Scripting the Future of Financial Services

No matter what role traditional banks choose to play in the future, customer service is the key to thriving in a landscape transformed by tech

Amber Seitz profileBankers can't open a trade publication today without reading headlines about all of the changes coming to the industry and the challenges they present to traditional retail banks. In the drama of the financial services industry, banks have been cast as victims, or worse, minor side characters doomed to be killed off in the third act. However—despite those changes and challenges—traditional, Main Street banks are well-positioned to define their own role in the future of financial services, no matter what that landscape looks like. In fact, the greatest challenge facing the banking industry is also its greatest advantage over disruptors: bank customers.

Setting the Stage: Challenges Ahead

Isolated core systems, deposit displacement, limited IT resources… The list of challenges banks face today is long, but the most critical is the fact that customer expectations are now being set externally, according to Rob Morgan, vice president of emerging technologies at the American Bankers Association. "It used to be your competitor was the bank down the street," he explained. "Today, your competitor is your customers' last best experience, whether it's with a bank, with you, or with Google or Amazon." As small fintech startups have grown into market share-leading behemoths, customers' standards are shifting faster than ever. "We need to realize that the 'upstart' fintech companies are 'mainstream' fintech companies, and they're changing the way our customers expect to interact with financial institutions," said David DeFazio, partner at StrategyCorps. For example, Credit Karma has over 80 million users on its app and has referred nearly $40 billion in loans to their partner institutions (users view mortgage and credit card offers). 

In addition to elevated expectations for their digital experience, bank customers today also have a much stronger preference for self-service than in the past, though most still expect hands-on treatment in certain situations. "Anyone at the younger end of the millennial generation on down has a different mindset," said Tina Giorgio, president and CEO of ICBA Bancard. "They want both consultative and on-demand service." Traditional banks must ensure that their customers receive top-notch service no matter which channel they use. "Digital gives the customer 24-hour access to the bank, so we want to foster that, but we also need to make sure their experience is the same as if they were here in person," explained Dave Werner, president and CEO, Park Bank, Milwaukee. 

Another common challenge for banks is directly related to these transforming customer expectations: how to deliver a cutting-edge digital experience via their current core system's infrastructure. "The biggest inhibitors for banks right now are their core service providers who are not letting them innovate quickly and freely," said Girish Ramachandra, senior manager leading fintech and blockchain initiatives at Wipfli, LLP. He explained that one of the most significant changes in banking today is the push for open banking, where consumers control their own data. "Having a multi-year contract with a core service provider is the biggest inhibitor to open banking," since it prevents banks from collaborating with various fintech companies, he said.

A final challenge connected to customer expectations is deposit displacement—the growing phenomenon of consumers storing their funds in technology and retail companies' apps rather than in a deposit account at a financial institution. For example, Starbucks' rewards program as 16.8 million active users who store over $1.5 billion on their Starbucks cards and app, and those funds account for nearly 40% of their purchases at U.S. locations. The benefit to retailers is this strategy dramatically reduces their transaction fees because customers load $20-$150 on the app or card rather than purchasing single coffees for $6.75 a piece. DeFazio estimates Starbucks has reduced their transaction processing fees by $20 million per quarter. With deposits at a premium in the financial services industry, the growing percentage of funds that could be deposits kept in a checking account but are instead held on retail cards and apps is a concern. "Checking accounts are the anchor product. Just offering a free checking account leaves you vulnerable to losing business to non-bank competitors with more attractive offers," DeFazio warned. "It's all based on convenience, value, and rewards."

The Cast of Characters: Transformative Technologies 

As they grapple with the challenges presented by changing customer expectations, banks also must adapt to and utilize the technologies that contributed to that transformation and continue to drive change. Of all the technology looming on the horizon, artificial intelligence (AI) gets perhaps the most attention, and for good reason. "What I'm seeing in the market is the biggest technology impact is coming from artificial intelligence," said Ramachandra. "The scope of AI is broad and it's already happening, especially in lending, wealth management, and customer support." According to a survey published by the Financial Stability Board in 2017, AI and machine learning firms managed assets of over $10 billion, and that number is projected to grow. AI's tremendous potential impact on the banking industry has drawn attention and investment from both the technology and banking industries. "As our chairman and CEO, Jamie Dimon, highlighted in his shareholder letter recently, we're all in on artificial intelligence, machine learning, and 5G and see the value that they'll provide for banking," said Al Araque, executive director – market director banking, JPMorgan Chase, New Berlin. Araque says banks will be able to utilize AI to help identify trends in customer feedback, help mitigate fraud, and work to personalize the customer experience. 

On another front, Giorgio says faster payments will also have a big impact in the future, whether they are near-time or instant. "We're all being measured to a different standard as banks," she explained. "We're not just measured against other banks, but against every other company online. The ability to open an account quickly and move money quickly will be critical in the future." As with AI, technological developments in payments could also bring enhanced security for banks and their customers. "I think in the next two or three years we'll see a significant shift to tokens in the ecommerce world, and we'll need to be prepared for that," said Giorgio. She also cited contactless payments as an area of significant growth and change. "Over 70% of existing POS locations in the U.S. accept a contactless payment, and it's being adopted by merchants at a rate of 1-2% per month," she explained. "That's huge." 

Though it's been making headlines for a few years, blockchain technology hasn't caught on in the financial services industry… yet. "Blockchain is slowly making its way into bigger companies. They're experimenting with how it can be used for settlements," Ramachandra explained. "Once it starts working, they'll scale it up and expand into many areas." Araque says JPMorgan Chase believes in the potential of blockchain technology and cryptocurrencies, provided they are properly regulated. "As a globally regulated bank, we believe we have a unique opportunity to develop the capability in a responsible way with the oversight of our regulators," he explained. "Ultimately, we believe that JPM Coin can yield significant benefits for blockchain applications by reducing clients' counterparty and settlement risk, decreasing capital requirements, and enabling instant value transfer." 

A dark horse to watch in this space is the Internet of Things, especially when paired with wearable devices. "We've just started to scratch the surface with IoT and wearables," said Giorgio. "The Internet of Things as we know it will really change the way we do things." For example, high-tech refrigerators that track your usage and can reorder items when you run low need to be hooked to some form of payment system, whether it's a technology app or a checking account. Combined with wearable technology, bank customers may one day transfer funds with a tap on their smartwatch so their car can pay for gas as they fill up on the way to work. These are all opportunities for banks to be even more present in their customers' lives.

Two Possible Roles in Banking: Distributor or Conduit

The stage is set and the characters assembled. What role will traditional banks play as the drama of financial services unfolds? There are two likely options: "In the very long-term, just like what happened in retail where small retailers have now started selling on Amazon, I think the banking industry is going to be two different types of industries: banking and distribution of banking," said Ramachandra. In the distribution model, traditional depository banks will still be the core banking providers (i.e. deposits and loans), but they'll sell those products on platforms provided by technology companies (the distributors). One example is Apple's recently announced AppleCard—the first step in the company's stated goal of transitioning from a "consumer product company" to a "consumer services company"—which is issued in partnership with Mastercard and Goldman Sachs. "What they're doing is selling financial services through your mobile phone," Ramachandra explained. "All the credit card data is on the phone, not visible on the card." The physical card has no number, CVV security code, signature, or expiration date, for example.

In the banking model, banks will continue selling their products and services to customers directly and rely on strong customer relationships to compete. One effective way to deepen those relationships in a technology-reliant world will be for banks refer customers to non-bank solutions when appropriate. "We need to be smart about what products and services we aren't offering but might be beneficial to our customers that we can recommend," said Werner. "It's becoming a conduit to other products and services and thereby enhancing our relationship with our customers as knowledge-brokers." The benefit of the conduit model for banks is that it fosters and deepens existing customer relationships. "You give your customers access to the entire ecosystem of products that are out there," Morgan explained.

Banks will likely choose between either the traditional banking model or the distribution model, or some combination thereof. Either way, the business of banking—accepting deposits and making loans—will remain at the center of the industry. "It's the core banking practices that we've always deployed that will drive our success in the future," said Werner. "Our ability to determine levels of risk and make educated, risk-based decisions on how we'll lend money."

Curtains Up: Time to Act

So, what should banks do today to prepare for the financial services landscape of tomorrow?

What they've always done: focus on providing their customers with the best possible service and value. "As we've seen in other areas, technology can shift the ground, but only when it changes the primary customer relationship," Morgan explained. If banks make their customers the bedrock of their strategy, it will equip them to thrive amid all the coming changes. "There are a lot of things happening that will come our way fairly quickly, and we need to be prepared to work within those new solutions," Giorgio advised. "It's all about putting the customer first and approaching this new world with that in mind." At Chase, Araque says a strong focus on listening and understanding customers' needs drives change and pushes the bank to evolve as they strive to remain competitive. "It forces us to keep an open mind and substantiates the value of always keeping the customer in the center of everything that we do," Araque explained. 

Traditional banks have operated legally in Wisconsin since 1853, and that long history has led to tremendous trust from consumers. "Banks still command the highest level of trust when it comes to the security of people's money compared to any other industry," said Werner. "As long as we maintain that trust, and it's incumbent upon us to do so, it will provide us a competitive advantage, especially when we're in competition with unregulated or less-regulated entities." Morgan says community banks are well-positioned going into the future. "They've always been relationship-based businesses," he explained. "The key is meeting customers digitally and providing them the same level of service they expect from other channels."

Here are five tactics recommended by the experts interviewed for this article that banks should consider utilizing in their efforts to serve their customers: 

1. Integrate technology strategy-not just maintenance-into the bank's strategic plan.
"In their strategy discussions, community banks must include technology strategy," said Ramachandra. "A technology maintenance plan must change into a technology impact plan." Werner advises banks to consider reinvesting the personnel cost-savings from efficiencies gained from technology back into technology. "Reinvesting those expenses into the technology side allows us to deliver at a very high level, which requires constant reinvestment. You have to constantly consider that as part of your capital planning," he said. "It will become a bigger and bigger part of everybody's budget."

2. Offer in-demand products.
"Right now, what I'm telling community banks is that they have to hop on the Zelle bandwagon," said DeFazio. "Zelle and Venmo are the new standards for P2P interactions. It's not an experiment anymore. They're the way millennials expect P2P services to work." Specifically, those apps have eliminated the need for consumers to find workarounds or enter lots of sensitive information—such as account numbers—in order to transfer funds from an account at one institution to an account at another institution. "It's going to be had to win the customers of the future if you don't have those standards in place," said DeFazio. 

3. Renegotiate core contracts.
"What banks should be doing is getting out of their existing contracts with core service providers," said Ramachandra. "Renegotiate those core service provider contracts so you have the ability to work with a number of different fintech companies."

4. Continue to speak up and be visible in your community.
"Continue to speak up as an industry," Werner urged. "Bankers historically have been humble people, not wanting to shine a spotlight on all the good they've done in their communities. We need to be willing to step up into that spotlight and show what we've done so people are aware of the importance of banks to their communities and their economy."

5. Focus on small changes. Innovation does not need to be dramatic.
"The biggest mindset shift for me has been around the idea that innovation needs to be dramatic," said Morgan. "I don't think that's the case anymore. More often in mature industries like banking you see innovation that compliments the core product, rather than something that radically shifts the core product. It's about understanding customers' needs and adding technology that facilitates their access, not changing your business model."

Wipfli, LLP is a WBA Silver Associate Member.

By, Amber Seitz