One of the most interesting aspects of the digital banking revolution is that in some ways it is actually taking banking back to its origins.
The concept that links the original bancos in 13th-century Italian piazzas to the cutting-edge developments in today’s Fintech hubs is hyper-personalisation. Using permissioned real-time data to generate insights that are customer-specific, banks can offer
services highly tailored to customers’ needs.
The rise and fall of hyper-personalisation, 13th-century style
The idea is not new. The original banks were a very good example of hyper-personalization in the absence of technology. They had deep customer understanding because many of them served a segment of one: for instance, the Medici family, or the Republic of
They offered unique, personalised financial arrangements and terms. Moreover, they focussed not on selling products but on helping a client achieve a certain unique outcome.
This personalisation was gradually lost, from the Industrial Revolution onwards. As the Industrial Bank arose to meet increased demand, banking became standardized. That meant offering a limited range of standard products to a mass market. Only the wealthiest
continued to receive tailored services.
In the late 20th century, what I call the IT Bank essentially offered the same products as the Industrial Bank, but introduced computers and IT to realise internal efficiencies and increase profit margins. Changes were driven from the inside, arguably with
little real benefit to customers.
In fact, some of the consequences of the IT Bank could be said to have made things worse for customers: centralisation and reduced local presence; in-branch staff with more skills in sales than banking; and the implementation of centralised and rigid ‘computer
says no’ style rules. The IT Bank focussed on efficiencies in the bank and its tech stack; it seemed to forget the customer.
Back to the future: the digital bank and new possibilities in personalisation
Excitingly, the digital revolution is today enabling hyper-personalisation again, and indeed bringing it to the top of the banking agenda. However, this time personalisation will be powered by technology, and delivered at huge scale.
Using digital technologies, a single bank will be able to serve many thousands of individual customers, while still treating each as a segment of one. Banking is coming full circle, but this time far more customers will benefit.
Today’s personalisation imperative
Hyper-personalisation is a key way in which banks can differentiate themselves and thrive in testing financial conditions. As the impact of the 2020-21 pandemic continues to be felt, and with interest rates at record lows, banks can’t just rely on traditional
interest-rate-bearing products. Indeed Deloitte, in its November 2020 report The future of retail banking, goes as
far as saying that for banks hyper-personalisation is now an “imperative”.
The urgency Deloitte expresses stems from several factors. Firstly, customers see this kind of personalised offering everywhere around them - from Netflix recommending programmes to Starbucks creating bespoke offers for every customer with a loyalty card
- and they want the same in financial services. Banking is slow here: in 2018, financial industry strategist and influencer
Jim Marous concluded 94% were unable to deliver on the potential hyper-personalisation offers and it is hard to see how that will have dramatically changed.
Second, there is a clear business case for meeting that demand: Deloitte’s analysis suggests that, “in terms of revenue, the personalisation maturity curve evidences that a firm’s revenue tends to increase after a certain level of hyper-personalisation adoption”.
Thirdly, it is important from a regulatory point of view: governments and regulators now expect that banks play a role in meeting those of society’s financial needs that are not well met by their existing narrow range of products. Personalisation is key
Going hyper-personal with Open Banking
So if they should be going hyper-personal, the question for banks is ‘How?’
The obvious doorway to hyper-personalisation is through Open Banking. Open Banking provides banks with a rich field of new information - especially if customers allow a bank oversight of their complete finances.
This information can be analysed using AI to provide insights into a customer’s very particular circumstances, and then used to offer a bespoke proposition - tailored to that customer in its cost, terms, penalties and bonuses. In the case of big-ticket financial
services, such as mortgages, a relationship manager could be involved in talking through these offerings and making suggestions - a hybrid digital-human model.
In return for making their finances transparent, customers will know that the bank can provide an array of highly personalised services that may well offer a much better deal than an off-the-peg product.
True personalisation through fintech partnerships
This kind of personalisation is only the tip of the iceberg though. Besides personalising their own services, banks should also be considering partnerships with fintechs. The bank then becomes the curator of a marketplace where - through a single entry point
- a customer can be offered highly personalised services from a rich array of fintech providers. They can then choose the one that best enables them to get the outcome they want.
These fintechs will have access to a customer’s financial landscape and can therefore offer products that suit the customer precisely in an area they specialise in. The bank in turn takes a slice of the profit earned by fintech providers.
This might sound like anathema to banks and it may not be as profitable as selling their own services, but crucially for the bank, it keeps customers on its own site. The bank becomes a key portal to a rich array of services, many provided by third parties. Deloitte
research suggests that in terms of valuation, the clear shift is towards what it calls “network orchestrators” being valued more highly than service providers. So there is sound business sense here.
To examine how this might work in practice, if you are a middle-income bank customer, you might be nudged towards a financial proposition from Avant, the Chicago-based online lending platform that aims to lower the costs of and barriers to borrowing for
consumers like you.
If your need is to refinance student borrowing, you might be patched through to a product from San Francisco's SoFi, which is again a specialist here. Doctors could be offered propositions from Panacea Financial which targets and offers special rates to
A tech SMB could be offered Brex corporate credit cards, which offer great benefits on spending on relevant services, from collaboration platforms like Zoom to food delivery. A small firm needing urgent funds might be nudged towards a proposition from OnDeck
- specialist offering funds that often arrive inside a day.
Thriving by putting the customer first
Whether in lending, investing, savings or insurance, it is hard to think of a service banks could not offer this way.
Of course, making the user experience as smooth and consistent as possible will be crucial, whether the bank is providing its own service or one from a partner third-party provider. But developing the front-end and the necessary APIs is significantly easier
than attempting to offer all these services yourself. Moreover banks are in a strong but benevolent bargaining position with fintechs, many of whom still find scale and profitability elusive.
In this way, banks can create an offering that, as with the 13th century Relationship Banks, is firmly about the customer and their outcomes again, rather than merely about pushing products that may not be a neat fit with what the customer actually needs.
Of course, this digital transformation could create efficiencies within the bank, but primarily it’s driven by an outside-in view not an inside-out one: it’s not about the internal product sales target, it’s about what works for me as a customer. By following
this path and going back to the future, banks can thrive in a Netflix world where standardised products alone will not cut it.