The Financial Industry’s Digital Transformation

While the financial industry transformation features some of the same elements as their retail counterparts, its origins and intra-competitive responses are unique, and the results…

The financial industry is undergoing a major digital transformation. While it’s not unusual for any industry to reinvent itself periodically, this latest evolution doesn’t resemble most of the scenarios of the recent past.

Typically, competition, innovation, and/or regulatory changes drive transformation, resulting in new products, providers, and pricing plans for consumers. A textbook example of this would be Amazon and eBay disrupting the retail sector. Through their own innovations and an overall advancement in technology, online retailers attracted customers away from legacy retailers with a wide variety of choices, low prices, and high convenience. This new model forced many traditional brick-and-mortar retailers who failed to adapt to go out of business, leaving very different and much more digitally-oriented sector leaders.

While the financial industry transformation features some of the same elements as their retail counterparts, its origins and intra-competitive responses are unique, and the results are still excitingly in flux.

Consumers Demand Personalized Digital Engagement from Banks, In Real Time, On Any Channel

The financial and retail sectors both have emerging competitors who are more technologically sophisticated than the incumbents. However, while financial technology (FinTech) startups have created challenges for their legacy competitors, traditional banks and credit unions have been much more resilient than their equivalents in retail. As of now, many of the banks you and I grew up with are still here (though they likely have gone through a merger or four). That’s because consumers still mostly rely on them for traditional banking, while FinTechs have largely confined themselves to more niche, specialized services (think of Venmo/Paypal for online shopping and peer-to-peer money transfers).

For the average customer, the banking disruption has taken the form of more digital fulfillment options, rather than required in-branch visits. And the origins of that shift are pretty easy to identity: having had a taste of the convenience of the digital revolution in other industries, consumers demanded it of their banks as well. But unlike their shopping center counterparts, established banks were able to accommodate consumer demand more ably. According to a survey by, nearly 40% of Americans have not stepped into the branch of a bank or credit union in the last six months. That’s not because old banks went extinct, but because they met consumer demand by shifting many services online or to ATMs. Thus, we haven’t seen digital disruptors take over the industry in the same way that Amazon captured retail (at least, not yet).

By no means, though, is the banking digital transformation complete. And one of the clouds obscuring the financial industry’s future ought to be in the shape of a smartphone. With mobile phones, consumers continue to gain unprecedented access to more information and services in the palm of their hand. As a result, smartphone-enabled consumers continue demanding more convenience from their financial institutions; the upshot is that the more basic services banks and FinTechs can migrate to smartphones, the firmer their staying power.

However, it’s not just convenience that consumers want. As a consequence of trends driven by Big Data and abetted by devices such as smartphones, today’s digital consumer has a new behavioral pattern compared to previous generations.

For instance, digital consumers are increasingly demanding “always-on” interactions in real-time from their financial institutions that are also personalized, relevant, and multichannel. Satisfying those demands is extremely challenging, and that’s even before considering that individual customers exhibit multiple personas across multiple devices. In a survey conducted by Forrester, 58% of consumers report using “cross-channel journeys” to shop for financial products, meaning that they’re browsing with one touchpoint—web, phone, app, or in-branch—and eventually enrolling or purchasing with another. That percentage will likely grow larger in the coming years, necessitating that financial institutions track and guide these different personas throughout their journeys. That can be a tall order, and data from Accenture confirms as much: 70% of consumers feel that their relationship with banks today is “transactional” in nature, rather than “relationship-based.”

If that percentage seems high to you, perhaps it’s because you thought “only millennials” have those kinds of needs. And while you may be right about that, banks can no longer afford to dismiss this demographic. According to Accenture, millennials now number 1.8 billion globally and are expected to have a lifetime value of $10 trillion. Having grown up in the digital age, this group is technologically advanced, focused on securing their financial futures, and expecting personalized experiences and convenience from all industries, including financial institutions. And yet, according to The Financial Brand, nearly half (46%) of millennials don’t think their bank markets products that are relevant to their future financial needs.

3 Imperatives for Financial Institutions Making a Digital Transformation

According to the Digital Banking Report, 84% of financial service professionals consider it important to know their customers. Financial institutions understand the need to tailor experiences to individual needs and personalize their interactions. In fact, more than half (55%) of bankers plan to increase spending on customer experience initiatives [CSI], and nearly 80% consider it important to deliver guidance to customers in real-time [The Financial Brand]. Currently, though, only about 20% of financial institutions are delivering more than basic personalization [Digital Banking Report/Everage]; clearly, there is still a significant gap to fill.

We’ve identified three key imperatives financial institutions need to address to deliver personalized, real-time experiences.

#1 Focus on Data Gathering and Consolidation

All of these multichannel, “always on” interactions that we’ve referenced generate large amounts of data, which is typically captured in various sources such as CRM applications, transactional data stores, disparate account management data stores, etc. Each data source provides a fragmented image of a consumer—a glimpse into one of the personas. Financial institutions need to bring these data sources together to create a comprehensive profile of a consumer, rather than a series of disconnected account holders across platforms and lines of business. By connecting the digital clues and gaining a single customer view, it’s then possible to interpret and anticipate future needs. Currently, according to Forrester only 0.5% of all generated data is analyzed. Richard Joyce, a Senior Analyst at Forrester says, “Just a 10% increase in data accessibility will result in more than $65 million additional net income for a typical Fortune 1000 company.” These stats are simply overwhelming and identify a clear-cut target for which the industry must aim.

#2 Build Powerful Analytic Engines that Predict and Prescribe

Personalization is not a matter of simply gathering data, but also acting on that data. And the hard truth is that anticipating customer needs requires powerful analytics engines that were once thought of as “nice-to-have.” However, only about 55% of organizations were expected to increase budgets for data analytics in 2017 [The Financial Brand]. Machine learning and predictive analytics are necessary to optimize how financial institutions market to digital consumers and should no longer be considered “optional.”

#3 Deliver Data-Driven, Highly Personalized Customer Experiences         

Having covered the need to gather and analyze data, our third imperative is about putting it all together into a cohesive system. Because digital consumers demand tailored, contextualized, interactive dialogues, marketing workflows need to synthesize and coordinate inbound requests for information with the appropriate outbound messaging. While certain modular tools can provide short-term fixes to these challenges, financial institutions will ultimately need to undergo organizational changes that break down silos and connect systems, thereby improving data flow and knowledge sharing.

The digital transformations that are shaking the financial industry—unlike comparable evolutions in the retail sector—sprung from consumer demands that remain largely unmet. Both the incumbents and the upstarts are still scrambling to harness the tools and advancements necessary to drive loyalty and engagement. The obstacles involve consolidating and acting on data, and agility in engaging with customers across channels.

If you are interested in hearing more, especially about how FICO and AWS have partnered to help financial institutions address these imperatives, you can join me for a free webinar on Tuesday, January 30th at 1pm EST / 10am PST (simply register by clicking here). As you can probably tell, we at FICO are passionate about this topic, and I hope to see you there!

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