Retail banking is facing the deepest level of disruption in decades. Shifting customer needs and a generation of millennials resistant to traditional banking methods are challenging established models. Edwin van Bommel, chief cognitive officer at IPsoft, writes
After years of incremental change, banks need to plan for a fundamental rethink of operations in order to thrive in a rapidly digitised, globalised and data-driven world in which customers expect access to information and resources at all times.
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Although consumer relationships in the retail banking space have never been particularly strong, a recent millennial survey revealed that all four of today’s leading banks are amongst the ten least loved brands by millennial consumers. Today’s generation is dealing with a dearth of jobs and personal debt, which has increased skepticism and has diminished trust between younger customers and retail banks. As a result, today’s hyper-connected consumer associates personal finance with crowdfunding, virtual currencies and online payment apps – rather than paper cheques, bank branches and ATMs.
The emergence of these fintech start-ups is heating up competition across all industries. Against this backdrop, customer loyalty and retention is paramount to success, making it critical for retail banks to reform their business models quickly or risk losing customers and economic value. The largest banks have announced aggressive cost cutting measures that promise to shave 20% of operations but they do so in such a hotly contested market that any sacrifice in quality of customer experience this causes will be heavily penalised by customers who have a fast growing wealth of alternatives.
A further pressure on operational costs is the ability to absorb the demands of mounting compliance regulations; together these competitive pressures represent a significant threat to the status quo. Studies have already revealed that within the five major retail banking businesses (consumer finance, mortgages, SME lending, retail payments and wealth management), up to 40% of revenues, in addition to 20-60% of profits, will be at risk by 2025 – with consumer finance the most vulnerable line of business.
AI Supporting the workforce
The key to transforming the finance industry is reliant upon the successful rise of artificial intelligence (AI) and cognitive computing. More and more financial firms are turning to machines to do the job humans have done for decades. In fact, there has been an increase of more than 400 million people using intelligent digital assistants in last five years alone.
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By GlobalDataThis trend of humans and machines increasingly working side by side is rippling through organisations. Intelligent automation is not a quest to replace people in the workforce. Instead, it is more about changing the way businesses operate by complementing and augmenting human capabilities with intelligent machines and software.
The McKinsey Global Institute estimates that the economic impact of the automation of knowledge work will reach $6.7trn annually by 2025. AI will provide a catalyst for operational change that has the potential to unleash unprecedented growth for legacy industries, like banking. AI will make it possible to automate vast proportions of knowledge work, managing data at record speeds and capacities while harnessing the same information for invaluable insights. Moreover, new cognitive-based solutions will also enable a more pro-active and personal customer experience. This is driven by their ability to build knowledge at high speed, understand natural language, and run operational processes in a fully compliant fashion.
With new capabilities that can optimise value rapidly, banks have a fighting chance to both compete and team with FinTech entrants and disruptors that have quickly gained mass appeal amongst customers of all demographics, regional markets and socioeconomic groups.
Retail banks that harness cognitive technology will gain the advantage of faster digitisation and provide customers with cross-channel, targeted, on-time products and services.
Winning Customer Loyalty in the Age of Agile Startups
AI will only be impactful if customers are willing to engage with it and that means understanding how to leverage AI to meet changing customer preferences. Banks can learn from FinTech companies who are growing fast in popularity by addressing these squarely. Analysing successful FinTech initiatives shows that above all customers want (1) cross-platform, (2) straight-through response 24×7, (3) easy to use and (4) low cost. Banks need to follow this example in order to protect their profits, 60 per cent of which are under attack from FinTech players according to McKinsey & Company.
The advent of the internet has created the most educated generations of financial services customers in history. These ‘Millennial’ customers have access to constant comparison information and visibility of alternative financial solutions which have seized considerable market share from more traditional financial institutions. Winning the trust and loyalty of millennials, however, is becoming more and more difficult, as increased competition has made it harder for retail banks to differentiate based on pricing or offerings alone. Customers around the world have reported increased likelihood to leave, with 52.7% of millennial customers likely to switch their banks by 2016.
Accessible anywhere at any time is the starting point. Customers can open a bank account in minutes with Bank Simple or get immediate confirmation of a loan through Lending Club. Both these services offer the same simple straight-through process that consumers have come to expect through other services such as opening a Gmail account. The price point of FinTech offerings is typically lower than that of traditional banks too.
FinTech companies have generated fanfare for introducing a stream of updated products and services that improve quality-of-life and feature innovative experiences and designs. In 2014, an astounding 73% of millennials stated they would rather handle their financial services needs with Google, Amazon, Apple, PayPal or Square than with their own nationwide bank.
Seizing the Competitive Advantage
AI technologies have matured and are ready to implement now. They offer the biggest opportunity in decades to establish new operational models. Many of the reactive service elements can be automated at a fraction of the cost, removing a large part of the volume of incoming requests, doing data entry and manual risk controls. In the back office, robotic process automation (RPA) is already being used to populate data entry and increasing processing speeds for all elements containing structured data. Together with other technologies and policies, this will lead to a radical slimming down of back-offices organisations within the next five years.
Insights from analytics engines will identify gaps in current personal finance offerings, uncovering opportunities and advantages that can be seamlessly provided to customers ahead of non-bank competitors. For instance, solutions like Watson or Sentient Technologies can analyse huge amounts of structured and unstructured data deliver recommendations to advisors or traders. These solutions will enable banks to make important decisions in real-time.
For example, they will support instant credit decisions or cross-sell suggestions. Smaller start-ups like Narrative Science enable banks to turn complex analytics into simple stories people can understand and act on. In addition, machine learning tools like R are boosting the effectiveness of marketing related analytics by enabling strategies on ‘next product to buy’, churn prevention and micro-pricing.
Cognitive agents, such as Amelia, can capitalise on these insights and provide personalised, informative services at scale making it possible to provide innovative high-quality services at low-cost. With customer patience becoming ever shorter always available service will become a necessity in order to maintain customer loyalty. In the US alone research shows that more than half of consumers will hang up after waiting on hold for 6-15 minutes while 25% will cut out of the call within the first 5 minutes of waiting . More-over, cognitive agents will make it easier for customers to access their bank as they are ‘always-on’ and will never have a ‘bad day’.
Cognitive agents integrated in mobile apps and websites, are beating the convenience of the current generation of apps and websites. For example, a customer who has just lost his debit card can immediately start a chat with the cognitive agent to explain succinctly what has happened and have the issue resolved without delay.
By contrast, existing apps would oblige the customer to search and select right menu option and follow a much slower and rigid process, which might well not satisfy all the specifics of that customer’s situation. Because the cognitive agent can answer questions in the same way as a human, the process is much more efficient for the customer. This hybrid workforce that combines skilled employees and AI ‘cognitive agents’ equates to a more agile workforce that rapidly address tasks and problems across all digital channels in real-time.
So what is the result of tying cognitive and other AI developments together? It will be the emergence of a fully automated bank that can provide personalised service at scale. Clients will be interacting in natural language with the bank’s cognitive agents that are stand-by 24/7 on their mobile. Real-time intelligence systems and automated back-offices will enable the cognitive agent to take educated decisions (e.g., on credit) and execute processes in a compliant way.
The bank’s financial backbone will be managed in a pro-active fashion as the underlying machines in the bank will exchange data and will accurately predict upcoming events.
By pairing the existing strengths of traditional retail banking with cognitive technology, banks can launch first-of-a-kind services at a speed and cost unmatched by today’s current set of services. For instance, retail banks will have the capacity to provide free financial advisors to younger customers who may need guidance but would normally be unable to afford personal support. Now, more than ever with a growing number of competitors, it’s important for banks to keep customer at the centre of their strategy. As banks construct their digital future, they have an opportunity not only to revolutionise the efficiency of their operations, but to deliver an entirely new level of AI-enabled superior customer service.
