Eugene Danilkis, CEO, Mambu
Alternative financing has seen a tremendous growth in the last five years, leading to unprecedented worry from banks about their products and services, and deeply affected margins. Goldman Sachs has predicted that 31% of unsecured personal lending will go to non-banks in the next five years. Challenger banks and alternative finance are expected to take at least $11bn profit in the US from the existing traditional banks in the next five years. This is on top of a whole new market opening up thanks to the huge unbanked population around the world.
One of the key reasons smaller challenger banks and alternative financial providers are doing so well in acquiring customers very quickly is that they have designed all processes and servicing systems from scratch. Customers, especially the new generation of banking users, were screaming for a different approach, and that is exactly what they provided.
The importance of customer experience and where the journey takes them is something most traditional players tend to skim over. The power of customer self-selection in the journey process is often undervalued, and the focus then falls on adjusting fees rather than adjusting the process to improve the customer purchase experience. And in this process, certain categories are neglected altogether.
For instance, SME lending has traditionally never been an area of focus for traditional banks with a perception of lower margins and costly customer management. However, challenger banks coming up in the UK are now targeting previously ignored customer segments, including SME lending and auto financing. The market for SME lending alone in the UK is expected to be $190 million by 2019, and this is a market which is currently entirely in the hands of the alternative finance providers and challenger banks.
But is there nothing traditional players can do in order to take this market back, and to address the unbanked markets in Asia, Africa and South America?
There are three fundamental reasons why the customer journey is considered simpler, better and more efficient in alternative financial providers:
- Customer Data – In alternative finance, customer data is given a lot of importance in every step of the customer journey. From marketing to visualization of product scenarios to pricing and customer retention, customer data is used in a big way. Alternative finance firms use a lot more data points to take decisions, including social media data, and use the data in interesting ways to calculate risks. They also provide incentives to customers for providing their data, which is considered by customers almost as important as monetary benefits when dealing with any service provider.
- User experience – Having brought down customer acquisition costs to trivial levels, fintech firms are able to provide a user experience that is simple, logical and basic. A new generation of customers are now willing to shop around for their financial services, and don’t expect every service to be offered by the same umbrella brand. This consumer attitude has made drastic changes to the way channels work with financial offerings, fintech apps and basic websites are taking hoardes of customers away from traditional, large firms providing bundled offerings.
- The level of personalisation – Todays consumer expects a level of hyper-personalisation that the world of online media has provided them. Whether it is consumer pricing of individual or bundled financial services products or the minutiae of the experience dealing with the provider, each person wants to be treated individually. Any firm that can provide this level of personalized interactions can help create a sense of loyalty with the service provider, launching that wonderfully virtuous cycle of lower cost of customer retention, further personal or monetary benefits and even more loyalty.
A larger bank can definitely create a better customer journey using these parameters, but it’s a hard slog – and something that requires diligent focus and a good understanding of the consumer desires, instead of further heavy investments modernizing legacy systems. Cloud technology has emerged as one of the main avenues of cost reduction within large financial service firms, and it has also offered firms with a large amount of data to truly capture the latent power of customer data. With a lower cost of customer data acquisition and maintenance, these firms are now able to focus on innovation and accessing newer data points.
And that technology has to drive speed. New products have to be launched as soon as a need or market trend is perceived and large firms are competing directly with much smaller, agile firms launching, managing and servicing these products. As the journey gets simpler, the service becomes faster and this is something that has evolved as one of the key drivers for millennials. The new generation of mobile users is comfortable using Twitter and Facebook to reach out to their banks – and most consumers expect even traditional banks to reply to their complaint or feedback on Twitter in less than an hour.
As more consumers use mobile, tablets and the internet to purchase financial products, or at least to explore financial product options, it has become important for traditional players to create an intuitive virtual experience consistent with physical channels, ensuring the virtual channels directly assist in improving customer satisfaction and lowering customer costs. A traditional bank will also need to bring in elements from outside the firm, like fintech startups that can assist with data analysis or visualization, to create a virtual ecosystem that makes sense to the customer journey. Understanding of the fact that consumer journeys need not begin and end in the same channel, and can go through multiple platforms, will, by itself, make a large impact in the channel management strategies of these firms.
Despite all this, the unbanked market of around 2 billion people worldwide provides the biggest growth opportunity for the traditional firms, and the channels, offerings, packaging, pricing and customer experience needed for that market is simply put, different. The traditional financial services firms can no longer depend on a rigid platform that only launches or manages certain types of products. The consumer purchase journey in the unbanked world can drastically change year after year, even month after month, and the technological and socio-cultural investments needed to capture this market deserves a completely new way of thinking.
Challenger banks claim that it is easier and more cost-effective to build a bank from the ground up, rather than changing the processes within a legacy organization – but it also means the opportunity to change, move and adapt is tremendous in such an organization. What is most important is that this disruptive thinking is supplemented, or even created, by a whole structural change supported by new technologies and processes that enable it.