Banks acknowledge that consumers’ transition to digital banking is both permanent and continuous, and their future achievements rely on developing banking experiences that combine the human touch with digital elements.

The “Innovation in Retail Banking” study¹ covers interesting developments in banking in multiple areas. For example, digitization has transformed customer engagement to such an extent that branches, which used to account for 50 percent of bank transactions 20 years ago, have ceded 75 percent to 95 percent to digital channels in most banks.

However, fewer than 15 percent of the survey respondents of the “Innovation in Retail Banking” study believe that they have been extremely successful in digital customer engagement and digital account opening. An earlier report,² identified that less than 10 percent of financial organizations can provide personalized financial recommendations, automated actions based on transactions, or lifestyle-related offerings using open API technology.

So, what are progressive banks doing differently to successfully scale digital engagement? The short answer: they are going beyond the basics. Here’s how:

Beyond Digital Channels

In a short span of time, transactions have swung from being mainly banker-assisted to almost entirely self-service digital interactions. According to Gartner’s³ projections, by the year 2025, approximately 37 percent of customers will experiment with utilizing a digital assistant for representing them in customer service interactions. It is critical for the bank to step in without delay with assistance offered on a text/audio/video chat, or via screen sharing, to resolve the problem or provide the required advice.

While customers can manage simple transactions on their own online, they often require assistance to resolve problems or complete complex processes, such as submitting a mortgage-application digitally; if they get stuck during the process and have no way of seeking help, they will likely abandon the application or drop out altogether.

So, what is the sweet spot for impactful and engaging customer interactions? The reality is that even the savviest customers expect to transition smoothly between self-service, banker-assisted service, and full-service channels for different – or sometimes the same – journeys. It is essential for banks to think beyond investing in just digital, self-service channels for engaging better with customers.

Beyond Interactions

While banks need to reimagine their channels, they cannot succeed at effective engagement without operating better. For example, when a customer submits a mortgage (or other) application, it triggers a multi-step process workflow inside the bank related to negative lists, credit rating, and loan eligibility, among others. Typically, because this cycle may involve substantial manual effort, it can be riddled with delay, inefficiency, and a lack of visibility, which creates friction in the customer experience despite the availability of digital self-service, partly-assisted and fully-assisted channels.

The reimagination of engagement processes cannot be restricted to the “interaction layer” alone. Instead, it must go all the way to the source of the friction in the “engine layer”. This calls for hyper-automating the various business processes such that the system is pulling all the required information from the concerned repositories – identity information repository, address and tax registries, credit rating databases, and more – and carrying out the required analysis for the loan approval. Based on the type of loan, amount and exceptions encountered, either it may be auto approved or submit to the loan officer for the necessary review and approval. Manual intervention is only required as an exception. This accelerates the process, providing customers with transparency and reliability.

Therefore, banks must go beyond reimagining interactions, all the way to (hyper) automating process orchestration till the engine layer for great customer engagement.

Beyond Own Offerings and Processing

Banking is the amalgamation of a very large number of processes. Banks will have well-defined steps, validations, and processing activities underlying their business processes. For example, the mortgage application approval cycle covered in the preceding section may have significant number of steps. Many of the steps require data from the external ecosystem. It is necessary to integrate and connect with various ecosystem participants – identity repositories, tax registries, and more, to ensure that the data can be accessed and fed automatically into the bank’s systems. This is apart from leveraging Fintech solutions for improving engagement, automation, security, and personalization.

In other words, banking processes should be designed for interdependence with their ecosystems. Trends such as open finance are driving banks to collaborate with their ecosystem partners to innovate, create, and deliver new products and services.

This means that banks must look beyond their own offerings and processing for better innovation and digital engagement.

Beyond Transactional Data

Banks are home to vast troves of data, the bulk of which is not leveraged to maximize gains. They need to fully leverage this information and look beyond transaction data. What does this look like? Traditionally, interactions between a bank and their customers were “stateless”. After a customer completed a transaction on a self-service or assisted channel, the interaction would conclude, and would have no linkage with the customer’s subsequent transactions. Banks were not using these opportunities to build a comprehensive customer profile and complete a “real KYC” beyond rudimentary verification of identity, address, and tax information.

However, progressive banks are engaging customers better by looking beyond transaction data at other information, such as income, expenses, lifestyle, channels, and risk profile, among others. This data is then used to deepen customer understanding, and ploughing back that insight to personalize products, services, and experiences. For instance, if a customer’s utility bill is suddenly higher than usual, or a rental payment is missed, or a login is detected from a new browser or location, the system can automatically invoke exception-handling mechanism, including simple alerting.

By 2025, around 60 percent of service organizations will embrace analytics technologies to complement conventional surveys, utilizing voice and text interactions with customers for analysis purposes. According to experts⁴, 74 percent of customers are open to sharing additional data as long as they receive improved services or products in return. Such data can be applied to various scenarios like frequent, recent, and relevant transactions in the dashboard, creating personalized transaction templates, contextual insights, and personalized alerts.

Although they have made some progress, most traditional banks are still some distance away from this level of personalization. To get there, they must unify engagement rules, unify customer data and insights, which can then be deployed to personalize products, interactions, controls, and processes.

Scaling success by maximizing customer engagement

While banks have made some progress in digital engagement, they still have a long way to go to attain the kind of success they expect to achieve. To get there, they must go beyond the basics in four key areas:

Reference:

1. Innovation in Retail Banking 2023 – Authored by Jim Marous and co-commissioned by Infosys Finacle and Qorus

2. Maximizing Digital Banking Engagement – Presented jointly by Infosys and Qorus, and authored by Jim Marous

3. The Future of Customer Service: 5 Emerging Trends To Watch – Gartner

4. How UK banks can meet customer needs in the future | EY UK – EY

The tide is shifting in favour of big banks

I was reading an article recently about something unexpected happening in the US markets. While there is a lot of uncertainty and concern around the banking industry owing to recent failures, many of the larger banks and financial institutions in the US have in fact posted robust Q1 numbers with better interest incomes and stronger trading results. Capital metrics are also looking comfortably above the mandated norms.

Upon closer look one realizes that while deposit withdrawal from some of the smaller banks have been in the headlines, mid-sized banks seem mostly unaffected and the larger banks have in fact seen some inflow of deposits as customers take flight to safety, quality and trust.

Traditional banks were always known for their stability and dependability. And in a fintech-free world, this was enough to enjoy customer loyalty. However, the fintech revolution and the emergence of challenger financial institutions and neo banks shifted the balance of power. Their success in disrupting incumbents was primarily driven by a modern, innovative and fully digital customer experience that matched other digital journeys that customers were used to.

Yet today, with the fear of financial uncertainty overcoming the affinity built by a better experience, the tide is turning, and many depositors are once again prioritizing the stability and reassurance of established banks over the experience of fintechs and neo banks.

This is certainly good news for traditional banks and FI’s and should be cause for some minor celebration at the very least. However, here’s the catch: simply having depositors flock back to traditional banks is not going to be enough, and certainly won’t be a sustainable trend if status quo persists with traditional banks. To retain this new deposit base and more importantly, to convert the fence-sitters, traditional banks must meet the high standards of innovation, service quality, and digital experience set by challengers and neo banks.

There is certainly a window of opportunity for traditional banks, but benefitting from this opportunity will require them to scale up their digitization rapidly.

How can traditional big banks transform successfully?

In our extensive experience of over two decades in helping banks modernize their operations and participate in new-age ecosystem opportunities, we have identified three key principles of transformation that can help incumbent banks compete with and overcome challengers.

#1 Recompose your business model around customer needs

While this seems obvious, fact is that banks tend to be driven to change more by regulation, competition or investor imperatives, than customer considerations, because the risks or rewards in the former cases are far more immediate, whereas the latter requires time and patience.

For long-term business sustainability however, banks must keep customer journeys at the heart of their product, process and operations design. What’s more, customer journeys will inevitably change over time, and he nce banks need to build flexibly, always ready to recompose their offerings to meet evolving customer needs.

Case in point: DBS bank

In the early 2000’s when they first embarked upon their digital transformation journey, DBS had the lowest customer satisfaction score of any of the banks in Singapore. As part of the transformation, they worked towards the goal of reducing customer time wasted in banking as a key metric to solve for – this was a critical customer need they had identified.

Within a very short span of time, through cross-functional collaboration and extensive digitization, DBS eliminated over 250 million hours of wasted customer time. They also managed to jump from lowest customer satisfaction to the highest in the same period. Their commitment to recompose their business around customer needs drove their success then, and it continues to do so even today in newer ways.

#2 Not just tech transformation; a cultural transformation as well

While a lot of traditional banks operate on hierarchical structures quite successfully, transformation doesn’t thrive well in hierarchies. Instead, giving people the authority to solve problems and the freedom to experiment and make mistakes can go a long way in helping them become more agile and adaptable.

In order to truly benefit from digital transformation, banks need to go beyond the hardware and software and also focus on the ‘heartware’ – creating a culture where people to feel safe and empowered by change and are enthused about utilizing technology to do better.

Case in point: BBVA

When BBVA first embarked upon their digital transformation journey, they recognized the importance of culture change to making the transformation successful. As a way of empowering their teams and creating a groundswell of participation, they took an interesting approach to problem solving:

The 1-2-3 method

By encouraging people to go beyond their job descriptions and think creatively, BBVA built a culture of problem solving and opportunity spotting during their transformation journey that has since benefitted them significantly in all subsequent tech. and business transformations.

#3 Modernize to the core

Traditional banks are sometimes guilty of doing the bare minimum to stay afloat on the digitization front. While it is natural to feel apprehensions, given the pain and uncertainty involved in an end-to-end modernization program, an exercise in tokenism can be quite risky.

In the past traditional banks have enjoyed customer trust based on their lineage and vintage, but in the digital world, that trust comes from fully digital offerings, data-driven hyper-personalization and meaningful engagement, which is impossible at scale without a modern core. Choosing not to modernize to the core therefore, is far more dangerous and debilitating for banks today.

Case in point: Goldman Sachs

When Goldman Sachs launched Marcus, it set out to disrupt the retail lending space. Their aim was to address the most prevalent frustrations in consumer finance and leverage new opportunities emerging from fully digitized customer journeys. These objectives were both lucrative and challenging at the same time. Goldman Sachs addressed these objectives in three ways:

Goldman Sachs couldn’t have accomplished this on a legacy core. Their choice of a cloud-hosted, fully composable modern core allowed them to build their offerings with speed, scale and a high degree of personalization. The modern core also enabled straight through processing, workflow automation and extensive use of APIs to leverage ecosystem opportunities.

In conclusion

Traditional, established banks have an opportunity today to capitalize on the wave of depositors who are fleeing uncertainty and seeking safe harbor in large banks. This deposit capital will only stay for the long term if traditional banks are able to deliver a meaningful, relevant and modern experience. To achieve this, banks need to embrace rapid innovation, more efficient operations, and better engagement with customers. They must recompose their business models around their customers’ needs, drive cultural transformation alongside tech. transformation, and modernize to the core. By doing so, they can compete with challengers and emerge as the modern banks of the future.

Lending, borrowing, selling, and buying have gone on for centuries. These are important aspects of finance, which are for the most part managed by centralized systems, long-established and governed by authorized banks and financial bodies. Traditionally, if a consumer wanted to take a car loan or mortgage on a new home or buy stocks or invest in funds or avail any kind of financial service, they would need to go through some form of middleman, namely the governing financial bodies like banks, exchanges etc.

In case of lending, banks and exchanges earn some percentage of the profit resulting from these transactions. Typically, to ensure security, they apply gatekeeping measures (KYC checks) for those requiring these financial services. As a result, the process becomes lengthy with many people involved and can create friction points in the formal credit system. Decentralized finance (DeFi), on the other hand, is aiming to cut out the middleman, and making lending and other financial transactions possible and more convenient between peers directly. At present, DeFi services can be enabled for a number of crucial areas of finance from lending to borrowing, funding, trading, derivatives, and insurance.

Decoding DeFi

The central idea behind DeFi is to facilitate the management of money through P2P transactions between individuals, merchants, and businesses without interventions by large financial institutions or corporations. It’s based on open-source technology without a controlling authority to deny access to any financial product/services sought by users. It also facilitates market exchanges round the clock.

DeFi is based on Blockchain technology, which enables financial applications and protocols with programmable functionality. Transactions on the blockchain are carried out automatically by smart contracts. Smart contracts include terms of agreement and the deal struck between concerned parties. These contracts set up a rules-based ecosystem where financial transactions such as lending, and investing can take place without needing third parties like banks and brokerage houses.

The transactions happen automatically when the conditions of the smart contract are met, as opposed to traditional finance where many people and systems can be involved in processing, verification, and logging of transactions. Transaction records are maintained on the immutable ledger and independently verified by thousands of computers around the globe.

From a consumer perspective, with just an internet connection, individuals can conduct financial transactions with peers. They have software to note every financial transaction and get it validated in distributed financial databases, which are accessible in various locations. These databases typically gather data from all users and rely on a consensus mechanism for verification.

As a result, more of the work historically handled by banks and other financial institutions can now be performed between peers, directly. Here the concerned parties agree to provide cryptocurrency in exchange for goods/services without needing an intermediary or overseer.

Click here to read a detailed thought paper about the emerging role of DeFi in reimagining peerto-peer (P2P) financial transactions, its potential in the future of lending, benefits, and more.

Banks have come up a long way in delivering the best of the best Digital Banking experience to their customers. Today, just open your bank application or website, and you’ll find a plethora of services just a tap away. And customers are loving it! As per the world bank report, two-thirds of the world’s population make or receive digital transactions. By 2027, the total digital transaction value is expected to reach the total amount of US$15.17tn. If digital transactions were a country, it would have been the world’s 3rd largest economy! From the ease of access to convenience, lowering the transactional cost to improving geographical reach, digital Banking scores distinction in all checkpoints discounting one: Personalization. Although the banks are trying to make their customers digital experience flawless but none of them makes it to the top 100 mobile apps list as per Forbes survey.

Banking is also about services tailored to your individual needs. The customer is no longer satisfied with being identified by account numbers. Instead, personalized customer journeys should be an approach towards Better Banking. So, an ideal relationship would be a blend of digital banking for day-to-day transactions and a personal relationship with your banker to assist with colossal needs. Can Metaverse be a key to paving the way to this solution?

Key challenges of digital Banking

Despite its benefits, there are some Challenges that the banks need to address in their Digital Banking channels:

Personal touch still matters: As per a survey by Deloitte, 73% of people worldwide use Digital Channels of banking such as Online Banking or Mobile Banking at least once a month. Digital banking is a good channel for transactional banking. However, when it comes to solving complex problems, it does miss the required personal touch. There is no better solution than an expert listening to your financial dilemmas and providing a range of tailor-made solutions to address the issue.

Surging Churn Rates: A recent research around the retail banking customers concludes that annual churn rates for the new client near 25% during the first year of relationship. Half of these don’t even make it to the 90-day mark. With most of the conversation being digital, banks don’t even get a chance to retain their customer. Also, customers prefer switching to a new banking application rather than physically going to the branch to get their grievances answered.

Keep offerings relevant: As consumers transposition themselves towards digital and businesses have started increasing their e-commerce capabilities, the appetite for completely virtual yet personalized banking solutions will continue to augment. With this growing shift in digital banking habits, banks need to keep their product offerings relevant to customer needs.

Gen – Z Ready Bank: In the last few years, more than 400 neo-banks have transpired around the Globe. With only a digital focus, they are more agile and ready to offer a seamless experience at a little to no price. Neo-banks pose significant competition in the Digital Banking space. Traditional Banks need to identify opportunities in the digital space to deliver innovative products for the changing consumer needs.

Is metaverse the cue?

Although not newly recently introduced, ‘Metaverse’ has been receiving a lot of attraction now. As per Google data for 2021, it is one of the most-searched words on the search engine in many regions. Today, many institutions, whether financial or non-financial are testing the waters in the Metaverse environment to see what’s in it for them as well as their customers.

The concept of Metaverse is introduced to the world as a virtual reality environment where its users interact with a computer-generated environment and other users. AR (augmented reality) and Virtual Reality headsets aid this virtual ecosystem. According to Bloomberg, the metaverse platforms would soon become commercially feasible, with the business totalling $800 billion by 2024. As per Gartner’s predictions, by year 2026, 25% of people would be spending at least one hour in a day on the Metaverse. According to Goldman Sachs and Morgan Stanley, the Metaverse economy might be worth up to $8 to $13 trillion by 2030. Banks are among the entities that are most positioned to meet the Metaverse’s growing need for digitally native currency and identification.

To understand more about how banks can provide more personalised customer experience and enhance the customer journey, click here and read the detailed thought paper on virtual personalisation.

Over the past few years, the banking industry in the United Kingdom has undergone significant changes. The rise of digital technologies and changing customer preferences, especially in the wake of the pandemic, have led to shifts in how people interact with their finances. In response, traditional banks have been forced to adapt and innovate, with many opting to restructure their operations to meet their customers’ needs better. From increased efficiency and reduced costs to improved customer experiences and greater financial inclusion, there are multiple reasons why recomposed banking may be the way forward for the industry.

With more than 1,600 fintech (financial technology) firms, the UK ranks among the top financial technology centres in the world. And although even the most successful firms, such as Revolut, Monzo Bank, Starling Bank and Wise, may not be threats on their own, they are collectively turning up the heat on the incumbents.

In a survey1 of 261 UK banks and financial-services firms published in January 2022, 60 percent of respondents felt that neobanks would overtake Tier 1 institutions, thanks to their abilities to meet customers’ needs better. Also, 63 percent of respondents said that the gap between traditional banks and fintech firms had narrowed in the preceding 12 months.

Clearly, UK banks will need to take substantive, proactive measures to retain their leadership positions in the future. In our view, the best way to accomplish this is by continually focusing on becoming a better bank in every respect. But how can a bank that is running successfully and has invested in optimisation and digital transformation become “meaningfully” better? By recomposing banking.

Banks with old-world business models should recompose them to adopt new-age models, such as digital-first banking, embedded finance and banking as a service (BaaS). Also, to match the agility and cost efficiency of their new rivals, traditional banks should recompose their own operations to save costs and accelerate growth.

While recomposing banking, an effective approach is considering how it impacts value for key stakeholders. Here is a simple framework:

By recomposing customer-value creation

In the past, traditional universal banks had a vertically integrated structure, meaning that they owned and operated every part of their businesses, from product development to distribution. If a bank wanted to create a new product or service, it would typically need to build it from the ground up, often at great expense and with significant time and resource investments.

Today, however, the rise of digital technologies and the increasing availability of third-party services have made it easier for banks to create new offerings without starting from scratch. By leveraging a partner’s or third-party provider’s foundational capabilities, banks can rapidly develop new products and services, reducing the time and costs required to bring them to market.

For example, a bank could use Stater’s mortgage utility service to launch a new mortgage offering. With product design, operations and collections taken care of by its partner, the bank can focus on engaging with and selling the product to customers. Sometimes recomposing value creation can yield “extra” value. For example, Goldman Sachs has secured much more value by partnering with Apple Card than it could have earned by working alone. Interestingly, our joint research with EFMA (European Financial Management Association) on retail-banking innovation found that 76 percent of banks successfully used innovation ideas from partners and fintech firms.

By recomposing customer-value delivery

Value delivery has changed even more than value creation. Instead of acquiring and serving customers through their own channels, banks now rely on partner networks for origination and distribution. Some banks have recomposed value delivery in this manner since birth; an example here is Goldman Sachs, which has always used partners to reach end customers with products and services. After partnering with Stripe to service online merchants with banking accounts and payments, the company enlisted Shopify as its extended partner after Stripe integrated its services with Shopify.

Other methods of recomposing banking delivery include embedded finance and related spaces, such as buy now, pay later (BNPL). This trend has taken root, with incumbent banks using non-bank channels, such as Amazon Pay or Google Pay, to reach vast consumer bases with their offerings.

By realising organisational and shareholder value

For decades, banks relied primarily on interest income to generate revenue, with some additional income from fees and other sources. However, in recent years, low interest rates have put pressure on banks’ profitability, forcing them to explore new ways to generate income.

While interest rates have begun to rise in some regions, regulatory and market pressures continue to create challenges for banks. For example, the cap on interchange fees for card payments, the MDR (merchant discount rate), has reduced revenue for many banks, particularly in Europe. Other regulatory changes, such as increased capital requirements and stricter compliance obligations, have also added to banks’ costs, making it more difficult to generate returns.

In response to these challenges, banks increasingly seek new ways to realise value for themselves and their shareholders. One strategy is to shift the focus from traditional interest-based business models to fee-based or value-added services. This could include offering new products and services that generate recurring revenue, such as wealth management, insurance or advisory services.

Another strategy is to leverage digital technologies to create operational efficiencies and lower costs. By automating processes, eliminating manual labour and adopting new technologies, such as artificial intelligence and blockchain, banks can reduce their dependence on interest income and generate revenue from new sources.

Ultimately, this need for banks to realise greater value for themselves and their shareholders drives the shift towards recomposed banking: partnering with third-party providers to create more tailored and innovative offerings. By doing so, banks can differentiate themselves in a crowded market, create more value for their customers, and ultimately drive growth and profitability. One way for banks to improve their levels of profitability is by reducing their cost-to-income ratios, and digitisation can be an effective strategy to achieve this.

By leveraging digital technologies, banks can streamline processes, reduce dependence on manual labour and eliminate redundant functions. This can result in significant cost savings, which can be reinvested in new digital initiatives or returned to shareholders as dividends. Additionally, recomposing value creation and delivery through digital channels can create operational efficiencies that further lower costs, enabling banks to realise even greater value for their shareholders.

End note

The good news is that technologies—especially cloud, API (application programming interface) and webhooks—enable banks to recompose their businesses with speed and economy. A case in point is BaaS, which recomposes value creation so brands can launch new offerings faster than ever before. Not just product development or delivery but a full range of services can be recomposed to build a complete digital bank without large investments in technology, operations, talent and so on. The only resources needed in abundance are a proactive stance, an open mindset, robust skills and a toolset to put it all together.

This article was previously published in the International Banker.