Digital banking is leading to a wave of changes that are challenging the value proposition of existing banking services and products. Though this trend is hardly new, many businesses in the banking industry are still wondering if digital disruption is a threat or an opportunity. Dealing with highly sensitive financial and personal data, banks are less flexible and more vulnerable than other businesses in terms of security and government regulation. But this doesn’t mean that banks can skip out on the digital transformation. Rather, banks need to catch this wave and surf it smartly.
Why is digital disruption in banking still spinning out
Digital disruption is uneven by nature. The extent to which each sector of the economy is exposed to disruption remains unclear. According to a report by McKinsey, digital culture, capabilities, and strategy are far less developed in banking than in media, retail, or logistics. Here’s why.
- Legacy systems. Before adopting innovative practices, banks must sort things out with their corporate systems. The huge IT departments of financial institutions are often maintaining complex software that’s built on obsolete technologies and is hard to modernize.
- Organizational issues. A large number of employees at most banks is an obstacle to digital mobilization. And each bank is just one component within a huge banking system that’s generally too bulky to quickly adapt to market changes.
- Strong regulation. Banks have to deal with constantly increasing regulatory requirements. They spend a large part of their budgets complying with regulations.
- Customer preferences. Not everyone wants a progressive digital approach applied to their funds. Statistics show that consumer demand for traditional branch banking services remains substantial.
As strange as it may sound, the simple desire for a level of human interaction is still crucial in the world of digital devices. Banks should pay attention to the differing demands of clients and single out those who eagerly embrace digital.
Target audience for digital banks
Millennials are the prime target audience for digital banks – millennials want 24/7 access, customized value propositions, a smooth online banking experience, and speedy operations. They also want all this on their smartphone. People born during the 1980s and through the 2000s are making good money and are interested in emerging technologies.
Research proves that millennials are among the most important group of customers for banks. And they shop, work, and communicate online. What should banks do to attract and retain millennials? Only solid digital banking will attract customers and leave competitors behind. Here are some tips for winning millennials as clients:
- Offer a seamless online banking service
- Create an omnichannel experience, reducing interactions with call centers, branches, and via snail mail and email while investing in digital platforms
- Tailor services by applying data analytics
- Meet millennials’ high expectations of quality, customization, and features, which have been shaped by digital-first companies like Facebook, Amazon, and Google
Millennials will not stand in lines to fill out piles of forms. They will simply write a negative review, complain about their bad experience on Facebook, and turn to a bank that offers the same services online. Millennials know how to spread the word. If they like your service, you can expect more customers; if they don’t, you can anticipate the consequences.
How online banking UX increases customer engagement and retention
Creating disruptive digital solutions to increase the quality of service may be your key to engaging and retaining clients. It’s time for banks to focus on the user experience and work out viable UX strategies. Here are a few tips on how to do that:
- Talk to clients. Banks should carry out UX research, collect feedback, and be open to criticism. Most importantly, banks should personalize their services based on what they learn from their clients.
- Craft a digital banking strategy. Ask a professional UX team for assistance in developing a UX strategy for online banking.
- Design an intuitive UI. Easy switching between accounts, simple balance charts, clear menus, and other elements of good UI design make banking products more useful and more attractive.
- Focus on microinteractions. Rethink the user journey for clients who are doing everything on the go. Design solutions to meet immediate needs – for instance, a microservice that lets a customer buy a designer jacket on an installment plan.
- Invest in security. Focusing on the simplicity of your UX doesn’t mean neglecting security. Biometric authentication is awesome, but banks should still require extra passcode authorization to change security settings or transfer big sums.
New FinTech trends that will make you compatible on the market
Disruptions in digital banking have led to what we call FinTech, a vibrant combination of financial services and technological innovations. The financial industry, which used to be among the most traditional, has been shaken by innovative startups that are rethinking financial services and products with advanced technologies.
FinTech providers try to outpace traditional banks by addressing customer needs more conveniently and transparently. They offer simpler business models, with tailored products that are easy to set up and access via digital channels. Digital-only and cryptocurrency-friendly banks, peer-to-peer lending marketplaces, and online loan comparison platforms are just a few examples of how deep digitalization can put its roots into banking.
Banks like N26 (Number26), Atom Bank, Fidor Bank, Simple, and Moven are some of the best-known challengers to traditional banks. These new banks have created data-driven customer experiences and offer attractive pricing.
Intellias has worked with Fidor Bank, supporting their Ruby development team on a number of products related to the bank’s end customers. Fidor Bank is one of the best examples so far of a digital-only bank. The first German digital bank, it commercializes its tech stack and sells it to banks and startups around the world. Fidor Bank’s uniqueness is in its customer-centric approach. Services and products are implemented based on customer suggestions within Fidor’s online platform. This community-driven model supported by social banking principles and a mobile approach has definitely paid off. The bank now has more than 100,000 users and 300,000 community members and is successfully heading toward the UK and US markets.
Fidor is also a cryptocurrency-friendly bank. Cryptocurrency is becoming increasingly popular, though it’s still treated with suspicion by traditional banks. Bitcoin, the most popular cryptocurrency, as well as blockchain technology, are being used to improve the financial and technological systems of digital banks as well as to cut costs. Cryptocurrency support from these banks usually includes cryptocurrency cards, cryptocurrency wallets, and support for cryptocurrency transactions.
Peer-to-peer (P2P) lending is another FinTech method that allows people to skip traditional banks. With P2P lending, borrowers connect with investors online and both parties are armed with digital instruments such as online loan comparison platforms to make the lending process quick, safe, and easy. While there are well-established players like Prosper and Lending Club on the P2P lending market, smaller startups are also making their way forward with decent investments. For example, Smava, an online social lending platform that offers personal loans from $1,000 to almost $150,000, has facilitated $67,056,018 in lending so far according to Crunchbase.
Digital transformation is the first step
There are two ways that traditional banks can respond to their FinTech competitors. First, they can purchase and incorporate FinTech startups, strengthening their position on the market. Second, banks can acquire new digital products, new clients, or even ready-to-implement ideas. Or they can just continue the struggle. To stay relevant, banks have to transform and respond rapidly to market conditions with products and services that clients want.
The move to digital banking means more than a simple shift from branches to mobile banking apps. Credible digital banking requires a cultural switch in the way that banks respond to disruption. New banks deliver the majority of their products and services digitally and are ready to work with new technologies, which is how they broaden their target audience. At the same time, they have no illusions about the fact that digitalization requires investment and thorough planning that may reshape the entire organization.
It’s clear that before testing the waters with digital transformation, banks should nail it down with precise strategies. A clear understanding of how digital banking works and the value it can bring is vital. Data-based analysis of user behavior and market evolution along with informed decisions about where to start with digital investments can help product owners avoid costly mistakes. We recommend cooperating with a trusted software vendor to access the digital banking expertise needed to succeed with digital services.
Get in touch with our FinTech experts to learn more about the technological side of digital banking services.