The retail banking industry today is undergoing change at levels not seen heretofore. There are two primary drivers of this change: demographics and technology.
There are 83 million millennials, people born after 1980, who came of age around the millennium. This makes millennials the largest demographic today at about 5 million more than the baby boomers. Today millennials represent roughly 36% of the US workforce and will become more than 50% in six years’ time. One of the distinguishing attributes of this generation is their rapid ability to adopt new models of interaction and in many circumstances, disrupt the status quo if it brings about a desired result. Think Uber and how quickly it is changing the taxi industry or how Pandora with its 175M users is changing the music download paradigm to one of streaming.
A core factor driving these millennial behaviors is the convergence of 5 key technology trends: mobility, location based services, big data and analytics, cloud and social. These trends are well known but also supported by the proliferation of smart phones which enable these trends to become mainstream. In the US today, according to a recent Nielsen study, smartphones represent 64% of all phones.
Digital Disruption causing a shifting landscape in Financial Services
In financial services, these technologies and demographic trends are allowing for transformative new services to be created by both established banking players as well as new non-banking entrants. It is effectively lowering the investment bar required for firms to achieve capability, brand awareness and the ability to reach potential customers with highly differentiated services that are made easily available.
Several studies have shown that millennials do not have similar views of brand loyalty or resistance to switching providers. According to a Think Finance Study, 45% are using alternate non-bank providers for traditional banking services for activities such as prepaid debit card, money transfer service, check cashing and payday loans. And 1/3 of Millennials are open to switching banks and over 50% don’t see their bank offer anything different than other banks according to a Viacom Scratch study.
So millennials are showing higher adoption of digital engagement, lower brand loyalty and a willingness to try alternate providers if the experience and price is right. This digital disruption is resulting in business models changing and traditional banks losing business to technology focused vendors and other new entrants. We are seeing many signs of disruption happening around us as new entrants are encroaching:
- Digital Banking startup Simple Bank, before being just recently acquired Spanish bank BBVA was processing over $1B in transaction in its first year. You can only open and account and transact online.
- Square, the mobile payments company that is transforming retailing went from $1B in payments 2011 to $30B in 2014. Square charges a fee of 2.75% on every credit card transaction and provides an alternative to the traditional card companies.
- Dwolla is a digital payments startup that will process more than $1B in transactions this year. Dwolla’s charges a flat fee of $0.25 per transaction over $10 instead of a percentage versus traditional credit card payment systems charge up to 3.5% of the total transaction amount.
- The two largest P2P lending companies, The Lending Cub and Prosper, have processed over $2B in loans. Kiplinger rated another Prosper, as one of the best ways to earn interest in 2013. Big banks and institutional investors have recently begun doing business with P2P lenders, with Citigroup, Union Bank, Capital One, Bank of Montreal and Deutsche Bank all buying up loans originated through these platforms.
Banks should be very worried as the percentage ownership of complex banking products that create deeper relationships continues to erode rapidly. Accenture’s 2020 Banking study found that more than 53% of the survey respondents chose a provider other than their primary bank for credit cards, 60% go elsewhere for home mortgages, 68% use other providers for auto loans, and 82% do so for brokerage.
Changing end user experience and engagement model
There is a battle going on for control of the end user experience and customer engagement model. Banks though have an opportunity to take the higher ground as an Ovum study showed consumers have the most confidence in banks (43%) to provide security in handling mobile banking and payments. This position may be short lived as entrants such as Amazon and Apple which have high consumer confidence ratings around security continue to prowl around the perimeter of traditional banking.
There is an opportunity for banks to maintain a leadership position by moving more aggressively to leverage smartphone device’s unique characteristics and combine that with big data and social to drive significantly new consumer experiences. Banks have an opportunity to move upstream in buying experiences, to simplify and connect the end to end buying experience of a consumer. Consider the home buying experience. This is an area that has seen major encroachment by non-banking players. A mortgage is a massive, potentially 30 year opportunity to have a deep relationship with a customer. Banks have traditionally sat at the back end of the home buying processing as a transaction provider of mortgages. Recently, Chase has provided a mobile application that allows customers and non-customers to better manage their experience, by providing capabilities for home search, allowing them to rate and compare, take and store photos and videos, see neighborhood information, keep a journal and off course calculate mortgage payments. This is an excellent example of a bank expanding well beyond the traditional model to engage with and ideally win new customers.
A next wave of innovation will be around mobile shopping and payments. There is an opportunity to transform the buying experience through mobile by being able to provide location based marketing and offer specific coupons that recognize when you are in the store and more importantly what your buying history while accelerating a secure and convenient mobile checkout. One aspect is to use big data to deliver the right personalized coupon for products that you would be interested in. The second is to provide you incentives to use your bank credit/debit card for payment. An application that can manage your retailer as well as banking and card loyalty rewards programs and intelligently help you figure out which is the best payment option will be one that keeps customer mindshare and acquires new customers.
Millennial attitudes towards banking and digital disruption are changing the landscape in financial services. At stake is who will control and manage the customer experience in a digital world. Banks have an opportunity to leverage their unique position to extend out from their traditional transaction oriented relationships. Time will tell if they seize the opportunity.
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