In a world where 76% of Americans are choosing mobile apps over teller windows and digital wallets are fast replacing cash in pockets, banks are changing rapidly. But it’s more than just expanding digital services. Financial institutions are faced with a culture shift that requires redefining and earning customer trust.
Trust has always mattered in banking. But it has been a particularly thorny issue since the 2008 financial crisis when it became clear that banking practices did not always serve the best interest of customers.“The industry did try to claw back a good 10 years after that to say, ‘We are rebuilding trust with customers,’” says Anthony Lipp, IBM Global Head of Strategy for Banking and Financial Markets.
When COVID-19 hit, an opportunity inadvertently presented itself: the chance to build trust around customers’ unexpected needs. As branches abruptly shuttered around the world, banks had to find new ways to engage with customers. In the case of helping customers apply for loans or open new accounts, financial institutions had to deftly swap face-to-face and other human interactions for more digitally-powered solutions. For instance, when call center volume shot up as much as 400%, banks leaned more on automated chatbots to handle the enormous volume increases.
This accelerated digital transformation ushered in a heightened and different focus on customer centricity.
Regulated versus unregulated trust
From the establishment of the First Bank in 1791, to the 1929 stock market crash, to the sub-prime mortgage crisis, U.S. banking regulations are constantly changing to mitigate risks (such as financial instability) and to protect customers. Banks are entrusted with personal and confidential customer information that they are obligated to protect.
At the same time, banks need to work toward what Lipp calls “unregulated trust,” building trust beyond what is required by regulation. Is the financial institution operating in the best interest of the customer? Or is it creating friction that often results in hidden charges or a fee?
According to the Consumer Financial Protection Bureau, in 2019 alone, credit card companies charged $14 billion in “punitive” late fees, and banks charged $15 billion in overdraft and non-sufficient-funds fees.
“Unregulated trust requires creating a banking relationship that is more transparent,” says Lipp. “Customers want visibility of the entire product process.”
This is a challenge in an industry where business processes have historically been opaque. Take home mortgages, which typically involve a 12-step process. The customer is faced with the laborious task of filling out the application, which then goes into the dark, mysterious void of “processing.” Banks increasingly offer digital platforms where customers can log in and track the progress. That’s a big step in the right direction. When the customer has more visibility — when they can view outstanding requirements, the schedule of fees, and other parts of the process — they gain a sense of control and an experience they can trust.
Technical Debt of Legacy Banks
While the pandemic pushed banks to transform their operations to meet customer needs, the industry still lags behind other business sectors in embracing new digital operating models.
“Banks have traditionally been very monolithic,” says Lipp. “It’s hard because the industry is dragging 50 years of layered legacy versus building something new. Companies that were built more recently, like Amazon and Google, didn’t start with this legacy complexity.”
To catch up, banks are seeking to deliver a more transparent, easy and efficient experience enabled by exponential technologies such blockchain and AI delivered on the hybrid cloud. They are modernizing their legacy systems and business processes in place within a structurally lower operational cost envelope.
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Startups, fintechs and other disruptors
In recent years, mortgage volumes went through the roof as new homeowners migrated out of dense city centers and took advantage of low interest rates. The fintech players in this space were more than ready to meet this surge in demand. They showed home buyers the entire process, from application to closing, through digital end-to-end platforms. Through that transparency, they started to earn trust from a customer base that had historically relied on incumbent banks.
“It was harder for many incumbent players,” says Lipp. “How do non-digital incumbents double the size of their workforce to deal with these volumes? Newer nontraditional players could just add another server.” This rapid, scalable growth has seen companies like Square reach market caps comparable to the 209-year-old Citibank.
Disruptors are also seeing stunning success in the small business space. When traditional banks onboarded a small business customer, they charged a sizeable onboarding fee to cover traditionally inefficient processes, then leave customers waiting for weeks on end. They charged even more for additional services. Digital payment companies, on the other hand, allowed small business owners to onboard for free in minutes.
For the digital payment company who poaches that new customer, says Lipp, “they are not just getting the payments business, they’re getting point-of-sale, finance and accounting, inventory management, and much more functionality within that small business ecosystem,” says Lipp. “But more importantly, they’re extracting value tied up in the friction between the individual value chains supporting small business.”
The emergence of embedded finance
In recent years, emerging platform-enabled, customer-centric business models have made it simpler for customers to go about their lives and conduct business by tapping into value chains within and across industries. Financial services are an integral enabler for many, if not all, of these ecosystems. Take a moment to think about all the interconnected elements of commerce happening in the background of your day. To reduce the friction in these complex customer interactions, platform companies are increasingly embedding financial services into their value propositions, especially in payments.
“The real challenge banks have had in this new operating environment is determining how best to embed their products and services, without accelerating the commoditization of their business,” says Lipp. Financial institutions can rebuild that customer trust by becoming truly customer-centric and showing up where their customers expect and need them to be.
Innovative financial service leaders are embedding and integrating their capabilities into platforms throughout the expanding, cross-industry ecosystem. With these new integrations, they can engage customers differently, and in the process, gather new insights to improve their own platform by developing targeted products and services.
Ultimately, it’s a win for the customer, a win for the ecosystem platforms and a win for the financial institution, all with trust at the core.
“People don’t wake up in the morning thinking about doing banking,” said Lipp. “But they want to make sure that banking is there when they need it, that it’s embedded in the right part of the experience, and that it can be trusted.”
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