There has never been a better time to be a banking consumer, with banks new and old striving to optimise the customer experience. FIS’s Marianne Brown asks if established banks can meet the challenge posed by innovative new entrants
It is something of a truism that incumbent banks are facing a huge challenge from digital-first startups. The trend is well understood: smaller, more agile and innovative challenger brands are offering customers alternative financial service models, based on digital technology, that are more convenient and customer-centric than legacy banking services.
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The concern for established banks worldwide is that the new market entrants offer higher levels of customer satisfaction at a lower cost, and will thereby win significant market share. The race is, therefore, on across the banking industry to develop new, customer-centric services that can compete with the best the technology startups can offer.
So, how is the industry doing? This year’s edition of the annual FIS Performance Against Customer Expectations (PACE) report provides some clues, indicating that a small but significant gap is opening up between the world’s top 50 banks, established for many years, and the newer, direct challenger brands, which are delivering additional services that are translating into higher satisfaction scores.
Overall, 76% of digital-first direct bank customers say they are ‘very satisfied’ with their banking relationships – a whole seven points higher than the figure for those who banked with one of the top 50. In the UK, the research shows that challenger banks are outperforming incumbents in nearly every satisfaction metric. This is a concern for established banks, which are losing out to companies with little or no history of reliability.
The figures would be less concerning if only a handful of customers are experimenting with alternative banks and services. However, our research reveals a strong appetite among UK consumers to try new financial services and banking models. In fact, 66% of respondents to the PACE report said they use alternative financial services – from payday loans to peerto- peer lending. Clearly, where consumers feel incumbent banks are not meeting their needs, they are happy to look elsewhere.
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By GlobalDataAdditionally, it is not only what services banks offer but how they offer them that matters to today’s customers. Consumers have grown used to highly convenient, omnichannel, Amazon-like customer experiences, and expect banks to offer the same. Customer satisfaction is increasingly connected to intuitive and convenient digital channels designed around the consumer’s preferences. This trend is born out in the PACE research, which found that for senior Millennials and Generation-X (27-52 years old), ‘digital selfservice’ is the most important factor when evaluating banking relationships.
These fast-changing consumer preferences present a clear advantage for the digital-first challengers that have entered the market. Unshackled by inflexible core systems, the speed at which they are able to adapt and even shape consumer preferences is substantial.
Enter Open Banking
The Open Banking agenda is making the customer satisfaction imperative particularly pressing for incumbent banks. More and more, banks are being pressured to release their grip on customers – and their data. Through regulations such as PSD2, which forces banks to provide third-party payments providers access to customer account data – providing the customer has given permission – incumbent banks are losing an important competitive advantage.
Pressure on banks in the UK to provide convenient customer experiences and services across all channels will therefore continue to mount. Consumers are starting to expect more from providers, and this will only accelerate as Open Banking continues and new services are launched.
In this new framework, banks must work with trusted technology partners to quickly fill the gaps in their solutions. To do so at the pace challenger banks are capable of, they must first complete long-avoided digital transformations to ensure they can effectively serve customers. Ironically, Open Banking provides the most agile approach for banks to add the digital capabilities that customers desire, at the speed at which those desires change, all without compromising security.
Indeed, security is key, and offers incumbent banks a source of differentiation. In our research, trust was overall the most valued factor in banking relationships and – importantly – most consumers are happy with their banks’ security. There is, therefore, a real opportunity for established banks to leverage favourable views of their security and privacy protocols and engage with the right technology partners to expand the use of, and loyalty to, their services. Customers want convenient, digital services, but they want these to be safe and secure too.
Our research reveals an industry poised on a critical inflection point. Challenger banks are outperforming on the critically important metric of customer satisfaction, and stand to win market share as a result. Meanwhile, Open Banking threatens to accelerate disruption and increase the range of competitive, customer-centric services.
However, all is far from lost. The customer satisfaction gap is relatively small, and can be bridged. By turning Open Banking to their advantage and accelerating digital transformations, incumbent banks will be able to offer highly competitive customer experiences that will increase satisfaction and loyalty.
They can also leverage established reputations for trust and reliability to offer something startups cannot: peace of mind. With lots of disruption and modernisation developments set to revolutionise the industry, one thing is certain: consumers are entering what will be a golden age of banking service excellence.
