The Banking sector entered 2023 on a firmer footing compared to previous years. McKinsey’s Global Banking Annual Review 2022 informs that, driven by interest rates and net margins, bank profitability reached a 14-year high. The sector, however, continues to be rattled by an uncertain macroeconomic outlook troubled by stagflation, geopolitical turmoil, and impending recessionary fears.

While the retail banking sector looks to be profitable on the back of rising interest rates, retail banks need to sharpen their drive to offer hyper-personalized experiences. This approach prevents customer churn on the one hand and on the other, creates the right mix of product functionalities that boost cross-sell and upsell.

Everest Group Banking IT services state of the market report 2022 posits that the retail banking focus is driven by the need to deliver better customer experiences to uncover newer revenue streams. This necessitates a never-ending focus on the following aspects.

Technology investments that push customer experience to the fore

Multiple reports conclude that customers switch banks when they encounter a mobile experience not tailored to their unique needs. This situation could be a possible outcome of a system that has been upgraded at the customer-facing end but lacks alignment between the front and back-office.

Deloitte’s 2023 banking and capital markets outlook highlights that the average number of channels customers use has increased from 2.2 (during the pandemic) to 2.7.  A technology modernization initiative that's steeped in understanding which points in the journey a customer encounters maximum pain points and uses it to create the required front to back office alignment, is highly likely to succeed. 

Resolving challenges brought by customers’ differing entry and exit points

Across channels, a customer’s entry and exit points can be very different. This means that banks are to undertake a deeper analysis if they want to accommodate customers’ preferences. Thereafter, aligning the channel mix across the sales, engagement, and distribution models can be the next logical step.

The wide range of access channels also brings to the forefront an additional challenge. Today banks must rethink on how channels like branches, self-service kiosks, ATM POS, and voice support centers, should be re-engineered to incorporate additional capabilities in real-time.

Ensuring consistency of experience across channels is one thing. Leveraging the customer's digital footprints to understand their access patterns and journey abandonment segments is quite another. Doing the latter consistently, helps banks to reduce friction across the customer journey.  More importantly, focus on channels that work best for a given stage of the customer journey, yields richer returns.

Customer Segmentation and Specialization are Key.

McKinsey report states that specialist players and Fintechs are far ahead in profit-generating banking products. These players have a P/B ratio far higher (3.2x to 9x, depending on the segment), than the traditional banking institutions that operate around 1.7x.

How is that made possible? The aforementioned results are attributed to the financial players' sharp focus on specializing - segmenting the target audience to a granular level. Only then, do their products closely fit the segment's needs. Two cases in point are the Zions Bank’s professional practice financing solutions for medicos and the offerings from Nerve that target independent musicians.

Identifying Newer and Viable Customer Cohorts is Critical to Driving Product Innovations.

While this appeals in theory, Capgemini's World Retail Banking Report 2022 shares that 82% of executives face difficulty identifying new customer segments. Although banks are flush with customer data, they suffer from a severe inability to leverage this data because of broken analytics and data consolidation engines. Focus groups can be a possible solution to arrive at newer products that appeal to a particular demographic and iron out detrimental features in an existing product line.

Enduring success in customer segmentation calls for the QUAD:

1. A robust product development or innovation team responsible for understanding audience needs and designing a product
2. A team responsible for arriving at the optimum business model to take the product to market through tech or business partnerships
3. A customer data platform to provide a consolidated view of customer behavior
4. A banking technology architecture that’s far from legacy.

The way forward

The change in the marketplace and the emergence of new-age Fintechs have forced banks to rethink their customer-centric strategy and modernize their legacy systems.

The ability to understand customer preferences, map them to product characteristics, and change their technology systems to launch products faster is vital. Towards this end, most leading banks have started leveraging partnerships with customer data platforms to aggregate, manage and analyze a wide range of data – financial, social, demographic, behavioral, and health. 

While some of these insights translate into creating newer targeted offerings, others call for a more significant shift in business model by partnering with Fintechs and new-age tech players or embedding financial products in the broader ecosystem.