How Banks Can Leverage Trust to Compete with Fintechs
- Seshika Fernando
- Vice President - Banking and Financial Services - WSO2
When I was young, my grandmother would take me to our small-town bank. The teller would give me a piece of candy and deposit the handful of coins my grandmother had given me, confirming the transaction by typing it up in my savings passbook. I mention this not for the sake of nostalgia, but rather to point out that banking customer interactions have not really changed very much in these intervening decades. The passbook is gone, but not the simple trust-based service model and the limited customer experience (CX) mindset that went along with it: you trust us with your money. We don’t have to do anything else.
Banks, which had a monopoly on deposits and lending for centuries, have increasingly found themselves over the past few years in competition from fintech firms that are luring business away, mostly by delivering a better CX. It’s a serious challenge for banks. We found that some banks are coming to grips with the situation and responding with confidence. Their confidence in working toward better CX arises from several powerful advantages traditional financial institutions have long enjoyed, including a history of trust. When banks use application programming interfaces (APIs) to leverage their trust in CX, they can do so without being slowed down by legacy technologies.
The Great Disruption
While fintech (including digital/challenger banks) may feel less challenged by digital native customers, this is not an easy time for most traditional banks. Fintech firms, many of which are entirely virtual, offer customers an engaging experience, new products, and services on mobile devices. They are also able to renew these experiences and reinvent them at a faster pace. Research reveals an industry in flux, with the potential for banks that move too slowly to be on the losing side of the transition to digital finances. The most recent Worldwide Banking Report from Capgemini and the Efma banking organization found that three-quarters of banking customers surveyed are attracted to fintechs’ fast, low-cost, easy-to-use products and experiences.
52% of respondents said their current banking relationships were not rewarding and were not emotionally connected to their banks, stating that banking “was not fun.” They probably never got a piece of candy from a teller.
The banks are aware of this problem. A report from PricewaterhouseCoopers found only 53% of bank executives feel their industry is consumer-centric. In contrast, 80% of fintech executives consider their businesses to be customer-focused.
Why are Some Banks Struggling?
In theory, banks should not be struggling with competition from fintech. Established banks are far larger than most fintech firms and have been in business for longer. In practice, fintech firms are poaching their customers, especially younger ones. Why is this happening?
Several factors come into play when trying to explain banks’ competitive dilemma. For one thing, banks have not emphasized customer experience until fairly recently. The introduction of ATMs and relationship managers, for example, only dates back to the 1980s. Before that, banks mostly felt it was enough to keep your money safe, pay you interest on your deposits, and extend loans. This was a valuable, unique service that customers appreciated. They had few, if any, alternatives.
Fintechs are successfully competing against banks, partly because they offer added convenience. For example, a fintech app might enable you to get an advance on your paycheck by pressing a few buttons on your phone. The same app might enable you to pay rent or add money into your investment account by touching another couple of buttons.
Fintechs also tend to offer more visibility, transparency, better advice, and useful outputs. They may help consumers with financial literacy and provide a big picture overview of their financial situations. Fintechs also provide more personalized services. They can work with niche or underserved customer segments more easily than banks. The people in those communities probably have smartphones but may not live near a bank branch—if they even feel comfortable going into one.
Trust, the Banks’ Secret Weapon, is Starting to Fail Them
Traditionally, banks have not offered such rich services and CX value. However, they should enjoy a huge advantage over disruptive newcomers. Banks offer trust. Their brand names embody trust. You can trust them with your money. Banks are well-regulated and licensed by the government. Your deposits are insured. And banks offer simple but compelling trust-based CX: If you have an issue, you can walk in and speak to an employee or call them up.
The problem is fintech customers trust their digital financial service providers. Fintechs have succeeded in building ‘trust’ through better financial literacy and providing more control to consumers in better managing their own finances. The younger the fintech customer, the stronger the trust between the fintech and its customer. These are big problems for banks. The banks’ one-person-at-a-time live engagement, which historically worked so well in building trust, cannot scale.
What’s Needed: New, Better CX for Banking Customers
Banks need to enable great CX to compete with fintech. They must provide the flexibility, financial literacy, products and services, and intuitive convenience that their digital competitors have brought into the marketplace. With a strong CX, banks can also reassert the competitive position they have long enjoyed. This is easier said than done, though far from impossible.
Why Delivering CX can be so Difficult for a Bank
Generally, banks do not have a problem recognizing where they are deficient in the CX department. Where they have difficulty is in realizing their CX objectives. There are many reasons for this, including that banks almost always serve customers from multiple generations and demographics. What’s totally natural for a millennial fintech app user may be anything but intuitive for their parents (though this may have changed permanently during the pandemic.) In addition, for understandable, practical reasons, a bank will usually have one app for all customers and use cases. This app will inevitably lack the feature depth of competing fintech offerings. A single app or web interface simply cannot cater to all these varying requirements.
The back-end is problematic, too. Banks are almost always hampered by rigid legacy technology. Even if they want to offer new features to customers, the process of connecting older software to user-friendly front-end interfaces is challenging and time-consuming. The Capgemini/Efma report bears this out, with 95% of banking executives saying legacy systems and outdated core banking modules inhibited their efforts to optimize data- and customer-centric growth strategies. These systemic difficulties, coupled with siloed data, also made it hard for banks to analyze data to determine what their customers even wanted.
The same obstacles that make legacy technology a barrier to great banking CX also block easy connectivity with third parties, a core element of fintech success. A bank might want to link their app with a paycheck advance service, but doing so in a fast, economical way has long been a big challenge. This is starting to change, however.
APIs and the Opportunity for Great Banking CX
APIs give banks a path to CX that will enable them to deliver seamless CX that can compete with fintech. They do this in part by connecting the dots between applications and information silos. With API connections, bank systems and third parties can exchange information in standardized formats. For example, an e-signature tool can appear naturally in the bank app. This is invisible to the end-user, who may have no idea that they are accessing an external service provider.
API integrations improve CX by enabling the bank to implement customer-facing workflows. The customer can be guided through processes that take them across multiple applications, some of which may be outside the bank—but all of which appear in the same user interface. The API-driven workflow can automatically pull relevant information from other systems as needed.
Putting APIs to work in workflows can also cut down on handoffs between departments at the bank. These handoffs, long a mainstay of customer interaction with the bank, don’t make for good CX. With fewer handoffs, there are also fewer opportunities for errors and confusion on the part of the customer.
A further benefit of APIs is the potential to align multiple departments at the bank with a single source of customer information. If a customer is listed as John F Smith in one database at the bank and John F. Smith in another, that tiny discrepancy can cause headaches for everyone dealing with John F. Smith, as well as John F Smith himself. APIs can make this problem go away.
With APIs, banks can personalize customer experiences, too. For instance, an API can automatically look up information about a customer as they start to engage with a banking system. Based on the customer’s profile, the banking system can adapt and present the most relevant information to the customer. For example, a customer with good credit may be offered a credit card automatically. Or, a customer who owns a home might be offered a home equity loan, and so forth. This capability lends itself to new applications of Artificial Intelligence (AI) and Machine Learning (ML), which make possible entirely novel and competitive modes of CX.
API integrations help to future-proof business processes. With APIs, the bank can be agile, constantly updating internal application integrations that drive better CX as market conditions and customer expectations evolve. This includes the ability to move quickly in establishing new partnerships and channels that connect with the customer. APIs facilitate the entry of a bank into new markets.
This is not the easiest time for banks. They are facing competition in ways they never had to deal with before. However, with the smart use of APIs, banks can once again leverage their trust-based brands to build compelling new customer experiences. If banks can match fintech for CX and functionality, their superior trust reputations should enable them to compete effectively against fintech disruptors.
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