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For decades, the current banking business model has looked unassailable, protected by the fact that customers had nowhere else to go. But the last few years have seen banks' grip on the average consumer slowly weaken as changes in regulation, customer behavior and technology open up new choices for consumers.
Moves toward open banking will force banks to allow third parties access to their customer data through secure APIs. Forrester predicts that at least half of all banks will fail to use open banking effectively in 2018.
FinTechs and challenger banks are embracing other new technologies, including blockchain, mobile payments, P2P and crowdfunding, to provide value. Older banks, saddled with unwieldy legacy systems, are failing to adopt new technology fast enough.
As new firms embrace new technology, customer expectations go up. Large banks already had a poor reputation and an unhappy association with global financial problems. Now, they're being compared to competitors with newer, more innovative products and far-superior customer service. It’s no surprise that Efma’s World Retail Banking Report reveals that more than 80 percent of consumers have higher customer satisfaction through FinTechs.
Despite these issues, the changes in technology and demographics are as much an opportunity for banks as they are for new businesses. But to stay relevant, banks must do three things.
The biggest competitive advantage banks have is their existing, large customer base. Although open banking might force them to share data, it does not completely erode the advantage of having a pre-existing relationship with a customer.
To retain this advantage, banks must fully embrace fantastic customer service. They need to speak to their customers more, get their feedback, involve them in their business, and build loyalty.
This shift requires changes at all levels. At the branch level, staff must move from an attitude of selling products and services to seeking to achieve customer satisfaction. Websites and apps must move from being functional to delivering a great customer experience, while decision-makers must start to take consumer opinion into account — what do the customers want?
By doing this, banks should see a significant improvement in their overall success; HBR reports that customers who have great experiences spend 140% more than customers who have poor experiences.
Until recent changes created new challengers, most banks had been playing it safe. That’s a good attitude to have with customers' money, but it isn’t such a good idea when it comes to innovation and new ideas. McKinsey estimates that banks and financial institutions that fail to innovate digitally will see their profits reduced by up to 60% by 2025.
Banks must empower teams and enable them to invest time and resources into looking at and researching new technology. To achieve this, banks must emulate the innovative mindset their FinTech rivals have. This will enable them to not only create the products and services that consumers want (and survive the short term) but put long-term development on the agenda and position themselves for the next shifts in technology and behavior.
Although some FinTechs, such as peer-to-peer money transfer service TransferWise, are genuine disruptors, most are enablers. These enablers offer banks an opportunity: By partnering with them, banks can improve their offerings to customers without having to put in the investment required to compete.
By partnering with FinTechs, banks get access to the latest technology and the culture of innovation that they are struggling to create in their own businesses.
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