Digital Transformation in Banking
Digital banking is more popular among millennials than among older population sectors. As a result, third-party financial technology (fintech) firms are proliferating to meet the consumer demand for responsive mobile banking services.Nearly 40 percent of Americans have not walked through the doors of a bank or credit union in at least the past six months. Furthermore, as time goes on, there are fewer of those doors available to walk through. Between 1995 and 2015, the number of commercial banks and savings institutions in the United States dropped from 11,971 to 6,270 -- a decrease of almost half. Clearly, customers are abandoning physical bank locations in favor of managing their finances online or via apps, and this is even more prevalent among younger demographics. This trend raises a question: How can banks, especially regional ones, use digital innovations to improve their customer experience while also encouraging more person-to-person interactions? The answer is complex, but the first step is to examine the habits of younger consumers.
Generational Changes in Banking Habits
Digital banking is more popular among millennials than among older population sectors. A report by Business Insider Intelligence surveyed millennials who currently maintain accounts at a brick-and-mortar bank. Of this group, 38 percent never physically visit their bank at all, except possibly to use an ATM. Another 36 percent stated that they step inside a branch of their bank only once a month or less. Collectively, those statistics add up to a startling revelation: Branch banks only see 26 percent of their customers more often than once a month. This generation of people who are disinterested in in-person banking must be reckoned with, because this group of some 80 million Americans now represents 34 percent of those who are employed.
External Innovators Are Having an Impact on Traditional Banks
Third-party financial technology (fintech) firms are proliferating to meet the consumer demand for responsive mobile banking services. These user-friendly startups have helped to unbundle financial services into a whole array of adaptable, easily accessed experiences. Here are just a handful of representative examples out of the dozens of products now available: Wealthfront offers accessible investment management, with transparent pricing that is free for investors with less than $10,000. Moven provides a mobile "financial wellness platform" that combines a budgeting app with access to free ATM and banking services. Venmo, owned by PayPal, offers peer-to-peer payments in a social media context.Meanwhile, online lending is a burgeoning field, appealing to people in the lower and middle income brackets. LendUp is competing with payday lenders to provide safer, more transparent loans to low-income consumers, while Payoff offers services to overstretched middle class borrowers. Apps like Biz2Credit give business owners a chance to get quick funding without having to take time to sit down with a banker.Furthermore, fintech firms are not bound by all the same federal regulations as the legacy retail banks, so they have more maneuvering room to create consumer-friendly products. These newer firms are also founded on a wholly different operational philosophy than are traditional banks, and they're engineered to be agile -- a fleet of kayaks maneuvering around a giant ocean liner.
Key Benefits of Digital Banking
Across the board, consumers now expect to interact digitally, whether purchasing from retailers, consuming digital content or ordering rides via Uber. It's only natural, therefore, that they would expect the same from banking. New fintech services not only streamline simple transactions -- they also project a warm willingness to respond to customer needs.Having 24/7 access to one's bank account makes a big difference to consumers of every age. It has always been a nuisance for working people to try to conduct in-person banking: They've typically had to rush to the bank on their lunch hour or leave work early. Even banks that offer Saturday hours end up with long lines of impatient customers who would rather be using weekend time for other activities. Mobile banking eliminates the entire scheduling problem. Also, applying for a loan can be nerve-racking and embarrassing. Consumers feel insecure about whether their credit is good enough, and going in to ask about a loan is classically viewed as stressful. Today's lending apps are presented with a charmingly friendly interface, and consumers are comforted by this experience.
How Some Banks Are Responding
Business Insider states unequivocally, "The bank branch will become obsolete." Not only that, but looking farther into the future, it announces, "The ATM will go the way of the phone booth." However, not everyone agrees with this prediction. Bankrate's Financial Security Index highlights the facts on the other side of the banking usage spectrum: 26 percent of banking customers say they visited their bank branch within the past week, and another 19 percent say they have been there in the past month. However, it's clear that regardless of what statistics are used, visiting bank branches is not about convenience. Dan Geller, behavioral finance scientist at Analyticom, states the obvious: "No one is going to a branch for convenience." He also comments that visiting bank branches can be an expression of insecurity -- that it brings people comfort to physically be in a place where they envision their money residing. "When people are less anxious about their finances, they are more open to doing things remotely," he points out.All of this is not to say that brick-and-mortar branches will simply vaporize. However, it is obviously imperative that banks must change in order to stay viable as businesses. Some banks, in addition to boosting mobile banking options, have invested in digital transformation at their physical locations, increasing the number of self-service kiosks and ATM machines. The case study below shows an integrated approach.
Cambridge Savings Bank: Case Study of a Regional Bank
Cambridge Savings Bank is a local bank with 16 branches, and it's navigating digital transformation with the right attitude. Its SVP of consumer banking, Dan Mercurio, comments that he's working to guide the bank toward a sustainable sweet spot: "We like to say that it's our goal to be more local than our national bank competitors and more digitally innovative than our community bank peers. That theme really transcends our entire strategic plan."He explains that mobile is his biggest priority and that CSB is "disproportionately" investing in mobile solutions because that's the way to provide customers with the experience they're looking for. One recent innovation includes the option for letting customers open accounts online, rather than having to come into the branch. However, this remote experience still involves interactions with real human beings, via the contact center.Two more solutions outlined by Mercurio include encouraging employees to use the bank's products in their personal lives, so that they have a stake and a direct understanding of what it feels like to be a consumer. Another important element is that the bank is making a sustained effort to employ "digital natives" and millennials. These are the people who have grown up feeling at home with digital solutions, so working with people to offer omnichannel contact with the bank will come naturally to them.Finally, Mercurio mentions the need for strong analytics. Data management takes center stage in the digital banking world, and if data is analyzed effectively, it provides a clear window into customer characteristics. Cambridge Savings Bank is constantly asking who its customers are, what their needs and pain points consist of, and how to empower its account holders.
Personalized Services Are Key to Consumers' Hearts
Financial analyst Greg McBride, CFA, notes that usage of bank branches is higher for people with more resources: 54 percent of people earning incomes higher than $75,000 report going into their bank branch within the past month, while on the other side of the spectrum, only 13 percent of people earning $30,000 or less report a bank visit within the past month. These statistics show the way forward for banks: They can develop more personalized services for their higher-earning customers while figuring out mobile strategies to keep the lowest-earning sector as part of their customer base. Millennials are especially open to their bank recommending services that would be relevant to them, with 58 percent stating that they welcome such proactive recommendations.
Banks Must Respond to Customers' Mobile Habits
Moving forward, the smartphone is becoming the primary banking channel. Business Insider states, "Digital channels, particularly the smartphone, will become the foundation of the bank-customer relationship." Right now, 74 percent of millennials say mobile banking is very important to them and 52 percent have used mobile payment apps. These active banking consumers, between the ages of 19 and 37, represent the future of banking.
The Way Forward
No matter the approach, banks need to ensure that they have a digital strategy in place to build a road map to their future. Their success depends on integrating digital transformation into the DNA of their culture and developing a mindset of responding to the true preferences of their customers. Digital innovations, drawing on collaboration with tech providers and providing omnichannel solutions to consumer expectations will spell success for banks in the 21st century. The Independent Community Bankers of America put it this way: "80 million American millennials are poised to transform banking forever."