Banks are having a collective epiphany:  the traditional role they play in their customers’ lives, which has been historically relegated to the “back-office,” must change. To remain competitive in this digital-first era, financial institutions need to shift their role and deploy offerings that position them as more central and essential to consumers’ daily lives.  

Ever since 2008’s financial crisis, banks have worked hard to rebuild capital to win back regulators’ trust and to create operational efficiencies. But this rebuilding came at a cost to innovation. As McKinsey notes in their 2021 Global Banking Annual Review, since 2008, most retail banks have became “safer” while their offerings became more commoditized.

In addition to traditional competition from other banks and companies like PayPal, banks are facing a sea change in their competitive set from an increasingly fragmented group of digital-only “challenger” banks and "Buy Now, Pay Later" providers. Hundreds of digital banks now exist, all with the goal of capturing market share from existing financial institutions. 

Commoditization, plus digital acceleration hastened by the pandemic, resulted in nimble digital start-ups differentiating their offerings and capitalizing on technology to add value and draw customers from traditional FIs. PwC notes that digital banks now make up 20% of all primary banking relationships in the U.S., up from 10% in 2019.

Banks must future-proof to compete, win and keep customers

Traditional banks need to fight fire with fire and borrow a move that the digital banks employ to stay competitive. That is, offering services and products that seamlessly complement a customers’ daily life, and establish the bank as more of a “life partner” that assists customers with financial wellness across multiple facets. In this way, banks can increase the value they add, and stave off threats from the challenger banks. As McKinsey’s report said, “In a future-proof business model, the customer, not the product, is the focus.” 

The nimble challengers get this: they don’t simply view customers as people looking for a place to store their money and visit every once in a while to pay bills or check a balance. Instead, these digital challengers introduce specific features, and even whole products, geared to specific audiences and solving for their specific needs. They are proactively helping their target segments be more active in how they spend and manage their money - embedding themselves in the customers’ daily lives, rather than being strictly transactional. 

Greenlight Financial is a good example of a company which is serving customers’ needs beyond the traditional banking role. In a nutshell, Greenlight is not just a bank, it’s financial education for children. On a mission to empower parents to raise financially-smart kids, Greenlight enables parents to provide their kids with debit cards, investment accounts, and tools for financial education. 

Among other things, parents can pay their kids’ allowance by transferring money into the Greenlight account and monitor the kids’ spending in real time. There are even built-in lessons on how to save and spend wisely. Kids can learn about saving, investing and budgeting their money simply by using the app. The transactional aspects of a bank are there - yes, kids can buy things, watch their account fluctuate with deposits and debits, see interest on savings accrue - but Greenlight goes far beyond simply being a place to move money around.

Another great example is Capital One. While certainly not a digital-only upstart, Capital One is one of the more forward-thinking banks that incorporates features beyond the back-office. For one - they introduced Capital One Cafes. These are not just branch offices for  core banking tasks - they’re coffee shops where you can hang out, use their wifi to work, and sip a caffeinated beverage to boot. 

Capital One’s acquisition of Wikibuy was another smart move: with this, they created Capital One Shopping to offer a feature benefiting something that is already part of their customers’ everyday lives, online shopping.  With Capital One Shopping, customers use a browser extension or app to earn cashback rewards on e-commerce purchases, to compare prices, and to find the best coupons at thousands of online merchants. With this tool, Capital One has entrenched itself in millions of their customers’ lives simply by offering a benefit - saving money, and getting cash back - for an activity that many of their customers do almost every day. 

Similarly, challenger banks such as *Acorns and *Douugh both provide shopping tools which help customers save money and earn cashback in the form of e-commerce rewards. Acorns and Douugh offer customers digital-only savings and investment accounts, accessible via apps, which showcase features like gamifying a customer’s progress towards financial goals. But, these innovators also leverage rewards and cashback to provide shopping companions which help their customers activate cashback for e-commerce purchases, which is earned into the customer’s respective savings or investment account and ultimately ties back to the customer’s overarching savings or investment goals. 

In this way, and similar to Capital One, these challenger banks have implemented programs which harness customers’ everyday online shopping and contribute to their financial wellness.

E-commerce shopping rewards programs are a rare example of a win-win-win situation. Customers benefit from shopping incentives and discounts. Banks benefit from better customer retention and loyalty by presenting themselves as a provider of concrete consumer perks. Merchants benefit from better conversion rates, increased average order value, and lower cart abandonment rates.

 The expanding penetration and the popularity of shopping reward programs, which consumers are familiar with and have come to expect, empowers financial institutions seeking to retain and acquire customers to break free from their place in the “back-office” of consumers' lives. By creating repeated positive brand interactions, FIs can turn transactional relationships with customers into higher-touch, more relevant services for their financial health.