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Can Community Banks and Credit Unions Survive in Today’s Digital World?

Over the past couple years, the Digital Banking Report has done several research reports on the digital transformation of the banking industry. While the largest financial institutions appear to be keeping pace with consumer expectations, the majority of the industry is falling woefully behind. It doesn't need to be this way.

Subscribe TodayThe has been researching the financial services industry for more than two decades, tracking industry trends and making predictions about the future of retail banking. Recently, a startling trend has emerged that could have a dramatic impact on the industry worldwide.

As digital technologies and advanced analytics have provided exciting opportunities for financial institutions, only the largest organizations are truly positioning themselves for the digital future. While there are notable exceptions, the question is whether the majority of institutions are too small to succeed in a highly competitive digital banking ecosystem — where winners will be determined based on the ability to use data and insights to deliver exceptional digital experiences.

According to a panel of over 100 industry experts looking at , the collection and application of consumer data, use of advanced analytics, ability to personalize the customer journey and improving the customer experience were among the issues at the forefront of their predictions. In fact, the impact of improved use of customer insight was the foundation of most of the trends predicted.

Expansion beyond traditional products, services and channels were also predicted, as open APIs, the Internet of Things (IoT) and more fintech/banking partnerships were expected. Finally, there was agreement among those surveyed that pursuing each (or any) of the major trends would continue to be a balancing act, as organizations would need to prioritize innovation while trying to continue their cost cutting — all in an environment of regulatory transition.

Here are some of the biggest areas of concern, as the industry wrestles with how to meet consumer’s digital expectations while competing with nimble fintech firms and innovative technology giants.

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Engaging With Consumers on a Personalized Level

In a published by GfK and Personetics, both consumers and banking executives were surveyed to uncover key beliefs, behaviors, trends and priorities related to personalization of banking relationships.

By comparing the results between consumers and financial institutions, gaps in the delivery of digital personalization were revealed, as well as opportunities for differentiation. Consumers want personalized, predictive and actionable insights delivered in real-time, and are willing to partner with financial institutions to achieve this value-added objective.

These expectations are caused by the increase of digital and mobile technologies, and the rise of mobile payment innovators such as PayPal and Square, that have made banking customers aware of real-time financial transactions and value-added services. At the same time, Google, Amazon, Facebook and Apple (GAFA) have raised the experience bar even further, showing that consumer needs can not only be met, but anticipated. As a result, financial institutions must accommodate these increased expectations with personalized service, or risk relationship abandonment.

To assess the ‘personalization maturity’ of financial institutions, organizations rated themselves as ‘Advanced’, ‘Emerging’, ‘Static’ or having ‘No Plans’ to provide contextual, personalized insights and solutions to consumers. In the research, the largest financial institutions had the highest self assessment around the ability to provide real-time contextual guidance. Of major concern is that roughly 40% of all but the very largest financial institutions placed themselves in the ‘Static’ self assessment category.

As the cost of technology and advanced analytic tools drops, the personalization tools once only available to the largest banks are now available to virtually any organization. The key will be for institutions of all sizes to leverage these tools to provide contextual solutions the consumer wants.

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Enhancing the Customer Experience

A positive customer experience is channel sensitive, with customers placing a higher weight on digital customer experiences more than ever. In fact, in a JD Power survey, the largest banking organizations improved in overall customer satisfaction, while midsize banks declined and regional banks plateaued. This was attributed primarily to improved mobile and online satisfaction.

Yesterday’s demands — including flexibility, efficiency and easy access for customers — have expanded to include integration of banking activities across multiple channels, personalized service, and recognition of the past, present and future breadth of the customer’s relationship with their financial institution. Going forward, banks and credit unions must build an improved customer experience and use it as a competitive differentiator.

Global research of banks and credit unions for the report, , looked at ways to better understand the ‘CX maturity’ of financial institutions and to provide a benchmark for future strategies. As might be expected, improving the customer experience was a significant focus for all financial institutions, with the majority of those surveyed indicating that CX was at in their top three priorities. Only 3% of respondents claimed that customer experience was not important, while 35% indicated CX was the primary focus.

Looking at the prioritization by institution size and type, however, the largest organizations were the ones where that focus was the greatest. Is this because smaller organizations already believed they have exceptional customer service and experience, or is there simply a general lack of realization about the challenges they face?

Smaller organizations also tended to measure customer satisfaction based on outdated metrics, such as branch engagement and problem resolution as opposed to digital banking satisfaction and ease of account opening and online tools.

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Using Digital Marketing Tools and New Media

The 6th annual report revealed that all banking providers are looking for new ways to become more efficient and more effective in their marketing efforts. This includes investing in new technology to assist in the implementation of marketing strategies as well as trying to leverage internal and external data to improve personalization and overall results — whether that be to support new customer acquisition, onboarding, cross-sales or loyalty.

There was also an increased emphasis in marketing techniques that utilize mobile devices, interactive content, website-based selling and brand development. Much of this use of advanced technology and marketing strategies was evident in only the largest financial organizations.

Given the lower cost of analytic tools, the availability of digital marketing platforms and the decreasing cost of digital communication, these gaps need should not exist. In fact, there are some who believe that smaller organizations could actually generate better results than their larger peers because of the potential for 1:1 engagement.

There was even a gap in the marketing priorities between large and small organizations. These days, the focus is all about digital channels, with an overwhelming 63% of large and regional banks making the adoption of digital channels a top three priority. The mention is almost twice as much as smaller organizations.

While the commitment to digital channels by smaller organizations did double compared to a year prior, this lack of emphasis overall creates a situation where it is harder for smaller organizations to catch up, both in commitment and in brand positioning. Other research indicates that larger organizations are becoming increasingly the choice of the digital consumer.

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Improving Account Opening and Onboarding

In the , there were indications that progress is being made to help customers open new accounts online and on mobile devices, especially at the largest organizations. Unfortunately, very few except the largest institutions could open a new account online or with a mobile device from beginning to end without branch engagement.

It was found that ID verification and signatures/supporting documentation “at the branch” are still required by the majority of organizations, and a “save and resume” functionality is not supported by most financial institutions, especially with mobile opening.

The result of this friction at the time of account opening and in the onboarding process is sales abandonment, with the potential customer getting frustrated and testing alternative financial institution options. While abandonment of digital account opening is still a significant problem, increased digitalization of the process and improved speed of application can help to solve this issue.

When looking at mobile account opening capabilities by type of organization, community banks showed absolutely no growth in support of mobile account opening between 2016 and 2017, remaining at only 10% of organizations surveyed. While significantly lower than 2016, 39% of community banks still had no plans to offer mobile account opening (47% in 2016).

As has been the case in all research conducted by the Digital Banking Report over the past several years around account opening and onboarding, it is clear that most institutions — and the industry as a whole — have not kept pace with consumer expectations around digital capabilities or digital engagement at the initiation of the customer relationship.

This reinforces the premise that there is a significant amount of lost revenue due to new account opening abandonment, sub-optimal onboarding, and the lack of using the mobile banking app as a selling tool.

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Deployment of Advanced Technologies

Nowhere is the challenge of being able to take advantage of digital technology and advanced analytics more evident than with the banking industry’s deployment of artificial intelligence (AI). With history in risk and fraud detection and cost reduction, the application of data, advanced analytics and digital technology is increasingly important for financial services firms to be competitive.

The digital consumer is being trained by firms that are becoming masters of AI (Amazon, Google, Facebook and Apple) and expect the companies they use to know them, understand them, and reward them through personalized communication. Financial institutions of all sizes can also deploy robotic process automation (RPA) to improve back office operations and reduce costs.

According to the report , organizations understand the importance of applying data insights through artificial intelligence, but only the largest are deploying AI solutions. Many smaller organizations not even considering these advanced technologies in the next foreseeable future.

The report looked at the state of AI deployment by the size of organization, and found that close to half of the largest financial institutions (those over $50B) have deployed at least one AI solution, with only 12% of the largest organizations not having it on their roadmap at all.

In lower asset size categories, however, the level of current and future deployment goes down significantly. While 25% of regional organizations (assets of $10B – $50B) have an AI solution in place today, far fewer in any smaller asset category are using AI. Not surprisingly, the percentage of organizations that do not place AI as a priority at this time increases as the size of organization decreases (with the exception of the very smallest of organizations).

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Playing Digital Banking Catch Up

The most significant challenge for most smaller financial organizations in becoming a ‘Digital Bank’ is to have the expertise and personnel to deploy digital and advanced data solutions. Not surprisingly, another challenge facing smaller organizations is the structure of data available to build digital solutions.

These challenges are not insurmountable, but they are significant. In most cases, smaller financial services organizations will not have the resources internally to address these challenges – especially considering alternative priorities in today’s marketplace. Smaller banks and credit unions will most likely need to evaluate a build/buy/partner decision.

With available talent in short supply, this leaves most smaller (and many larger) organizations with a decision whether to buy or partner with a specialized solution provider to deploy digital banking solutions. But more important for smaller institutions, will be the need for top level commitment to deploy resources to meet the increasingly demanding needs of the marketplace.

Instead of waving the white flag of surrender, some organizations have decided to become part of digital banking coalitions to meet the needs of the changing marketplace. In doing so, these smaller firms can offer consumers digital account opening, onboarding, marketing and advanced lending solutions found at larger banks and that are expected by the digital consumer.

Doing nothing is not an option.

Jim MarousJim Marous is co-publisher of The Financial Brand and publisher of the , a subscription-based publication that provides deep insights into the digitization of banking, with over 150 reports in the digital available to rs. You can follow Jim on and , or visit his .

All content © 2017 by The Financial Brand and may not be reproduced by any means without permission.

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