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The Tug of War Between Traditional and Challenger Banks Continues

With banks and their customers being forced to shift a majority of their activity online as a result of COVID-19, it is only logical that the digital banking experience should get more focus. Now, the race is on between financial institutions to get it right as those who sprint ahead of their peers will be able to use their superior banking experience as a competitive advantage.

A good place for banks to start is to focus on delivering increased omni-channel capabilities across services such as onboarding, KYC, loan origination, and customer service. If banks get it right, then there is no reason why their customers will not stick with them. However, if they get the digital experience wrong, banks could see a gradual increase in the number of customers leaving them for another provider.

For traditional banks this isn’t a new concern. Even before COVID-19, these organisations were wary of the challengers snapping at their heels, many of which were delivering an outstanding service online. But what the pandemic has presented is an opportunity for traditional banks to claw back the customers who value the safety of a well-known brand during a crisis. Even though all banks are regulated in the same way, there is no denying the psychology of knowing that you are banking with a reliable pair of hands, when other aspects of life are in chaos. This ‘flight to safety’ was a feature of the last financial crisis.

Banks must also concentrate more of their efforts on improving their service offering. Currently, interest rates are at a record low, which has created a situation where challengers cannot compete with regards to savings and lending. What’s more, transactions are down as consumers and businesses are restricted in terms of where and how they can spend their money. This is another area where challengers are taking a hit. This means that challenger banks, in particular are facing a problem with a lack of product price differentiation, meaning it is difficult for them to stand out unless they can offer a wider variety of products.

Given their currently limited offering, the only way challengers will be able to make headway on services is by partnering with other organisations, for example Starling Bank linking up with Habito. This relationship allows customers to manage their mortgage’s investigation and approval process with an approved mortgage provider using a digital broker through the Starling app. If they don’t adopt this or similar strategies, there is no way for them to gain the majority of a customer’s banking. Instead they are left with the current or savings account, which are increasingly easy to move, to entice people to step away from the longstanding banks.

Before banks do attempt to push their services more aggressively, they must also consider how best to do so. By taking advantage of dynamically personalised customer engagement they will be able to refocus new customer outreach and sales promotions on differentiated customer needs with a personalised, empathetic approach which is more likely to strike the right tone.

Lastly, financial institutions must learn to support distributed operations and come to terms with the fact that this way of functioning is not disappearing anytime soon. Right now, they are continuing to struggle with having a majority of their employees working from home. Specific pain points include the inability to quickly re-prioritise and re-allocate work. In addition, banking policies are not systemically automated, so for new members of staff that have been brought on to cope with the spike in customer service requirements, it is difficult for these individuals to be effective as they simply don’t have the knowledge to hit the ground running. In the future, banks must utilise technology more to support remote teams, to give them the power to seamlessly reallocate work and resources based on changing demands, and increase the pace of team proficiency.

We’ve also seen the importance of flexibility during the COVID-19 pandemic, so banks also need to be able to harness tools that facilitate the reprioritisation of work based on changing market conditions and volumes. This is particularly pertinent given the findings of The World Bank’s recent Pandemic, Recession: The Global Economy in Crisis report which reinforced the view that the likely prolonged recession will negatively affect domestic financial sectors and heighten the risk of financial instability.

We cannot pretend that the future looks rosy. In the coming months, banks face some difficult choices and long-term negative impacts on their returns which could last for years. Of course, this will restrict their operations, yet at the same time this environment will reveal opportunities for the traditional banks to snap up emerging players, take back a lead in the market or at least grant them some willing partners so they can stay afloat.

If banks can tick the boxes of not just an omni-channel offering but a channel-less one, where customers and staff can move between channels easier, as well as a greater variety of services, all while supporting the newly distributed workforce, they will be able to provide the most frictionless end-to-end customer journey possible. However, they need to act now, or their competitors will leave them in the dust.   

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