Across UK industries, the rise of digital solutions is enhancing the accessibility, transparency, and quality of services available to consumers. There are two key trends that are shaping UK banking space. First, FinTech firms are muscling into financial services, raising consumer expectations for personalized, integrated services from banks as well. Second, UK regulators are beginning to demonstrate their willingness to open up financial services for non-traditional entities (PSD2) to increase competition.
Responding to the digital needs of customers, UK banks have started investing billions to revamp their IT infrastructure, modernize online product offerings, implement big data analytics, and train employees on digital technologies. However, even with these digital initiatives, legacy banks have a long way to go to offer a seamless online experience similar to FinTech or tech titans like Google or Apple.
In this whitepaper, the following aspects of the financial service industry in the UK are highlighted:
- Where legacy banks lag behind in terms of customer experience
- Strategic considerations for legacy banks to retain market share, enhance customer experience and boost revenues
DISRUPTIVE FORCES IN UK FINANCIAL SERVICES
New FinTech companies are disrupting financial services in every way consumers and businesses interact with their money. Digital challenger banks offer banking accounts that practically live on smartphones, providing transparent and real-time details about a consumer’s money and transactions.
67% of consumers in the UK use mobile banking for checking their balance, paying bills or transferring money. Disruptors are engaging with customers across devices and communication channels such as mail, messaging and phone in order to cater to evolving customer expectations. They are offering AI-enabled digitized services including customer onboarding, ID verification, and resolving customer issues.
Legacy banks face competition from four distinct groups of disruptors:
- Digital banks, which offer mobile banking services without the hassle of visiting a branch. They have been efficient at driving customer engagement through digital channels to create an effective user experience.
- Investment management companies competing for the wealth management business of traditional banks by providing customized solutions based on sophisticated data aggregation.
- Payment platforms that are piggybacking on banking infrastructure to provide faster, more economic transaction services both domestic and internationally.
- Alternative finance companies that include marketplace lending, crowd funding, and invoice trading observed a 43% year-over-year growth in 2016 from £3.2 billion ($4.3 billion) to £4.58 billion ($6.17 billion).
These disruptor companies have successfully engineered and executed a complex orchestration of digital products and services that generate value for the end users. UK FinTechs have seen significant traction and have already raised more than $1 billion as of September 2017.
They have focused on:
- Driving positive customer engagement using synergy from customer interaction technologies and AI-driven analytics to create an effective user experience for digital products and services.
- Creating and measuring customer context to develop and enrich data from different sources, manage it in a defined architecture, and analyze it to generate actionable insights.
- Intelligent execution of advanced technologies such as NLP, robotics and cognitive automation to create revolutionary digital products and services.
In the future, the PSD2 open banking regulation will be a catalyst for disruptive players since UK banks are mandated to open up their customer data to third parties through a secure API. Consumers will have more choice on how and where to manage their money. These developments put the spotlight on customer centricity. Adapting to this new normal is not an option but a necessity for high street banks.
DIGITAL TRANSFORMATION STRATEGY FOR UK BANKS
To remain competitive, UK legacy banks must develop a digital transformation strategy to take on the new wave of innovative challengers. This will take more than reducing ATMs and branches, or giving a cosmetic overhaul to the products and services portfolio as consumers become more digital savvy. The only way to truly transform the banking experience will be to create a meaningful, individual customer experience through focusing on analytics and AI-enabled automation.
UK banks can use the following transformation framework to successfully navigate digital disruption and thrive in a rapidly evolving technological and regulatory environment.
Fig 1: Digital transformation roadmap for UK banks
1. ASSESS CUSTOMER NEEDS TO DESIGN INNOVATIVE PRODUCTS AND EXPAND THE VALUE CHAIN
Customer data has long been a proprietary asset of UK banks, creating a closed market of financial services. Previously tech giants like Google and Facebook had to negotiate with banks to access customer data when given permission, which restricted their opportunities to enter financial services. Less glamorous startups had an even more limited scope and had to ask for a customer’s login username and password to scrape transaction information from the webpage. With open banking, banks must now ensure that customer data is accessible to duly regulated organizations, including competitors, subject to a customer’s permission. This new rule potentially disrupts the equations of market share, enabling FinTechs, challenger banks, and tech giants to compete with legacy banks. It creates enormous financial freedom for consumers, empowering them to easily switch financial service providers per their needs.
A significant impact of open banking regulation will be a disaggregation of the financial services value chain, dismantling complexity for financial products and services. Customer will only need to pay for the specific set of services they need. As these new digital disruptors threaten to eat into the bank value chain, banks need to develop innovative new services and product lines to enhance revenue and strengthen the customer relationship. Legacy players must now drive innovation in product design by integrating data management to understand customer life events, demographics, shopping preferences, and financial goals. For example, this could include offering insurance policies to newly married customers, or providing apps for monitoring spending habits to enable better financial management. FinTech innovation can also be leveraged through partnerships or acquisitions to deliver a broader ecosystem of services and offerings.
With numerous new entrants in financial services, losing customers will be easier than ever. Legacy banks will need to differentiate themselves with superior offerings and customer experience to position themselves as trusted financial advisors, rather than just a utility provider.
Fig 2: Comparison of banks in traditional and digital banking eras
2. SIMPLIFY BANKING FOR CUSTOMERS
Simplification means intuitive interfaces, fewer options, and shorter journeys.
Consumers expect the same convenience and simplicity from financial institutions that they demand when ordering food or a driver. While legacy banks are strongly pushing towards digital banking that enables customers to research, buy, and manage products including loans, bank accounts, savings, and investments through digital touch points, not all have been able to effective in executing their strategy. Legacy banks must understand how to use customer journeys to aid in the design, development, and execution of the brand’s digital strategy. This calls for adopting a design thinking approach to re-create customer journeys that enable banks to integrate the needs of consumers with streamlined internal operations. Attributes like concise and contextual messaging, on-click services, minimalistic interface design and visual communication can go a long way to incorporate simplicity into a bank’s brand identity.
Banking can be made effortless for customers by:
Fig 3: Road map for simplifying processes
3. TAKING A CX-CENTRIC APPROACH AND PROACTIVELY MEASURING CUSTOMER EXPERIENCE THROUGHOUT CUSTOMER JOURNEYS
Frictionless customer experiences create strong brand advocacy, yet many banks rely on reactive metrics like retention rates and annual NPS to keep track of it. This might be too little, too late for these brands. Based on research of the four largest UK banks – Barclays, HSBC, Lloyds and RBS – it is clear they missed out on an average of £3.7 billion between 2015 and 2018 due to inadequate customer experience offerings. Therefore, proactively measuring customer experience should be a strategic priority for UK banks.
FinTechs like Venmo have been successful in taking a CX-centric approach and competing with incumbents on account of faster payments. In the same spirit, banking leaders need to come to terms with the relevance of customer experience in retail banking. In the past banks competed on three factors: price, product, and scale. Now, banks not only need to deliver their services, but deliver them in the way the customers want. Therefore, banks need to set up processes to proactively measure and enhance the customer experience they offer and personalize customer interactions across all the touch points in an integrated fashion. This is vital for a bank to differentiate itself from the competition and stay ahead of the new entrants.
With the establishment of the Open Banking Implementation Entity (OBIE), customers will now be able to share their financial information with firms other than their bank . This is an opportunity for banks to position digital transformation as a strategic initiative to drive their own FinTechs and is really the only effective way to use their size as an advantage and compete against Fintechs. For example, consider RBS, which has recently launched a automated lending platform called Esme, which enables SMEs to easily procure loans within a short span of time even beyond office hours. The service is built on Ezbob’s LaaS (Lending as a Service) platform, which also powers Ezbob’s small business loans services.2
Fig 4: Customer Experiences in Banking
The key to building a better CX infrastructure is to measure the aggregated experiences of customers throughout their journey across all brand interactions:
- Build capabilities to deliver the optimal experience based on customer context
- Determine what the future journey looks like
- Design a relevant, succinct yet navigable UI
A successful customer experience measurement program comprises of the following steps:
Step 1: Identify experiences to measure
o Break down the customer relationship into journeys, and journeys into interactions Step 2: Define customer experience metrics for each interaction
o Choose attributes such as ease, satisfaction, engagement
o Dimensions may include whether an interaction is enjoyable, easy, meets customer needs
Step 3: Align on the defined metrics to measure customer experience across the organization
o Metrics may include NPS, repeat visitors
Step 4: Collect the data
o Use tools including customer surveys, social listening, web analytics
Step 5: Leverage machine learning and AI to mine feedback data to identify gaps and revise strategy
o Look for methods to better match customer needs with products or services
o Identify opportunities for personalized communication
Step 6: Set clear goals to improve customer experience score across business functions
o Define desired touch point satisfaction levels
o Set a maximum number of complaints at different points of customer journeys
Step 7: Review customer experience status and metrics regularly
o Strategies include call monitoring and customer representative feedback
4. ENRICH BRAND EXPERIENCE THROUGH PERSONALIZATION
Customers now have a shorter attention span, seek more value for their time, and are surrounded by more choices of financial products. Banks must make efficient use of their customer’s increasingly expensive time. That makes it important to personalize their offerings, deciding what, when, and what channel (email, message and phone call) to contact customers based on the context of their past and current journeys. It takes anticipating customer needs and proactively reaching out to them with relevant offering, rather than forcing customers to scan through a laundry list of banking products in a mobile app.
One-to-one, real-time personalization for a large bank with millions of customers involves massive computational complexity. Incorporating machine learning algorithms and AI applications in a decision engine can enable banks to churn petabytes of data in real time. This helps optimize every single brand interaction based on all the available historical information about a customer.
An integrated data ecosystem helps banks to decipher the needs and preferences of their customers, which is crucial for delivering highly customized digital experiences. They need to be more dynamic and predictive to come up with the next optimal action to meet immediate customer needs, as well as help customers to reach their long- term financial goals.
Here are some examples:
• Robo-advisor digital platforms: Robo-advisor platforms provide automated, algorithm-driven financial planning services with minimal human supervision, enabling advanced banks to incorporate personalization into the financial consultation space. It is expected that these capabilities in the future will evolve into more advanced offerings such as automatic asset shifts, and expanded coverage across alternative asset classes like real estate.
A Business Insider study suggests that the total assets under management by robo-advisors in 2016 only represented $10 billion of the wealth management industry’s $4 trillion, less than 1% of all managed account assets, and this figure will likely rise to 10% by 2020. Top UK banks are still considering using digital robo-advice service, while some startups like Nutmeg’s robo-advisors are doing well as they make investment decisions on behalf of its customers. They create diversified portfolios for customers, as well as invest money in different types of assets, countries and industry sectors.
Robo-advisors can also recognize customer spending patterns and predict account activity. For example, a customer with a low balance and upcoming bills might appreciate a personal overdraft offer from a bank with the ability to apply online using a mobile app. In addition, banks can use chat bots, voice command technologies, and intelligent robot-advisory platforms to provide personalized financial advice when customer needs.
• Data-driven cross selling: Most legacy banks rely on guesswork or simple decision rules when devising their communication and cross-selling strategy. Data analytics can play a vital role here by using customer history to help devise a segment-based approach for making the right data available to the right people at the right time, and identify additional products and services to sell. Data analytics can thus help in leveraging the triggers and inclinations of the customers, and use this information to introduce them to the best next products.
• Location-based marketing: Banks should use predictive analytics to target mobile users who enter a defined geographic area to personalize customer notifications. For example, the mobile app of a person is passing by a shopping outlet could display offers related to credit card reward points. The predictive analytics model can divide the customers into different categories based on their customer personas, and serve content accordingly to create convenience and eliminates unnecessary distractions.
5. EMBRACE TECHNOLOGY WHILE ENSURING CYBER SECURITY
Digital technologies open up new possibilities for cyber-crimes. Fraud over digital channels cost the UK a whopping £10 billion in 2016. Financial industry fraud takes a toll on consumer confidence and damages brand image for banks managing their hard-earned money.
Banks traditionally have been skeptical of new technologies due to the sensitive nature of customer data. For example, legacy banks have concerns regarding transferring personally identifiable data over cloud, although centralized decision making in a cloud framework does add significant efficiency and agility to their business. This approach is passive and sub-optimal.
Banks should adopt these key strategies to leverage data and ensure cyber-security:
• Bolster cyber-security via artificial intelligence: Banks should leverage artificial intelligence to understand the prospects of malicious activities, anticipate subsequent movements, and alert customers before fraud even happens. Banks can build a team of data scientist deploying a pipeline of artificial intelligence, machine learning, and operational analytics to determine abnormal behavior associated with transactions, file systems, and application processes. Process improvement and protocols for cyber-security should be passed on to the employees.
• Deploying automation systems: Automation synced with AI can help set up new engagement models and ensure real-time protection against cyber-attacks. This can include real-time data encryption or manipulation to subtly change what attackers see as targets. Automation can help cyber-security teams prioritize and focus on riskier threats. Artificially intelligent surveillance can also help avoid inappropriate access to sensitive data. Leveraging natural language processing programs to scan internal communications can enable banks to flag possible suspicious activity by employees. Some seemingly common threats such as phishing attacks can be validated and responded to by automation systems. Thus, these systems can generate help in monitoring the advancement of cyber-attacks.
• Visual dashboards: Visualizing cyber activity data can help security teams figure out how contextually valid a cyber-threat is, as well as give a representation of the extent of the probable damage. Visualization can enhance the ability to interpret and react to security events. This helps the efforts of AI and automation infrastructure by validating variations in usual patterns as cyber-security threats.
With open banking, customer data will be more interconnected across multiple organizations. One security breach can spread to a large number of customers through the network very quickly. This calls for additional stress on cyber-crime prevention. Along with banks, customers can also play an important role to prevent frauds by being more prudent while using the internet and following bank security guidelines while sharing financial information.
Many frauds are not reported because customers don’t notice the illegal activity due to minimal financial loss or not having enough legal knowledge on what to do in case of fraud. Banks go unscathed in these cases despite failing to protect their customers’ interests. Regulators must implement robust laws in case of any fraud to ensure accountability from banks. One such step from UK regulators in this domain is the GDPR, or General Data Protection Regulation.
A collaborative effort is required to fight fraudsters as UK banking undergoes a digital shake up.
6. INCORPORATE DIGITAL DNA INTO ORGANIZATIONAL CULTURE TO BOOST EFFICIENCY AND AGILITY
The operating culture of incumbent banks lacks agility compared to FinTech start-ups due to their large scale and/or old-world organization mindset. Banks must focus on building a culture that fosters innovation and responsiveness. Otherwise, they will lose their business due to customer dissatisfaction and competition.
Data analytics, artificial intelligence, and machine learning are real digital catalysts. With the increase in the incoming data volumes due to the proliferation of data sources (IoT, web, mobile, social etc.), traditional data analytics practices have lost their sheen. Banking organizations need to find ways to analyze the vast amounts of data they are accumulating to derive proactive, real-time insights. Advanced analytics comprising of techniques such as machine learning, deep learning, and network analytics reduces the manual intervention and the time required to arrive at these insights. Traditional banking organizations can incorporate these practices to tailor highly personalized customer journeys and identify business process improvement opportunities in an agile fashion. Banks can leverage advanced analytics to build better recommendations, trigger alerts at the right customer moments, predict end user behavior, and identify suspicious or fraudulent activities.
Legacy systems have resulted in inefficient paper-based processes especially in the middle and back office. They usually have siloed data sources and are based on manual processes, which result in a poor ability to respond to change and develop new offerings. Some of the typical challenges associated with legacy systems are as follows:
• High complexity
• Flexibility issues when adapting as per changing business requirements
• Expensive to support and maintain
• Endless customization
• Data synchronization and redundancy issues
As a result, traditional banking organizations lack the ability to build a fully integrated digital system from scratch. Although a lot of customer-facing functions such as net banking and mobile payments have been digitalized, there are still many back and mid office processes which involve manual and paper-based efforts, are prone to high error rates, and inconsistent. The way forward lies in the development of a multi-platform architecture which promotes integration of different legacy systems through APIs.
Furthermore, bankers can introduce robotics process automations to enable workflow optimization and provide a core for digital transformation across the front office, middle office, and back office. Through robotic process automation, organizations can set up computer programs to capture and interpret existing applications for processing a transaction, manipulating data, triggering responses and communicating with other digital systems. This helps in a variety of ways, such as reducing human involvement, easy retrieval and management of information, automatic documentation, and providing an end-to-end view of processes. To summarize, RPA eliminates the siloed approach of legacy back office systems and promotes transparency.
Most of the digital innovations mainly revolve around the front end, while the back end often remains overlooked. Digital transformation in front end has enabled faster onboarding, cross-selling and retention, which has resulted in a lower cost of customer acquisition and higher lifetime value . The middle office transformation is also necessary to streamline operations. Digitalization in back office is equally important. Retail banks have to take right steps in bolstering back office by improving fraud surveillance risk using digital capabilities. This would help the bank in improved customer experiences and translate into greater market share.
Even though digital transformation of the mid office and back office is important, banks are not doing much. As per a recent research report, only 38% of CIOs stated that their banks are considering the digitalization of the middle office functions. The digitalization of the middle office provides centralized governance of products and customer segments as well as centralized focus on control functions such as product development, and can surely give a sustainable competitive advantage to banks. The eventual output will be streamlined and automated front-to-back processes.
Digital transformation is a cultural transformation, and is beyond just a project requiring investment. In a rapidly evolving market, challenging the status quo will be the key. Banks must change the risk-averse mindset of their employees to test new ideas that deliver seamless customer experience. Gone are the days of taking an idea through a yearlong series of meeting and approvals before it has a flicker of hope for implementation. Legacy banks need a top-down approach to shift organizational culture, from the CEO down to each individual employee. This massive change can’t happen overnight. Leadership must build a digital culture through empowering employees and moving forward with consensus.
Banks must also curb their sales-driven mentality and incentivize employees based on customer experience to differentiate their brand. This requires empowering employees to give a better experience to individual customers. Though customer experience might not lead to immediate increase in sales, it does deepen a bank’s relationship with customers and creates future business opportunities. Getting the culture right is crucial for executing a digital strategy. Banks need to adapt to a culture of small prototypes, testing assumptions, winning over key stakeholders over and driving change across the enterprise.
Given the scale, capital, and consumer trust legacy banks enjoy, they should invest in cloud solutions, IOT digitalizing, block-chain and other advanced technologies. From a customer perspective, banks should try to be more agile. The focus should not be just on offering a journey-based customer experience, but empowering customers to do things themselves – for instance, regarding their data – through business developments both in-house and through partnering with disruptors to thrive.
The digital transformation strategies provided in this paper can help legacy banks redefine themselves as agile and collaborative brands consistently catering to evolving customer needs. Some leading banks have adopted these strategies to transform their mindset and designed new products and platforms. TSB has built a banking platform for the digital age that verifies customers through an iris scan, letting the customer access their account just by glancing at their phones. HSBC has published an open banking API and built a mobile app to evaluate some of the features promised by open banking. RBS launched first investment robo-advisor in the UK through NatWest Invests. Barclay’s Accelerator and Lloyd’s Fintech mentoring program are few examples of collaboration between legacy banks and FinTech startups. There will be more success stories as banks mature on their digitization journey. But, banks that focus on outcome-based transformation and design thinking will be leading the pack.