The days of piggy banks and physical interaction with one’s money are distant memories for many of us and completely foreign to younger generations. Your bi-weekly paycheck is now just a number on a screen rather than a paper slip requiring a trip to the bank. A single tweet can dictate where you spend your money over the weekend and that company named American Telephone and Telegraph invoices you for monthly cable usage by dropping a line in your Gmail account.
The strong consumer appetite for digital is disrupting a variety of industries but perhaps none more than financial services. As the financial world has become less paper-based and more digital, the lines have blurred between banking activity and everyday consumer activity. Banks have interpreted this conundrum as an opportunity to better engage with their customers, from helping split the bill at dinner to recommending products a consumer might like.
But several factors pose challenges to banks’ suitability as providers of new age financial services. Their conservative cultures and lack of in-house technological expertise are poor matches for customer bases in need of high-end mobile and web solutions. Banks know that they are not tech companies and are not pretending to be. Instead, their focus remains on core competencies related to managing customers’ finances, tapping their friends in the fintech space for delivery of cutting edge digital solutions.
Banks have a long history of relationships with tech vendors, procuring core processing services from the likes of FIS, Fiserv and Jack Henry. And as the branch has become less of a gateway for financial activity, banks have bolstered partnerships with those capable of supporting its customers in other physical domains, namely payment companies and ATM manufacturers. The digital revolution commands more of the same types of relationships – ones that yield the mobile apps, SaaS platforms, SDKs and APIs that banks need to support digitally-oriented customer bases.
The digital makeover in banking implies a flight from paper, which remains a popular resource for the $900 billion U.S. P2P payment market. The U.S. accounts for two-thirds of all checks written worldwide, according to Moven’s Brett King, while a large proportion of financial transactions made in Europe, Africa and Asia run through mobile devices. Checks were an appropriate means for payment when the only alternative was physical withdrawal of cash. Now, with mobile banking putting funds at consumers’ fingertips, the check should seemingly be on its way to obsolescence.
Using P2P platforms like Fiserv’s Popmoney, consumers can pass money to peers via text message or e-mail. These types of solutions, however, have seen limited traction due to cumbersome entry of bank information on setup and the general lack of ubiquity across consumers. Just as popular have been third-party apps like PayPal and Dwolla, which tend to be easier to configure. These apps tend to be cheaper for transactions under $30 and, unfortunately for banks, mask funding origins once set up.
With full intentions to profit from P2P payments, banks have little interest in partnering with third parties that have shown willingness to accept thin (and sometimes negative) margins. While it is certainly possible for banks to find a way to embed said solutions in mobile banking apps, the consensus seems to be waiting on vended products to slowly achieve scale.
Consumers have made clear their distaste for paper in making a payment and have shown even lesser tolerance of extraneous paper ads that find their way into mailboxes. Ads and coupons coming through e-mail tend to be equally as annoying but banks may have found a way to increase relevance through the use of analytics. Bank of America in particular has teamed up with Cardlytics, a specialty marketing firm that mines card purchasing activity to facilitate deals with increased relevance to consumers.
The value added by companies like Cardlytics stems from their ability to decipher true customer spending intentions so that subsequent offers are personalized and contextual. Such solutions help avoid the mistake of offering beauty products to a middle-aged man who purchased Clinique facial cream as a Christmas gift for his wife. Banks do their part in making these targeted offers easily redeemable; card-linked offers are passed directly to a consumer’s payment card, alleviating work on the consumer’s end.
In addition to increased customer engagement, banks have the potential to realize incremental revenue on offers that are merchant-funded while still relevant to the consumer. Such benefits have prompted big names like U.S. Bank and American Express to join BofA in this space. The value propositions of targeted offers are clear but, in such uncharted territory, banks and other FIs are heavily reliant on analytics houses to build context around consumer expenditures.
The utility of big data and analytics does not end with deals. Such assets also play very pertinent roles in creating a holistic view of an individual’s financial health, an increasing need for the general consumer population that has resorted to clunky spreadsheets up until now. Personal financial management (PFM) addresses this need in a digital manner by aggregating card purchases, bill payments and debt behind the scenes to produce insights on consumer behavior and financial stability.
But PFM is a bit more substantive than targeted offers in that consumer-facing software typically accompanies financial insights and that PFM tools are only as valuable as their integration with other digital applications like online bill pay, social media and mobile wallets. As such, the selection of a PFM vendor is of utmost importance, both from a solution interoperability and customer experience perspective.
Most regional and national banks have partnered with a PFM provider but have done a poor job of both integrating the white label solution with existing bank products and marketing it to consumers. Meanwhile, customer-centric neobanks see PFM as a core banking service, placing it at the center of operating models. Traditional banks can start by making it easier for customers to find PFM tools on their website, followed by incorporating them in mobile banking apps.
As alluded to, there is considerable linkage between digital add-ons and existing technology, creating challenges on the bank’s end to achieve interoperability and seamlessness. Consumers expect P2P solutions to be pre-populated with account and other personal information, once initialized. Offers must be accessible through mobile apps, payment cards and social plug-ins so that the user’s only action is a one-time activation of the offer.
Siloed banking organizations with fragmented tech systems have served as barricades to the successful inclusion of digital in bank operating models. And as the digital noise grows louder, now is an opportune time for banks to revisit technology procurement strategies and modify core infrastructure to account for services like P2P pay, targeted offers and PFM, which have the potential to dictate industry leaders in the near future.
Banks can take a page out of PayPal’s book. In its partnership with Discover, the company grew scale at the physical point-of-sale. In acquiring Braintree, the company will expand its reach in mobile payments. Without these strategic relationships, PayPal remains confined to e-commerce with not nearly the operational scope to stay relevant in an increasingly mobile-centric arena for payments. The same holds true for banks and digital; building out tech relationships may be a deciding factor in remaining competitive.