How banks can turn the tide of customer defection
Rising investor and customer confidence in alternative financial services business models are brewing threat to traditional retail banks and are gradually taking centre stage in Nigeria.
Some of these alternative financial services are luring potential customers with mouth-watering services devoid of penalties and fees; some of them say that customers can automate their savings and earn up to 15 per cent interest on money saved every year. The alternative platforms are comprised chiefly of fintech startups.
“What good is your saved up cash that cannot work for you?” querried one of the alternative financial services. “Your savings on the platform will start earning interests from the word go. You earn as much as 2.5 times what your bank can give you. Not only because you deserve it, but also because we have done the Maths for you.”
And these alternatives appear to be able to do this because of obvious reasons.
Compared to banks, startups and tech companies are less encumbered by legacy IT systems and regulations, which enables them to offer better financial solutions and make it easy for people to find them. Now more and more consumers are defecting from traditional financial institutions.
Bain & Company (Bain), a foremost global strategy consulting firm, surveyed 83,000 consumers in 22 countries between July and November 2014. The firm found that more than 33 per cent of the respondents (27 per cent in the U.S.) bought a banking product from their primary bank’s competitors in the previous year.
A survey carried out by BusinessDay indicated presently, over 30 per cent of the middle class prefer their money in alternative financial instruments. The respondents cited low interest rates, high charges and poor services as their reasons for their waning patronage of the banks.
These are obviously missed opportunities and as Bain noted, these opportunities go unnoticed because banks usually don’t know their customers were shopping for a particular product in the first place or that they lost the sale.
Banks that fail to respond to this threat risk getting saddled with the bulk of low-margin accounts while nonbank providers capture high-margin products like credit cards and mortgages.
According to experts, the banking industry has acknowledged the emergence of blockchain and its threat to their operations. Blockchain technology disrupts the bank’s centralized nature and engenders transparency in its transactions without the need for a middle man or a physical operational system. Many of the world’s poorest lack access to savings because of rural marginalisation or cost of infrastructure.
With the digital revolution, more poor adults in sub-Saharan Africa are increasingly gaining access to the internet. 6 in every ten adults have access to the cyberspace. The implication of this is that cryptocurrencies can undo banks inadequacies.
The products and services that the traditional bank offers demand a lot of physical presence and documentation, which the blockchain provides alternatives. Blockchain, for instance, offers a more efficient and stress-free lending system by analysing spending and loan access, in contrast with the traditional bank procedures that emphasise collateral and payback means.
Mobile technology has the potential to either exacerbate or mitigate the problem for banks. It’s clear that the mobile channel has become a key element in the bid to earn customers’ loyalty. Increased loyalty, in turn, pays off with customers buying more products and making more referrals, which allows a bank to capture more than its fair share of new sales.
Mobile has become the most-used banking channel in 13 of 22 countries, including the U.S., the Bain survey found. Smartphones and tablets account for around 30% of all banking interactions worldwide and 35% in the U.S. The share of U.S. customers using mobile apps rose by a stunning 14 percentage points in the past year to 43%, with strong increases across all age groups.
Until recently, consumers layered mobile onto other ways of interacting with their bank—for example, they might check their balance more often, but they weren’t reducing other interactions.
In 2014, a Bain survey found a substantial decline in the usage of branches, ATMs, and online banking options, with a 6 percentage point drop in online routine interactions in the U.S.
Deploying apps to make it easy for customers to connect to the right bank resources and employees as they shop—and preapprove them for the best offer—could substantially raise the odds of winning the sale for banks.
BusinessDay found, however, found that banks in some regions of the world have already moved ahead of banks in other regions in the mobile realm. Singapore’s OCBC, for instance, now has a three-step process for opening a new account on a mobile app in under 10 minutes, using image capture of an identification card and on-screen signature.
Mobile does not completely replace other channels, of course. About 62% of U.S. regional and national bank customers surveyed by Bain used a combination of digital and physical channels to do their banking—what we call “omnichannel” behavior. Customers expect to be able to hop from one channel to another.
In fact, omnichannel customers gave their bank higher loyalty scores than those who rely only on the branch or on digital channels. The payoff is higher product ownership. Omnichannel customers held an average of 0.5 more product with their primary bank than digital-only customers, and 0.7 more than branch-only customers.
Building innovative customer service options that fuse the best of banks’ physical assets with digital tools and processes present a challenge. Most banks have products and channels that operate in silos, and processes that require extensive signoff from compliance, legal, finance, operations, marketing and other departments to make any change. There are 50 people who can say no to a particular idea, versus just one who can say yes.
Banks will need to redesign their operating model in order to be successful in the mobile realm. In pursuit of this goal, they should take a cue from leading retailers and alternative platforms.
Some Nigerian banks are already doing this. Others are not, but need to brace up or risk extinction.