Digital transformation has been a hot topic in retail financial services for at least a decade, but many banks still struggle with the channel. These struggles come even as the pandemic has pushed customers toward digital channels and neo-banks and fintechs disrupt the industry.
One of the biggest challenges is that banks spend billions of dollars to attract new retail customers through digital channels, but the yield on those investments today is lagging. For example, the quality of digitally-originated customers is often poor and there continues to be opportunity to improve digital experience for the existing customers. Banks need to do a better job of focusing investments on the things that matter.
Why aren’t investments paying off the way they should? There are a variety of reasons: legacy business models, organizational structures and measurements, technology platforms and a budget-first approach instead of a customer needs-first approach. Thus, despite continued digital investment, many providers struggle to measure or produce a solid return.
Where It Stands Today
To start, banks are still well behind challengers when it comes to basic digital functions that customers want. (See Figure 1.) Data from Curinos Digital Banking Hub find that 91% of fintechs allow full mobile account opening, but only 50% of national banks do across product sets. And this comes as digital customer acquisition is up 26% since 2019 as the pandemic dramatically changed customer expectations on where and how to bank, according to data from Curinos SalesScape. (See Figure 2.) We have also found that neo and direct banks account for 37% of primary customer acquisition during this period.
It all means that incumbents are losing ground in the new-to-banking market and are seeing their existing customers open additional accounts with the newer players.
After interviewing hundreds of financial services executives from organizations of all sizes, Curinos has identified a common set of challenges in their digital transformation efforts. These range from technology being viewed as a silver bullet for success to lacking clear definition of digital transformation goals or how to measure success. (See Figure 3.)
The result: branch-originated customers are fewer, but balances for branch-originated accounts are seven times greater than those of digitally-acquired ones. Furthermore, 45% of digitally-acquired accounts are closed within three months, compared with 4% of branch accounts, according to SalesScape data. Given long term digital trends, the challenge is not how to drive more customers into the branches, but rather how to get the same productivity in digital channels as in branches.
Figure 1: Consumer Preferences, Attitudes and Consumer Behavior
Much of the trouble can be tied directly to a lack of focus on digital onboarding, which gets customers to fund their accounts, use the features of the mobile app, add bank products and services, use their account to pay bills and, even better, set up direct deposit a key sign of a primary relationship. Furthermore, new-to-bank customers who have a good onboarding experience are far less likely to attrite down the road.
Current efforts to onboard a new client are too often disjointed across product lines and channels. Marketing teams aren’t incentivized to build customer lifetime value, but rather to lower cost per acquisition (CPA).
There are many real-life examples of missed opportunities. A colleague opened an online account with a very attractive savings rate. One month later, she was still waiting for the bank to send her a simple reminder email to fund her account. In addition to the obvious need to communicate with the customer, the bank is missing the chance to capture balances and turn a new customer into a loyal customer rather than just a rate shopper.
And just think about the advertising dollars that are wasted when a bank promotes a savings rate and the new customer fails to fund the account.
Figure 2: Customer Acquisition Indexed to FY u201919 Performance
Focus On The Customer, Not Competitors
The major pitfall is that banks tend to be caught up in a digital arms race, adding mobile features and functionalities based on what other banks are doing instead of what the customer needs a sort of supply-side view of the world versus a demand-based view. New entrants, meanwhile, seldom compare themselves with banks intentionally, preferring to focus on unmet needs and personalization. Consider, for example, the handful of fintechs that several years ago started to offer customers access to their paychecks two days early if they had direct deposit. These fintechs saw a need among customers who were living paycheck to paycheck and created an appealing product for them u2014 building loyalty at the same time. Traditional banks are now playing catch-up, with some introducing similar products. The same applies to overdraft fees.
Those that argue that the new entrants are niche players fail to understand the disruptive nature of fintech technology. Banks like U.K.-based Revolut started as a money-transfer exchange service for global travelers who were battered by foreign transactions fees and exchange rate commissions. Once established, it secured a banking license to accept deposits and offer consumer credit and it has also now expanded into the small business segment. Brazil’s NuBank, meanwhile, developed a credit card that tapped into unbanked consumers and others who were frustrated by high bank fees. The company, which now services 60 million customers who can conduct all their banking activities on one app, challenged incumbents who controlled more than 80% of the market.
These new entrants, which aren’t encumbered by legacy technology or business models, are reimagining the customer experience through a redefinition of faster, easier and more convenient banking. Furthermore, they are personalizing the journey, providing nudges and insights through the experience to deepen the client relationship and engagement.
Figure 3: Challenges that Get in the Way of Digital Progress
Break Through The Logjam
With so many banks still organized around products instead of customer needs and benefits, how can they succeed in the digital transformation race? Curinos sees the following steps as critical to breaking through the logjam:
- Organization and Measurement: First, set a goal to acquire profitable customers (as measured over six months of behavior) at an improved NPV of the new relationship. Create a cross-functional and agile team, bringing together people from branches, operations, technology, marketing and product to focus on the customer. Pick the right experience to optimize and then create the organizational focus and metrics around it. Hold people responsible for these objectives and then coordinate across the institution by product and channel.
- Improve the Onboarding Experience: Perhaps the most important experience for new-to-the-bank customers is onboarding. Focus on facilitating immediate funding though tailored marketing campaigns. Companies that excel in onboarding typically have a clean screen, sleek design and require fewer steps than most traditional bank brands. Mobile homescreen dashboards engage customers by providing updates and track activity across products, displaying rewards points, credit score changes and personal financial tools.
- Broaden Scope of Data: Better uses of existing and alternate data are essential to customer focused personalization. There is an increasing need for it to be real-time. Many bank products and mobile features are developed without real-time understanding of what matters to clients and what they think of the current offerings and functionalities. To do so requires thinking about the customer and what they need. Instead of targeting people who have conducted Google searches for 529 plans, why not explore public birth records to attract potential customers who haven’t even thought yet about saving for their child’s college tuition? Also, banks often only look at rivals in their back yard for insight into products and services. While it is fine to learn from direct competitors, the most compelling new models often are coming from places like Brazil, the U.K. or China. Banks shouldn’t benchmark their digital functions and features against other banks, but against their digital experiences vis a vis incumbents and new entrants. Listening tools that peel back the onion on customer feedback, frustrations and delights will also enable banks to better serve clients and ensure what they are building addresses customer pain points and needs effectively.
- Increase Pace of Learning: The historic three-month marketing cycle time and six-month technology enhancement times are obsolete in the fast-changing digital world. Successful players must redesign the learning cycle if they are to create and maintain, not a handful, but potentially hundreds of different personalized experiences. What is needed is personalization and experimentation technology to improve response rates and shorten cycle time. The new business model should enhance the old one that was built on direct mail and bring to the market the advantages that digital offers. The future is: test, read the test and quickly decide on campaigns and campaign adjustments. How to do that? Marketing decision engines, when paired with a dynamic creative optimization engine, drive incremental lift particularly among the least-engaged customers. It is therefore unsurprising that many neobanks and challengers are constant engagers, continuously testing how they can hyper-personalize customer communications to get their audiences to act. Examples of the benefits of rapid test-and-learn abound: recently a demographic that typically was most engaged after receiving emails that are straightforward, witty or hinged on fear of missing out responded much more to messages that emphasized care and safety in the aftermath of Fed rate hikes and the invasion of Ukraine. Without the ability to test and learn quickly, such an opportunity would be lost.
True digital transformation isn’t an upgrade to existing capabilities and processes. Rather, it requires a new customer-focused approach to organization, metrics, process and the technology and skills that bring the promise of digital into reality.
How To Improve Customer Engagement
Providers of consumer checking accounts have many whiz-bang features at their fingertips, so why do they still have problems engaging with customers? These features often even compete with price and interest rates that are the main attractions when consumers consider switching brands, but providers just can’t seem to find the holy grail a channel mix that can retain and grow retail checking clients.
It is clear that accounts that are originated digitally perform worse than those originated in the branch. There are likely a number of reasons for that poor performance, including the fact that digital channels make it easy to open an account without really committing to the institution. Furthermore, young customers who flock to digital channels often don’t have large balances yet.
Regardless of the cause, better engagement and a personalized onboarding experience have the potential to improve performance.
At this stage, banks should be doing better and many of their newest competitors already are. The key is better communication through all stages of the customer journey and through all channels.
Pushed And Pulled
Consumers have been pushed and pulled toward digital channels, especially as the pandemic triggered limited access to branches and banks increased their digital marketing output. Teller transactions and sales volumes have edged up from pandemic lows, but it is clear that digital channels are still gaining ground.
U.S. new-to-bank checking account originations have just barely recovered to pre-pandemic levels and, unsurprisingly, the digital channel has made big strides. The percentage of new-to-bank digital checking accounts now stands at more than 40%, up from less than 20% before the pandemic took hold.
But the average balance for digitally-originated accounts at the end of the first month on book is between six and twelve times lower than branch. And the average balances are still significantly lower, even when normalizing for factors such as age.
Adding fuel to that fire, the percentage of unfunded digitally-originated accounts at the end of the first month on book is getting worse, not better. Nearly 70% of these accounts are unfunded, up from 50% a year ago and compared with 6% for branch-based accounts. The percentage of digitally-originated customers who attrite within the first year is roughly two thirds versus only a quarter for those who onboard in person. Given the low level of survivorship for digitally-originated accounts, the balance gap does close over time but is still two to three times lower than the branch.
Curinos sees four factors for these disconnects:
- Younger people are more predisposed to initiate a new banking relationship through digital channels, and they have less money.
- Digital engagement provides consumers with better access to more brands, so they’re able to shop around more and do it at different stages of their banking journeys. Consumers are more likely to test products and services by installing multiple banking apps on their smartphone than they are to drive from one bank branch to another.
- Banks that do a lot of digital marketing drive a disproportionate share of communications to digital applications. Often, these campaigns are badly considered and have benefits that just aren’t sticky such as cash offers to open a new checking account.
- Banks are failing to successfully onboard new customers in a way that establishes them as the primary banking provider.
Communication Leads The Way
The root of these problems often boils down to communication. In onboarding, many banks rely on a batch-and-blast email approach that falls flat, or a standard journey that is personalized for a small handful of triggers, but is still one-size-fits-all in terms of messaging. At a minimum, the email campaign should address the customer’s current status so it is sending relevant content at different stages of the process. These include a funded account, activated debit card, first debit-card purchase, direct deposit set up, enrollment in electronic payment services and/or an added savings account. Netflix, Amazon and other consumer-facing brands have set standards in terms of delivering personalized communication based on well-considered funneling and banks can do the same to motivate next steps through reminders, incentives and other prompts.
On the surface, neobanks appear to be leading the way in terms of this type of engagement, with impressive product-based onboarding and retention functionality that is designed to establish and deepen the relationship as quickly as possible. They encourage new customers to transfer funds into the account as soon as it is open. They encourage them to add virtual cards to their digital wallets as soon as possible, not relying on the days (or sometimes weeks) that it can take for a physical card to arrive in the mail. One forward-thinking provider recently announced that most customer journeys can be completed in two clicks on its app. But when it comes to cross-channel engagement during the onboarding window, these same neobanks fall flat. Customers get trapped in fund-your-account or refer-a-friend doom loops or are bombarded with uncoordinated product pushes that undo the trust that was built with sleek product onboarding sequences.
For traditional providers, orchestrating complimentary onboarding experiences across channels is essential to bringing to life the humanity at the heart of the value propositions. That can include proactive outreach from a local branch team to invite customers into the office for a financial review, relevant content from the bank’s library or nudges and how-to instructions that spark engagement with the bank’s digital offerings and services.
And it doesn’t stop there. Consideration must also be taken after onboarding in order to retain customers and have them grow into their new provider’s day-to-day banking offering. This is even the case for even for younger customers who haven’t yet built their wealth.