By Ross Sleight, chief strategy officer at Somo, a digital product agency

Digital transformation in finance is not new or a nice-to-hav –  it’s table stakes for growth. But the question now is how fast banks should transform and how digital they should be to best serve their audiences.

These decisions are fundamental.

Banks must understand that it’s no longer about ‘traditional’ or ‘digital’, but ultimately what the needs and wants of their audiences are. This should dictate the transformation strategy rather than the legacy mentality of ‘how do we keep our original business model as a bank and continue to try and cross sell products?’,  which is the business model today.

Those with a clear understanding of changing consumer behavior will find ways to create products around the new needs of the customer rather than pushing a more traditional model based on minimizing risk and maximizing returns to the benefit of the bank  – and this should be done through a combination of traditional and digital channels. With COVID resulting in a massive 50% surge in mobile banking – now 6% of US adults consider a digital bank to be their primary bank which is a 67% jump from January 2020 – traditional banks could finally catch up with the convenience and ease of the challengers but with the added bonus of reputation and loyalty, if they’re smart.

The challenge for challengers

Challenger banks have accelerated transformation of the banking sector over recent years. The disruption the digital-first banks created was immediate yet fairly simplistic as it concentrated on reimagining customer experience – the teams looked at an industry standard customer journey that hadn’t changed fundamentally in decades, identified the obvious pain points and customer barriers and thus created an attractive digital experience that saved customers time, effort and energy. This, often combined with either market leading interest rates or savings, a modern technical stack with little if any legacy and debt, and exploiting the lack of trust in traditional banks, appealed to a whole new digitally-literate audience with high expectations and gave traditional financial businesses a much needed wake-up call.

Yet, challenger banks have also faced problems and continue to do so. Research we conducted at Somo outlined in our white paper ‘Are digital-only brands the future of financial services’ showed that only 1 in 5 consumers were getting salaries paid into their digital account and so challengers need to find a way of becoming the primary account rather than the secondary one.

Although research shows that digital-only banks are expected to grow exponentially over the next four years – 19.8% in the US according to an October 2020 forecasting report by Business Insider  – simply holding a large number of savings or current accounts is not hugely profitable for these challengers. Therefore, it’s no surprise we are already seeing challenger banks seizing COVID-related opportunities owing to the larger institutions offering fewer new business accounts because of the huge backlogs. Additionally, according to the Bureau of Labor projections, the portion of gig economy workers will increase to 43% in 2020 in the US. A gap is emerging that needs to be filled with banks that can evolve and cope with income volatility in customers and hold a completely different customer-first offering. Chime in the US, for example, currently has 9.5m account holders and this is expected to increase to 19.4m by 2020, according to the October 2020 forecast by Business Insider. The bank’s growing product suite proves they understand the changing needs of customers – such as settings that automatically transfer 10% of wages into a savings account or early wage access for those living paycheck to paycheck.

The next stage of challenger banks is the creation of product marketplaces through banking as a service. They should be providing multiple offerings from other brands, moving further away from the siloed system of traditional banks only offering their customers their own financial products such as savings, loans and insurance. Whilst margins will be lower for marketplace products offered in comparison to own-brand products, set-up and risk is also outsourced and customer satisfaction should rise as they have a curated choice of market offerings rather than a single-branded offering.

The traditional’s struggle

This approach is trickier for traditional banks to adopt. Gartner research shows that in the US 69% of retail banking brands rank average or below in digital performance. Currently, most are only selling their own branded products developed and delivered on their own technical infrastructure regardless of the customer needs.

Traditional banks have the ability to use their branch network to increase customer digital and financial literacy as well as a customer service triage point (an area that most challenger banks have been poor at focusing on) – because people still want to talk to people at a bank as they make their financial choices.

So what’s the answer?

Traditionals have the advantage of albeit costly physical branches and are hamstrung by inflexible legacy systems, technical debt and expensive time consuming transformation programs whilst challenger banks have proven to be able to develop customer experiences that fit audience needs, yet have an issue with ensuring they are the customer’s primary bank and then selling additional products to achieve profitability.

COVID has added to this inflection point and accelerated the need for strong strategic vision as it has exposed traditional banks that had pressed the snooze button on modernization. When branches were immediately closed, banks had to provide a good end-to-end digital service and this exposed weaknesses in traditional bank customer journeys to all.

For banking to properly adjust to what customers want and need, especially in recent times, companies need to adopt a hybrid approach to deliver the best parts of the traditional and digital models – the loyalty, service and financial literacy education of the branch in traditional through to the needs-based product and experience of the digital. The key for both in the route to market is to start relearning who their customers are and what they need – and to prioritize helping them over selling to them. Banks that don’t solve this problem risk their survival and this must be their number one priority. Developing a customer experience and products that meet the needs of their particular customer base is critical.

Building emotional engagement

Banking is one of our oldest services and there is a belief that customers with traditional banks do not want change. This isn’t the case – in fact, people expect change now more than ever. We have been made to question modernization across all walks of life without any choice, and so customers expect to see movement that now matches with what they have come to enjoy from other services.

But banking is not the most engaging sector for customers; they are like utilities where our engagement is low and based often only on a monetary exchange. Therefore, getting people to switch is incredibly difficult because, behaviorally, we often see more potential worries about a switch in comparison to the benefits we receive from switching. For many, the thought of having no ties to a traditional banking system worries them, which proves the need to emotionally engage with customers and offer assurance over practicality and function. We are already seeing digitals capitalizing on traditional bank failings and slow movement since the pandemic, but they also will struggle to cost effectively scale acquisition due to the inherent worries of switching from traditional banks. Building an emotional engagement that helps address these customer worries and helps them through the process rather than simply trying to get them to sign up to an account should be the key focus here.

The time for change

When Somo meets with traditional financial institutions, we preach the value in modernizing and transforming the technical stack to enable a more efficient system and provide the foundation for the development of engaging customer journeys and products. The primary issue to address is not the transformation itself but the pace of transformation to keep aligned with the particular audience needs. We help clients through identifying and prioritizing audience needs and support internal teams to deliver at pace and scale against these. Ultimately transformation is a C Level ownership and focus – the speed of this transformation is dependent on the vision, the agreement of the shareholders and the funding of this ongoing journey.

Despite rapid changes, a conception sprint validating a particular journey and identifying key user pain points can be done in as little as eight weeks, feeding into the subsequent rapid design and build of Minimum Loveable Product (MLP).

We know that digital transformation has shot up the priority list in boardrooms across industries as digital uptake has accelerated at an unprecedented rate over recent months. As documented in Somo’s new white paper ‘Digital Leadership Priorities for 2021’ companies that sped up their plans now have a stronger chance of surviving and forging forward whilst those that did not prioritize change are finding it tougher.

Where there is no quick fix, for banks the priority should be building a culture with an adaptive and agile mindset that recognises new customer behaviors and employee needs. This will lead to a deeper embedding of transformative thinking led by the C-suite and across the organization to develop a strategy for sustainable growth that can withstand the pressures of the ‘new normal’ and carve out a roadmap for successful digital transformation.