The Digital Banking Evolution

Breaking Out of the Banking Box

Within banking, a dichotomy of customer expectations has emerged. On the one hand, the bar that customers have for banks is pretty low:

Don’t mess with my money.

Don’t make me wonder where it is. Don’t make it hard to access. Don’t charge me to do basic things with it. And definitely don’t hit me with surprise fees or make my fee structure a college-level calculus exam. This bar focuses on the transactional aspects of the banking relationship, the dollars and cents, and is fundamentally rooted in trust.

On the other hand, the bar that focuses on the experiential aspects of the banking relationship continues to get higher. For well over a decade, fintechs, startup banks, and shrewd regional banks have chipped away at some aspects of the traditional banking relationship by putting those dollars and cents within the frame of people’s daily lives. Rather than focus on the transactions themselves, they focused on actively helping people solve a problem having a financial component. Incumbent banks still tend to think the other way around, starting with the financial component and working backward to the customer’s actual, day-to-day challenge or need.

This approach, which worked well in the early days of digital banking, is no longer enough. It’s still vital to move money quickly, accurately, and securely, of course. It’s still vital to maintain that basic trust. But it’s also increasingly important to remember that money is an enabler. Smart FIs investigate what customers want and need to do with that money—and where. Doing this gives them opportunities to reach new customers and engage with existing customers in new places. By doing that, they become much more than a place to simply deposit or borrow money; they become active financial partners empowering households and businesses to accomplish their goals.

Having escaped the traditional banking box, new opportunities abound.

Example 1: Embedded Banking

The rapid rise of embedded banking demonstrates the clear-cut power of starting with the customer instead of with their money. In an increasingly common scenario, let’s say a couple goes shopping online for an outdoor lounge set from their favorite furniture brand. At checkout, they’re offered a no-interest, short-term loan from PayPal.

Through this “buy now, pay later” (BNPL) offering, they’re 1) able to buy the set that 2) they actually wanted and 3) enjoy it now. They do this without interruption to their shopping experience, an ideal scenario for both the customers and the seller. The process is fast and frictionless, especially when compared to applying for a branded credit card they don’t really want or, worse, going to a bank first to secure a personal loan. From the traditional bank’s perspective, such loans were often too small to pursue, and thus the customer’s need wasn’t significant enough to address. That math, however, has eventually added up to lost or diminished relationships.

Example 2: Small Business Banking

Meeting the needs of small businesses is another example where taking the time to understand the customer has paid off. The 7.9 million American small businesses that account for 44% of American jobs typically have tight budgets but complex needs. Fintechs such as Square and Clover understood this, going well past card payment processing to offer loyalty programs, scheduling solutions, inventory management, and detailed reporting that helps small businesses understand their own customers better. And they shaped those solutions around specific business types because a local hair salon naturally has different needs than a regional burger chain. 

Whereas traditional merchant services teams dove deep into card processing, these fintechs swam wide across the customer’s end-to-end journey, creating a suite of tools and services that not only expedited cash flow but increased revenue and reduced costs. By doing this, they eventually became integral business partners, not just financial service providers. Sticky.

Another often-overlooked opportunity lies within the onboarding process. Business owners are anxious to get their great ideas launched and are immediately confronted with a mound of paperwork and a month of appointments just to get the financial and legal basics in place—often with minimal guidance. Such tasks are critical but not what they set out to accomplish, and they’re likely not interested in getting good at it.

Alliances such as the one between US Bank and State Farm are resolving this common gripe, streamlining the onboarding processes for both banking and insurance while also providing access to approachable, dedicated experts to help them overcome roadblocks. Besides delighting the customer, these value-add opportunities allow FIs to swim upstream of the customer’s typical consideration point, a bonus for marketing executives seeking fresh avenues for engagement.

Example 3: Value-Based & Niche Banking

A less obvious example of surpassing the higher experiential bar—but one of growing importance—is values-based banking. Particularly with Millennials and Gen Z customers, the desire for alignment between their personal values and a brand’s values can be enough to deepen their loyalty or drive them to switch.

In less than 15 years, the Global Alliance for Banking on Values has grown from 10 to 68 member banks worldwide with $200B+ under management. This is just a subset of the fintechs and niche banks targeting customers who care about topics such as the environment and social justice. Houston-based Fair, a challenger bank focused on ethical finance, and Aspiration, a fintech dedicated to reducing reliance on fossil fuels, are just two of the many startups seeking to serve the like-minded or underserved.

This trend is also apparent within Wealth banking, where a company’s ESG (Environmental, Social, and Governance) performance is increasingly a factor, enough that the industry has responded with significant investments in analytics and reporting to field investor inquiries on these factors with hard data.

This specialized banking isn’t limited to ESG concerns, either; niche bank brands have sprung up all over to meet the needs of specific audiences, from those in the gig economy to doctors and even newlyweds.

Here again, is where that dichotomy comes into play. The rising popularity of such FIs indicates that banks may get the transactional part of the relationship right and still lose customers. For the moment, switching banks still comes with a fair amount of friction, but the tide may change quickly as onboarding becomes a focal point and as customers elect to run to—not from—a bank brand.

Why We Should put Customers (Not Executives or Product Owners) In the Drivers Seat

The examples above demonstrate that winning today’s customer requires doing more to understand who they are and what’s happening in their lives. Perhaps ironically, the more entrenched in the digital world consumers become, the more three-dimensional they want to be—even to their banks. Transactionally, they still care about speed, accuracy, and convenience, but the playing field is leveling out as core banking solutions mature.

What’s left, then, is the customer experience.

The good news is that putting the customer experience first not only makes customers happy, it addresses a common challenge faced by banking executives tasked with “transformation” or “innovation” efforts. Such well-intentioned initiatives are easily tangled by the realities of resource constraints, system complexity, technical debt, and heavily-regulated processes. Most times, such projects go unfinished, are rolled out only partially, or miss the mark. The cycle then begins anew, with the burden increasing for the next leader and the customer experience lagging further behind competitors.

An alternative is to task leaders with improving some aspects of the customer’s experience. In all of the examples cited above, one of the following two questions was answered:

• How can we better meet the needs of our customers where they are today?
• How can we take what we’re already good at and apply it to meet a new or existing customer need?

The critical first step to answering either of these questions is to ask the customers what they think. While this may seem obvious, the investment and time given toward this activity is often surprisingly low. We may spend years building something for our customers, but only a few hours or days asking them what to build. They may have limited insight into the vast ecosystem required to accomplish routine financial tasks, but they do offer tremendous insight into how, when, and why they’d like to do them.

Knowing these details is essential to picking the right parts of the journey to focus on and designing the right solutions to improve them. Conversely, it prevents us from fixing something that customers don’t really care about while leaving broken something that actually frustrates them (not us). 

And, done enough times, this exercise can significantly improve the customer journey (and build internal momentum for those big-ticket initiatives).

Some Themes We’ll Explore In This Series

• Embedded banking drives adoption and builds loyalty because it is frictionless and engages customers where they want to be.

• FIs that think in terms of 360° solutions, not vertical product lines, will win as digital banking matures beyond solving for efficiency and availability.

• Understanding your customer may be even more important in the digital space, where the top of the marketing funnel expands but new challenges emerge further down.