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Mark Roper, Commercial Director, Collinson Group

As we begin 2016 the large retail banks still command the vast majority of the market but new competitors continue to emerge, from new retail banks such as Starling and Metro Bank, to financial services disrupters such as Transfer Wise and gocardless who are creating cheaper banking processes that give a better consumer experience.

The Current Account Switch Service reports that 2.25 million people had used the service to change banks but this belies the ‘hidden transactions’ where consumers use an alternative financial service provider, without banks realising they have lost a transaction.

This year will be an interesting one, where we see significant investment and also important decisions about the type of services banks will offer in the future. We see five key challenges that are threatening the status quo, and offer potential resolutions that financial boards could adopt to mitigate the risk of disruption.

  1. The interchange conundrum
  • Financial services providers have traditionally funded their reward and loyalty programmes through the interchange fee levied on merchants for the processing of credit and debit card transactions. The European Union has regulated these fees, meaning that in the UK alone merchants stand to be £480 million better off, with banks and card issuers losing out.
  • This change is already impacting the industry. Similar government legislation in Australia has led to Citi rapidly scaling back its customer loyalty benefits.

Resolution: Financial services providers must think creatively about how they attract and retain customers in spite of this funding gap. In the very short-term, charging for other services can close a funding gap. In the UK, we are already seeing that banks are raising current account fees to cover the interchange shortfall. At the same time, six of the UK’s biggest lenders have started cutting savings.

A more progressive approach might be to work more closely with merchants who may now be more willing to fund loyalty in partnership with banks, as long as they can be sure that they are getting incremental business for their investment. Adding truly valuable ancillary services and products that customers can buy can help create a new revenue stream, while at the same time stopping consumers going to new providers for these products.

  1. Develop the brand experience
  • In the past, a common frustration regarding loyalty programmes is that it is too hard, and that it takes too long to earn enough points to access the best rewards. Consumers often feel that redemption processes are too complex and do not offer a wide enough range of appealing rewards.
  • Moreover, consumers now expect reward programmes to have some level of personalisation that caters for their individual interests. A £50 bonus for opening up a current account is no longer a persuasive incentive to new customers, nor enough to encourage someone to switch their existing bank. Even the possibility of redeeming for a set of golf clubs might not be enough of a compelling reason to join a loyalty programme.

Resolution: In order for banks to build loyal and satisfied customers, they must think about personalising their customer experiences. For example, Nationwide has personalised the world of the ATM, which recognises customers prompting a personalised offer to withdraw their usual amount. It is at this relationship level (where the customer feels as though the bank knows them), and not at the product level, where the future of loyalty lies.

Furthermore, banks need to position themselves as a destination for services, so that relationships become sticky and engaging. Customers should be  able to trust that their banks can operate as a ‘one stop shop’ for multiple products and services. Our research indicates that personalised and relevant communications, rewards and service, regardless of how customers choose to interact with a bank, is important for consumers all over the world.

  1. Existing in isolation
  • Banks hold vast amounts of customer data – from earnings to spend patterns and travel behaviour. Yet this vast wealth of data remains largely untapped and stuck in product silos.
  • A sizeable barrier to innovation comes from legacy IT infrastructure that does not allow financial institutions to interrogate data and derive actionable insight from it.

Resolution: Investment in data analytics and prioritising customer insight will allow banks to gain a greater understanding of what motivates their profitable customers. This will open up previously unseen possibilities, such as partnerships with brands outside of the organisation.

For example, peer-to-peer lending platform Zopa has recently partnered with Metro bank. For the first time a retail bank can earn a return by lending millions of pounds each month directly to UK consumers through Zopa.

Armed with insight banks can also think beyond financial services partnerships too, such as offering airline lounge access or concierge services or allowing customers to pay for lifestyle services with accumulated loyalty points.

The opportunity remains to reward customers for their loyalty in a manner that reflects their product holding and patronage and only a single customer view will facilitate this approach.

  1. Digital differences
  • Traditionally, banks have considered investment in digital as a smart way to reduce costs — both in terms of personnel and real estate, rather than create an engaging, personalised customer journey.
  • Both retail and business customers are increasingly demanding digital services that are richer and more immediately available. These will meet the demands of how they wish to consume information and make purchasing decisions that recognises them and makes their lives easier.

Resolution: There is a real opportunity here for the boards of financial organisations to think beyond cost saving, and invest in innovation for the customer, whether that be through exceptional service delivery or a new and convenient way to access platforms while on the move. Several European banks, including Barclays, have begun a video banking service that allows high net worth customers to speak to and see advisers at any time, seven days a week.

Delivering customer loyalty and enhancing customer experiences in this way needs to be higher up the board’s agenda as digital platforms can be invaluable in gaining deeper understanding of customer behaviour. The result is the provision of value that is based on customer needs, which in turn will drive revenues for financial organisations.

  1. A clear identity
  • Banks must understand who they are in the new world of digital disruption. This is not about branding, but instead a deeper exercise in knowing which services to continue to provide, which to jettison, and which new spaces to move into.
  • The new challengers are focussing on particular aspects of banking, be it foreign exchange, peer-to-peer lending, current accounts, or mobile payments. The established players must wrestle with these specialists to remain relevant and encourage bank-wide loyalty.

Resolution: Instead of thinking about customers within traditional demographic boundaries or income-based segmentation, retail banks should be identifying and targeting customers based on behaviour and motivations. For example, Collinson Group research recently identified four groups of people within the top fifteen percent income bracket – the middle class mass affluent consumers. Findings indicate that these groups do contrast in the services that they want from financial brands, for example a large proportion value face-to-face interactions as well as digital services, while others prefer mostly digital experiences. Recognising these differences enables banks to build more engaging relationships with their customers.

Final Thoughts

2016 promises to be a year to watch as the fintech revolution matures, and it will be intriguing to see how the banks start to face-up to these challenges. The year ahead is a chance for financial service organisations to trial new projects, and test new loyalty initiatives to build bank-wide loyalty to retain profitable customers and even attract new ones.

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