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Its time to put innovation before transformation

In my last post Banking where customers don't see it, I highlighted how seamless digital experiences are helping to acquire customers in innovative ways. In that article some examples quoted were:

  • Online shopping portals created by many large banks such a Citi
  • Robo advising investment models
  • Keep the change programs (earn and invest the spare change from your transactions) such as from BoFA and Clink

The latest trends seem to be reinforcing this thought process:

  • We've seen an announcement by PayPal to invest $30MM in Acorns, an app that allows users to move their spare change from credit and debit transactions into an ETF portfolio. 
  • There is also a similar app in Europe called Clink
  • PayPal also recently acquired Venmo which is a P2P payments company (ever felt the need to split a lunch payment with friends?).
  • In addition, Ally bank recently announced a new feature called Splurge Alert, that tracks / maintains locations where you tend to overspend, and then takes various actions like notifying friednds etc.
  • Citi recently started making the FICO score available to customers more generally, in addition to showing more details of the reward dollars and how they were earned.

Very interesting and innovative concepts! Traditionally these kinds of feature enhancements were evaluated in light of the "business case" they served. And more often than not, these ideas failed the criteria and never made the cut for investments. That's because while these created a buzz, it was difficult to attribute higher spending or greater loyalty to these feature additions. Till only a few years ago, digital and mobile were still only just catching up. In addition, these features were not considered part to the core business priorities. That's exactly why solutions like PayPal were not considered a threat but another channel to grow through.

But times have changed. As I pointed out in my American Banker article on APIs, the ecosystem is more open now. The big change from 5 years ago is that today there are way too many digital entrants making these same "feature enhancements" as their core business model. And traditional players need to take action to avoid the continuous chipping away of their customer account base. It's a slow battle to win customer engagement in the long run.

What advantages do banks have:

1. Better value to provide: At  least for the short term, traditional players can play the same game with much lower costs to customers because they don't have to act as middlemen. Vanguard launched their digital advising model, as did Charles Schwabb. Both are seeing tremendous success. And banks don't have to charge "monthly fees" to provide digital services like "Smart Bill Pay", "Invest Your Change", "Smart Checking Accounts", and "Offers For your Holiday Wish List".

2. An existing customer base: Incumbents don't have to acquire new customers. They already have the customer base to engage and excite. But only so long as they evolve their internal processes to ensure they don't engage in dinosaur practices. For example, when I look at my Bank's Bill Pay screen to check new bills and pay them, my bank has a link right in front of me (ahead of all the other much more important preferences) that asks if I want to cancel my Online Bill Pay account. And if I do, everything will be deleted etc etc. I'm sure there are much better ways to achieve the same compliance objective in 2016! It shows me how legal ruled the project's digital experience development. And it shouldn't be that way.

What advantages do new entrants have:

1. Fantastic time to market: Unburdened by legacy and bureaucracy, the new players (or fintechs) can bring these innovations to market much quicker. They don't have old business models to protect, or long development cycles. Their eyes are fixed on the prize. And their objectives are to take a couple of simple use cases and focus on them. Online investing units are criticised for their simplistic ETF portfolios, but they don't need to make it any more complex to meet the latent market need - the need to help people invest. There's enough time to evolve and grow into more comprehensive business models. 

2. A customer base hungry for new options: Even though the cost of these new offerings may be higher than alternate options, they are low enough to attract customers to try these out. These are long standing pain areas which need a resolution. For example, it is well known that people need to get started early with investing for the future. And both Clink and Acorns help customers accomplish that for a cost that is only slightly higher than alternative mechanisms. And online investing and lending firms make access to capital much easier. As time progresses, there is no doubt that the market will continue to expand, and these players will in turn become legacy too.

The key takeway:

The most important conclusion is that banks need to innovate much more rapidly to expand their digital customer experience capabilities. As I pointed out in my BAI article titled Think Simple for Digital Transformation, the business value must not be evaluated in isolation, but as a sum of these innovations. The presence of legacy technology and processes can no longer be an excuse. There are plenty of ways to work around them, and innovate rapidly. And as all this happens, customers will be the ultimate winner. Our job is cut-out and simple: help them win!




Comments: (2)

Michael Thomas
Michael Thomas - Financial Services - London 22 April, 2016, 08:20Be the first to give this comment the thumbs up 0 likes

There a lot to commend in this article, however, transformation has to work hand in glove with innovation.  They cannot be seen as mutually exclusive. What was once 'innovation' is today's legacy.  There have been many examples of legacy systems directly impacting operations to customers for days on end leading to significant reputational damage (to an already damaged sector).

Digital needs an on-line, real-time banking experience and this is where the heavy-lift, mission critical systems fall short.  Major payments processors especially in Europe still cannot settle in real-time meaning that the periphery digital examples cited are the best we can hope for as an experience for now.

ACH does provide a glimpse of an alternative, however, a lack of standards is hindering progress and again, will take a few years to iron out the wrinkles there.  Additionally, many ACH processors are also 'legacy' but they are 'real-time'.

A Finextra member
A Finextra member 22 April, 2016, 10:35Be the first to give this comment the thumbs up 0 likes

Thanks Michael. Completely agree that transformation and innovation need to move together. I was just trying to make the point that we can't wait for those multi-year transformations and complex capability projects because the pace of change is too rapid. We have to keep up with the buzz. It's also a PR thing at one level?


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