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For quite a while, banks were eyeing fintech startups as their main foes. They invested in technology to compete with these startups and to improve customer experience in banking. But the landscape is constantly changing.
There seems to be a bigger threat to banks coming from a different direction, namely tech companies. In fact, McKinsey and many similar top consultants are warning banks that tech giants like Amazon and Facebook could seriously disrupt the banking sector.
Tech companies are taking a somewhat subdued approach – at least from the banking industry’s viewpoint – to moving into the financial space. They aren’t making big declarations, nor are they coming in like wrecking balls. Instead, they’re slowly expanding their service offers with financial products that simply make sense for their customers.
The big push started in Asia. Rakuten, the largest online retail marketplace in Japan has a messaging app with approximately 800 million users. They aren’t just a messaging app though. They issue credit cards and provide mortgages as well as security services.
Alibaba from China has also stepped into the financial space. Not only do they offer loans based on people’s history of interactions with their site, but they also offer asset management and payment services.
Tech companies in the West are also making small yet significant strides into the banking space. Amazon has expanded its services with quite a few financial products. There’s Amazon Cash that allows people to add money to their Amazon Balance by going to certain convenience, drug, or grocery stores. Then there’s Amazon Pay, which is a wallet similar to PayPal, allowing people to pay for purchases from vendors other than Amazon. The company also provides loans to small and medium-sized businesses, and are in talks with major banks to offer their customers checking accounts.
Another example is Facebook, which has started to integrate person-to-person payments in its messenger app using PayPal. Apple has also jumped on this train, enabling users of iMessage to send money to each other.
Tech companies are disrupting the banking sector at a time when people still find it hard to trust conventional and reputed banks. The bottom line is that it’s working!
What’s really interesting is that a survey Bain & Co conducted showed that almost 60% of bank customers in the US would be willing to try a financial product from a tech company they already use. With younger demographics, this percentage was even higher as approximately 73% stated they would be open to trying out a credit card, deposit account, mortgage or investment from a tech firm.
In other words, if Amazon started offering credit cards tomorrow, 73% of people aged 18 to 34 would get one. And if they offered mortgages, well, there would be a lot of refinancing going on and quite a few displeased banks. But why?
Well, it’s a combination of elements. First of all, tech companies have a good reputation. Their focus on constantly improving customer experience has allowed them to build powerful relationships with their customers. The result? People trust them a lot!
That said, tech companies aren’t perfect. They’ve made their share of mistakes. But it’s easier for consumers to stick with companies that learn from their mistakes, constantly improve offerings and prioritize relationships over transactions. Every time customers shop on Amazon, they are happy because they have a great experience. And if they don’t, Amazon goes out of its way to make it up to them.
So, if the same company were to start offering traditional financial services, by extrapolation, consumers would expect the same quality of service and would be more than happy to switch. Banks, on the other hand, are yet to come to grips with the fact that customer experience is a top priority – only 37% of banking organizations have a formal CX plan!
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At the moment, traditional financial organizations already rely upon their tech counterparts for many of their more sensitive and strategic capabilities, such as cloud computing. This poses a significant problem if the two were to ever end up in direct competition. Tech companies could simply cut the plug and leave banks in the lurch.
However, banks do have one advantage and that is that in the US, tech companies can’t amass deposits. Federal law doesn’t permit companies to combine commercial ventures with a full banking organization. So, Amazon will not be able to take deposits. However, it can partner with a bank to do so.
In other words, companies like Amazon might end up as the distribution channel for banks that will be relegated to the background. Banks will also have another problem if they lose their direct connection to the customer. At the moment, banks are willing to lose money on a checking account because they know they will make their money back when that customer comes in for a mortgage. However, if customers start purchasing their financial services off of a single platform that’s not under the control of banks, it will be much more difficult to maintain this approach.
Another problem is that companies like Amazon don’t have to invest a lot in customer acquisition since they already have a loyal following. So, they could offer digital accounts without any of the annoying fees and high minimum balances many lenders impose, which would quickly attract consumers, especially younger ones who demand more flexbility and seamlessness in experiences.
When it comes to tech companies entering the financial service space, it’s no longer a question of if but when. They’re already offering plenty of services and it won’t be long before they start taking over the retail banking space if financial organizations aren’t responding back.
So, what can banks do about it? Firstly, the banking industry works on customer trust. This is where banks really need to up their game. They’ll have to treat every interaction as an opportunity to build a relationship. Leveraging customer data intelligently can help in this.
Next, it’s important to create products and tailor your services based on what customers expect from you. These expectations keep changing. Which is why banks need to always listen to their customers across multiple touchpoints. Be it on social media, at your branch, or on your website, your customers are telling you what they want! The question is, are you listening?
Furthermore, banks can take advantage and partner with small fintech companies to create more innovative solutions or even become distributors themselves.
Ultimately, it all boils down to how much you care about your customers. Do you find that customers are leaving? Find out why this is happening. Technology is today’s prime weapon that companies should wield to understand their customers and their behaviors precisely.
It’s time for banks to take the blinders off and start taking action proactively. Customer-centricity should be the goal – that’s how they can ride this wave.