They will find new ways to incorporate the customers’ voice into the strategic decision-making process before investing limited resources in costly initiatives that won’t pan out.

To keep up with the pace of change and differentiate in an increasingly crowded market, banks have no choice but to look first to the customer in order to find their path forward.