7 minute read 10 Feb 2020
Man climbing hong kong blue sky

How banks can stay relevant as customer preferences change

Authors
Jan Bellens

EY Global Banking & Capital Markets Sector Leader

Passionate leader on innovation in financial services, especially in emerging markets. Global citizen. Keen traveler.

Karl Meekings

EY Global Banking & Capital Markets Lead Analyst

Developing views on the future of banking. Fulham FC follower. Germanophile. Medievalist.

7 minute read 10 Feb 2020

Customer-centric banks outperform their peers. Three areas of focus can help deliver the outstanding experiences consumers expect.

This article is part of our Banking in the new decade series.

As banks head into a new decade, analysts forecast that profitability will remain a challenge. In these challenging conditions, do banks double down on cost control or commit to driving transformation? High-performing banks know that both are key to lifting profitability and that a focus on the customer is a smart place to start.

Competition has raised the bar for customer satisfaction

For banks, the challenge to keep up with changing customer expectations is not new, but it is increasing. Advancing technology and reforms, such as open banking, have expanded the financial options on offers, and customers are turning to a broader range of providers to address their needs.

For example, small and medium enterprises (SMEs), frustrated with banks’ stringent underwriting criteria, poor customer service and slow credit application processes and decisions, are increasingly switching to FinTechs. FinTech adoption (pdf) among SMEs has grown to 25% and could surge to 64%, based on current trends. Meanwhile, recent announcements of BigTech and Big Bank partnerships look set to bring a new level of customer services to financial services, and seem to contradict frequent arguments that tech giants don’t really want to get into banking.

The good news is that the EY analysis of the world’s top performing banks – those that deliver a return on equity (ROE) above their cost of equity – shows that many high performers are using a customer focus to get ahead. They are making the most of two fundamental advantages in the fight against new competition: experience of managing customers’ assets through the business cycle; and the right data and tools that allow for the greatest insight into each customer. Most FinTechs and BigTechs lack both. Banks also can leverage their large balance sheets, strong capital adequacy and experience to lower the cost of service. Estimates suggest that large UK banks can price a mortgage 30bps cheaper than new competitors, just as a result of their internal ratings-based credit models.1

With this in mind, incumbents must build the seamless, easy experiences customers expect, while protecting their reputation as trusted protectors of customer data and remaining price competitive. Balancing these priorities will be a challenge, but three areas of focus that play on banks’ inherent advantages will help:

1. Play the trust card

Despite trust in the overall financial sector declining, customers still hold high levels of trust in their primary finanical service provider (PFSP), according to EY’s NextWave Consumer Financial Service researchSixty percent of consumers surveyed said they are comfortable sharing personal information with their PFSP without specific assurances about data protection and security.

Capitalizing on this trust advantage can help banks, not only gain competitive advantage, but also drive revenue growth. To understand the impact of trust on consumer demand, we ran a simulation that varied the trust features of different banking offerings, while keeping all other variables the same. Examples of “trust features” include full price transparency, hyper-personalization and the ability to own and control the use of one’s personal financial data (similar to what is mandated by General Data Protection Regulation or GDPR).

Within the US alone, we estimate that strengthening trust could help banks create an additional US$11.3t in assets. 

We compared a share of preference scores with those offering a “trust bundle” against the base case of current offerings for banks, and we found a clear advantage for those with features that built trust with customers. This advantage translates to a significant revenue opportunity — within the US alone, we estimate that strengthening trust could help banks create an additional US$11.3t in assets.

Incremental share of preference chart

These results point to some clear short-term actions for banks:

  • Enhance data security and privacy protection, and put customers in control of their data. In some jurisdictions, open banking regulation already mandates this. But banks that take a proactive approach to empowering customers could differentiate from competitors.
  • Emphasize ethics and transparency. As the use of artificial intelligence (AI) and machine learning in decision-making increases, the rationale for these decisions can be opaque and subject to unintended bias. While some of these effects can be limited by good governance and ensuring the diversity of the teams developing algorithms, it is critical for banks to have clear audit trails for decisions, and to be able to explain, in simple terms, the rationale behind any decisions to customers. 
  • Ensure open communication. Bad press around data leakages, or unjustified credit decisions will impair trust in the sector. Past experience shows that the least impacted firms within and outside of financial services are those that have taken time to acknowledge the full impact of a breach and build confidence with customers that it was being effectively resolved. At a minimum, banks should test such scenarios to ensure an effective response when something does go wrong.

2. Make it simple and seamless

Customers are demanding dynamic, customized experiences that predict and meet their needs in real time. And they want interactions to be simple. According to the 2019 Edelman Trust Barometer, nearly three-quarters of people agree that financial services firms should lead on creating and using emerging technologies that make doing business with them easier. Similarly, the 2019 EY FinTech adoption survey (pdf) highlights that one of the reasons SME adopters chose FinTech is their 24/7 availability.

Digital innovation

73%

of people agree that their financial services firms should lead on creating and using emerging technologies that make doing business with them easier.

Source: 2019 Edelman Trust Barometer

Banks need to focus on the “brilliant basics” – giving both personal and business customers a positive experience that meets their needs. This starts with fast, digitized online customer onboarding, enabled by new technologies that allow them to conduct their own know-your-customer (KYC) reviews and get instant decisions and disbursement of credit. 

Technology can also help banks bridge the industry’s “advice gap” and deliver the right advice to the right customer at the right time. Many banks have already piloted video tellers and AI-driven business advisors, while others are offering products that seek to positively influence overall customer wellbeing.

Delivering the simple, easy experiences customers want depends on banks building a deeper understanding of them – using technology and data insights to know them better than they know themselves and being ready to support them, not just through their major financial moments, but in all the moments where a decision or transaction is made.

3. Help customers achieve bigger goals

Banks that consistently outperform the market take a strategic approach to meeting customer expectations. They identify a target customer segment and work systematically to understand this segment to develop and market relevant products, allocate investments in capital, ensure management focus, maximize share of wallet, and guide virtually every other significant decision.

Banks must shift from the traditional “product-push” approach to one focused on helping customers achieve their wider ambitions. For consumer banks, this may mean helping customers prepare for big life events, such as weddings or retirement, building their financial skills or achieving major goals such as buying a home.

One bank in Tennessee has decided to target customers in a clearly defined set of communities. By focusing on meeting the needs of this specific group, the bank has lifted ROE above the cost of equity.

For banks serving SMEs, it’s time to go beyond the “brilliant basics” and add more value by:

  • Connecting clients to an ecosystem of suppliers and distributors
  • Providing data-driven insights on customers, products and regions that support growth
  • Supporting productivity with a range of services, including human resources (HR), talent, tax and regulatory compliance provided by bank partners
  • Navigating larger commercial customers through increased business risk and helping them enhance performance in a weak market

Banks with corporate customers can also reap the benefits of a targeted approach. A high-performing bank in the Philippines focuses on serving just a few industries, including transportation, using its deep knowledge of these sectors to offer clients relevant services across all aspects of the business.

Building on trust to improve experiences

Changing expectations and increased competition make it even more challenging for banks to remain relevant to customers. But, high-performing organizations know that creating a customer-focused culture is critical to lifting profitability in tough conditions and allowing investment in the digital transformation programs that will drive long-term value. Building true customer centricity does not happen overnight, but banks can begin now by building on the latent trust of existing customers, improving their experience and taking a strategic approach to meeting wider expectations.

Summary

FinTechs and BigTechs have raised the bar for customer service, but high-performing incumbents are maximizing two competitive advantages – deep customer insights and the ability to use their size to lower costs. Building on consumers’ higher levels of trust in their primary financial services provider; delivering easier, more intuitive experiences; and supporting customers to achieve wider goals can help banks leverage these advantages to grow revenue.

About this article

Authors
Jan Bellens

EY Global Banking & Capital Markets Sector Leader

Passionate leader on innovation in financial services, especially in emerging markets. Global citizen. Keen traveler.

Karl Meekings

EY Global Banking & Capital Markets Lead Analyst

Developing views on the future of banking. Fulham FC follower. Germanophile. Medievalist.