There has never been a better time to be a banking consumer. Banks, new and old are striving to optimise the customer experience. Marianne Brown asks if the established banks can meet the challenge posed by nimble, innovative new entrants?
It’s now something of a truism that incumbent banks are facing a huge competitive challenge from digital-first start-ups. The trend is well understood: smaller, more agile and innovative challenger brands are offering customers alternative financial service models, based on digital technology, that are more convenient and customer-centric than legacy banking services.
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The concern for established banks worldwide is that these new market entrants offer higher levels of customer satisfaction at a lower cost and will thereby win significant market share. The race is therefore on across the banking industry to develop new, customer-centric services that can compete with the best the technology start-ups can offer.
The state of play
So, how is the banking industry doing? This year’s edition of the annual FIS Performance Against Customer Expectations (PACE) report provides some clues; indicating that a small but significant gap is opening up between the world’s top 50 banks, who’ve been established for many years, and the newer, direct challenger brands, who are delivering additional services that are translating into higher satisfaction scores.
Overall, 76% of digital-first direct bank customers say they are ‘very satisfied’ with their banking relationships. This was a whole seven points higher than the figure recorded for those who banked with one of the top 50 global banks. In the UK, the research shows that challenger banks are outperforming incumbents in nearly every satisfaction metric. This is so concerning for established banks because they’re losing out to companies with little or no history of reliability.
Changing appetites
These figures would be less concerning if only a handful of customers are experimenting with alternative banks and alternative banking services. However, our research reveals a strong appetite among UK consumers to try new financial services and banking models. In fact, 66% of respondents to the PACE report said they use alternative financial services; everything from payday loans to peer-to-peer lending. Clearly, where consumers feel incumbent banks aren’t meeting their needs they’re happy to look elsewhere.
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By GlobalDataAdditionally, it’s not only what services banks offer but how they offer them that’s important to today’s customers. Consumers have grown used to highly-convenient, omni-channel, Amazon-like customer experiences and expect banks to offer the same. Customer satisfaction is increasingly connected to intuitive and convenient digital channels designed around the consumer’s preferences.
This trend is born out in the PACE research, which found that for senior Millennials and Generation-X (27-52 years old), ‘digital self-service’ is the most important factor when evaluating banking relationships.
These fast-changing consumer preferences present a clear advantage for the digital-first challenger banks that have entered the market. Unshackled by inflexible core systems, the speed at which they are able to adapt and even shape consumer preferences is substantial.
Enter open banking
The open banking agenda is making the customer satisfaction imperative particularly pressing for incumbent banks. More and more, banks are being pressured to release their grip on customers – and customer data. Through regulations such as PSD2 (Revised Payment Service Directive), which forces banks to provide third-party payments providers access to customer account data (providing the customer has given permission for them to do so), incumbent banks are losing an important competitive advantage.
Pressure on banks in the UK to provide convenient customer experiences and services across all channels will therefore continue to mount. Consumers are starting to expect more from their providers, and this will only accelerate as the rollout of open banking continues and new services are brought to market.
Time to act
In this new framework, banks must work with trusted technology partners to quickly fill the gaps in their solutions. To do so at the pace challenger banks are capable of, they must first complete long-avoided digital transformations to ensure they can effectively serve their customers. Ironically, open banking provides the most agile approach for banks to add the digital capabilities that customers desire, at the speed at which those desires change, all without compromising security.
Indeed, security is key and offers incumbent banks a source of differentiation. In our research, trust was overall the most valued factor in banking relationships and – importantly – most consumers are happy with their banks’ security. There’s therefore a real opportunity for established banks to leverage consumers’ favourable views of their security and privacy protocols and engage with the right technology partners to expand the use of and loyalty to their services. Customers want convenient, digital services, but they want these to be safe and secure too.
Bridging the customer satisfaction divide
Our research reveals a banking industry poised on a critical inflection point. Challenger banks are outperforming them when it comes to the critically important metric of customer satisfaction and as a result stand to win market share. Meanwhile, open banking threatens to accelerate the forces of disruption and increase the range of competitive, customer-centric services on the market.
However, all is far from lost. The customer satisfaction gap is relatively small and can be bridged. By turning open banking to their advantage and accelerating their digital transformations, incumbent banks will be able to offer highly competitive customer experiences that will increase satisfaction and loyalty. Moreover, they can leverage their established reputations for trust and reliability to offer something start-ups cannot: peace of mind.
With lots of disruption and modernisation developments set to revolutionise the industry one thing is certain: consumers are entering what will be a golden age of banking service excellence.
Marianne Brown, is Chief Operating Officer of FIS’ Global Financial Solutions Organisation
