While retail banks used to dominate the financial services space, online lenders represent an undeniable force within the industry. These digital leaders cater to convenience and consumer preference, enabling customers to engage with their services as much or as little as they see fit.
But, while many assume that the increasing appeal of online banking alternatives comes at the expense of their traditional counterparts, industry leaders shouldn't count retail banks out just yet. According to an Accenture study, 47 percent of those polled have been with their bank for 10 years or longer, with 81 percent claiming they wouldn't switch companies if their primary bank closed their local branch. In fact, 66 percent of consumers plan to use the branch as often as they do today or more in the future, indicating that traditional banks aren't quite as antiquated as some may believe.
"Retail banks, especially community banks that operate as an individual's primary financial institution, offer the benefit of an existing relationship," says Dan Moultrie, director, advisory services at Saylent. "This existing relationship enables a conversation with real people who know an individual personally, including their life situation, and can offer solutions tailored to the individual, whereas online lenders leave consumers somewhat on their own to find the right product or service."
However, as Rob Heiser, CEO and president of Segmint, explains, today's competitive landscape requires traditional banks to innovate both their product offerings and technology to better serve their customers and enhance brand experience. While they already operate with the human element at their core, banks must also leverage customer data to serve and predict individuals' needs, anticipate their next banking product at exactly the right second, and send targeted, one-to-one messages in real time via whatever channel the consumer happens to be using at that moment.
"This 'always on' approach means that they have a window into their customers' spending patterns, as well as transactional and lifestyle behaviors, meaning they can dynamically adapt to any changes," Heiser adds. "Banks can respond in milliseconds now-not days, weeks, or months later when it's often irrelevant. They should know what products are most important to their customers based on their needs at that moment in time. Data has emerged as the DNA powering the next generation of banking-especially data that's activated and can adapt dynamically to life events, and that can serve as real-time triggers for delivering highly personalized, truly tailored banking and payments experiences."
Paula Tompkins, CEO and founder of ChannelNet, emphasizes that it's important for industry leaders to understand the end-to-end customer experience, which means using incoming data to their advantage. Only then will these retail banks be able to create a customer relationship plan that integrates varying touchpoints in meaningful ways.
Not all retail banks are alike, however, as some have taken bigger steps than others, says Gil Mermelstein, managing director at West Monroe Partners. Nevertheless, he says, banks should internalize Bill Gates' famous quote: 'Banking is necessary; banks are not.' As such, retail banks must invest in the digital customer experience and product innovation to ensure they remain competitive. To do this, banks must:
- Guarantee the technology architecture is nimble, flexible, and cost effective to compete in the future.
- Reinvest in the customer experience with the 'digital by default' mindset at its center.
- Invest in digital and real-time marketing to reach current and future customers.
- Adopt advanced analytics capabilities to gain greater insight into customer behaviors.
- Ensure employees have the skills to compete in a digital environment.
- Reimagine internal processes to create a digital-enabled organization.
Unfortunately, however, many institutions have yet to embrace these new standards. "It's hard to tell someone who has been successful at something for a long period of time to suddenly change how they do things," says Ash Exantus, financial empowerment coach at BankMobile. "Retail banks have invested billions of dollars in their branches and aren't ready to accept the fact that the customer is demanding a more efficient way to bank. This has impacted customer satisfaction and engagement to the point where customers are either leaving retail banks all together or using both retail banks and online alternatives. This new generation of customers wants convenience or they will walk away."
Yaron Lavie, CEO for Pareto Pulse, notes that retail banks haven't yet begun to embrace the convenience factor entirely because they aren't feeling much pain from online lenders quite yet. Pain usually predates change. In certain cases, that's because online lenders are going after the customers banks have rejected-those whose credit is too low, or who are, for some other reason, ineligible for a bank loan. Banks don't need to be concerned about losing customers they wouldn't want anyway, Lavie emphasizes. The greater concern derives from the fact that these online lenders will start eating away at the banks' existing customers who do have good credit and would be eligible.
According to Priyanka Prakash, finance specialist for FitBizLoans.com, there are three areas in which banks continue to lag behind:
- Underwriting:Banks still rely upon credit scores as the be-all, end-all of underwriting when evaluating someone's loan qualifications. Online lenders, however, have already seen past credit scores and look at a variety of other criteria, such as social media data and application behavior, when evaluating applicants. Banks that neglect to look beyond credit scores risk failure.
- Speed: Banks are still stuck in the 90s in terms of how quickly they can get customers approved for loans and other financial services. Online lenders use computerized underwriting algorithms to quickly approve people in as little as one business day, while traditional banks may take up to two months. Many people, especially Millennials, just don't have the patience to wait that long.
- Paperwork: Many online lenders are able to plug into other systems that a customer might use, such as Amazon or QuickBooks, to obtain financial information on the given individual. That saves the customer the trouble of having to fill out vast amounts of paperwork. The average bank loan requires more than 10 hours of paperwork, making pen and paper tedious and discouraging.
Yet, while online lenders may appear to have the head start, Prakash emphasizes that they still haven't captured so much of the market share that it's impossible for banks to catch up. People still trust big bank names like Chase and Bank of America. If those banks can keep up with online lenders and offer similar products, then they can compete.As with most products, the main frontier of competition will be price. If banks can provide lending products quickly, efficiently, and at lower interest rates than online lenders, they will likely win back some of the customers they may have lost.
Prakash claims there are two main technologies all banks need to implement if they wish to truly compete with their online rivals:
- Big Data Underwriting Algorithms: Embracing Big Data means using algorithms that look at numerous factors-from how long the customer spends on an online application to their college GPA-to evaluate credit risk. Banks must realize that credit score isn't the only factor that matters, and such tools will enable traditional banks to calculate risk beyond the norm.
- Online "Smart" Applications: Customers should be able to complete the loan application process online from start to finish. This means that the application should be able to draw from other online systems the bank employs to ease their burden and streamline the experience. However, banks might want to retain the pen and paper option for older borrowers or those who don't have access to a computer, as such measures will cater to every possible customer imaginable.
But, above all else, traditional banks must adopt the appropriate mindset. "Retail banks must take the new trend in online lending seriously," Prakash adds. "There are a lot of unknowns as to how online lenders will fare, but one thing's clear: They are not just a fleeting phenomenon. Remember when taxi drivers and limo drivers thought that Uber was a temporary phenomenon? That hasn't worked out so well for them! If banks don't act now, they may not exist 10 or 15 years from now."
Ultimately, as Exantus explains, retail banks must not only provide traditional banking solutions, but also empower their customers by offering financial education. In many instances, engagement continues to dwindle because customers feel lost when it comes to managing their finances. Here, retail banks have the advantage over online lenders because they have the opportunity to, once again, embrace the sense of community and personalization they've already established to expand upon customer relationships even further. Retail banks can go beyond products by focusing on the human element of their one-to-one service so they may act as beacons of trust and reliability in the future.