The Future of Retail Banking: How to Save Retail Banking From Itself

A bank with a two-week wait list to join? No, that’s not a typo. After Simple, a fee-free Internet only replacement bank launched in 2013, so many customers inundated the fintech startup with requests to join that Simple had to institute a two-week wait list. Simple’s CEO and co-founder Josh Reich says the bank is designed to eliminate all the “gotchas”, like overdraft charges or monthly maintenance fees, which allow big banks to make billions off the backs of customers. But Simple does a lot more: the bank uses mobile technology to analyze customer spending patterns and automatically help customers budget and save. Three years later, Simple is still going strong, joined by a slew of digital financial service providers such as BankMobile and Moven that are disrupting traditional retail banking. Oh, and these services are all free.

It’s no secret that the traditional retail banking is struggling. Big banks were slow to make the digital transition, and some are still playing catch up. Mobile deposits, for example, weren’t widely offered by all retail banks until recently­—a major oversight for regional banks that lack nationwide branch penetration. It’s small but costly mistakes like these that are driving today’s customers away from retail banking and into the arms of free digital service providers like Simple.

Can anything save retail banking from itself?

Disruption Sectors: Payments, P2P and Data

More than $12.7 billion has been invested in fintech in the last five years, reports Chris Skinner, Chairman of the Financial Services Club, who says that “one third is focused on payments, one third on P2P, and one third on data and analytics.” It’s no coincidence that these three bank sectors also generate a significant portion of retail bank fee income. As these sectors are disrupted, traditional banks lose even greater market share.

No-fee banking services such as deposit, checking, ATM access, debit cards, mobile bill pay, P2P payment, and financial education are all going digital. While customers overwhelmingly support these offerings, many fintech companies have struggled to scale services citing high customer acquisition costs. Furthermore, most fintech firms focus on developing a few core processes rather than a full suite of offerings, potentially limiting their viability. Michal Panowicz, Managing Director for Products, Marketing & Digital at mBank thinks that for digital institutions to be fully competitive with bricks and mortar banks they need to provide “end-to-end digital product-and-services processes”– and most currently do not.

But it’s not all gloom and doom for big banks. Take Millennials, for example, who are far more likely than any other demographic to leave their primary bank if that bank doesn’t meet their needs. This chart from FICO shows the specifics. Seventy-two percent of Millennials use mobile devices for banking. However, “63 percent (of them) still use bank branches — just slightly below 68% of Gen X and 69% of Boomers,” reports Aaron Back of the Wall Street Journal. This could mean that Millennials are sticking with banks that provide face-to-face contact, so long as they can have free digital services too. Banks willing to chart a new (fee-free) path with their customers can retain market share and profit from the customers they have already paid to acquire.

“Fintegration”

I’ve written before about the need for fintech and bank integration and coopetition. Big banks have traditionally commanded a large market share due to their sheer size and brand loyalty, but internal legacy systems and overhead costs have created an environment ripe for disruption. To compete with fintech startups, big banks need to innovate internally, acquire fintech innovators, or create joint ventures. Regardless of the integration strategy, adapting large bank legacy systems to fintech innovation will still require significant investments of human and financial capital– an investment many have been slow to make.

As the traditional fee-for-service retail model disappears, bricks-and-mortar banks must find new ways to stay competitive.

What Could A Bricks-and-Mortar Bank Provide?

How can banks leverage their trust, association, relationships and perception? Skinner says, “The Internet of value is far greater than cryptocurrencies. It’s about how we value ideas and individuals. There are many ways to create value and then monetize it, but banks are not capitalizing on those opportunities. Amazon, Facebook and Google all do it well.”

The tech giants understand where the value exchange marketplace is going, and have been collecting massive amounts of customer behavior and decision making data for years. Google, Apple, Amazon, Samsung, etc. all offer payment solutions. Banks still own a competitive advantage however as they currently mediate billions of customer relationships. If each customer represents more value than their currency holdings, banks could actually generate network value rather than just store value.

Rewards, Airline Miles, Relationship Credit 

CGI put out a report to better help financial institutions understand consumers in the digital era. The result was clear; customers want to be rewarded for their loyalty, have 24/7 access to all services, be seen as a person, and have access to education and experts. This is not a new trend; we see this across industries and sectors. Customers want to benefit from recurring business and relationships. Airline mileage programs may be the best example. Banks have offered partnership rewards via credit cards for years. What if the banks took return relationship credit/reward systems one step further? What if banks used their customer profile data, relationship networks, purchasing histories, credit ratings, service offerings, and integrated payment solutions, to develop a multi-metric reward programs network wide?

If banks actually matched and securely stored the network of relationships – rather than paper or digital money – they could actually make a larger cut of each transaction by providing a service that saves customers money versus tacking on fees for service.

With a little data mining, banks could develop a rewards program via in-network referrals. They do not need to reinvent the wheel. In addition to airline miles programs, banks have offered merchant branded credit cards for a long time. Branded credit cards inspire customer loyalty, but are also restrictive. Case in point: store credit cards. Sure, I may use my J.Crew card to pick up a new pair of pants, but outside the store’s ecosystem, the card doesn’t provide much benefit or motivation. Point accumulation is slow, and with a high threshold for redemption, J.Crew offers me little incentive to use their store-branded card over another credit card. Why be limited to a few cards and a few bonuses at a few choice stores?

A Scenario: Multi-Metric Rewards and Relationship Clearing

Let’s assume you want to renovate your house. You can’t go to an ATM to get a loan. A new fintech lender may fund the renovation, but not many digital providers are set up to do that kind of underwriting yet. More than likely, you have a mortgage at a bank and a personal relationship with a local branch banker. The bank is holding your home as collateral until the mortgage is paid off and they have an interest in making the asset more valuable. The bank also has a large network of local and national relationships with many businesses and service providers. Therefore, if you walk into the bank and let the bank about your upcoming renovation, the bank could provide the loan for construction, but could also offer a network of service providers to you at a discount. By directly referring and connecting customers and suppliers, banks can help businesses minimize marketing overhead and pass those saving directly onto the customers. Instead of a confusing points system, banks could offer an array of discounted referrals to plumbers, tilers, carpenters, and maybe even competing discounts between Home Depot, Lowes and your local supply store. This type of rewards system would benefit retail customers and businesses alike. Commercial borrowers can secure a steady customer stream via bank referrals thereby lowering commercial loan default risk and associated interest rates. Essentially, banks can create an entire value network where everyone wins.

Next Steps

Needless to say, this scenario would take a lot of system development. Legacy system migration is hard enough and a networked rewards system would require a monumental systems push towards big data analytics, machine learning, and artificial intelligence engines, not to mention potential privacy concerns. In the current competitive environment, banks need to scale innovative customer management solutions and build reward systems that capitalize on their remaining strength.