The rise of the digital banks and digital technologies has created a pause for thought for many incumbent banks and traditional lenders. While the sector remains extremely competitive, the new generation of banks have naturally built their value proposition using new technologies. Banks have more to learn from challengers and other industry players than from their traditional industry "peers". Industry boundaries are disappearing at an alarming rate thanks to Open Banking and Banking-as-a-Service technologies.
For banks, successfully integrating personalization elements across touchpoints with customers will be critical to deliver a superior experience and thus, better financial outcomes. The “AI-Engagement” layer should provide banks with a deeper and more accurate understanding of each customer’s context, behavior, needs, and preferences. This understanding, in turn, enables the bank to craft an intelligent, contextual and personalized offering. To support this, banks need to analyze customer data in real time and embed financial services within customer journeys.
In the second part of our Quick Guide to Understanding & Competing With Neobanks, we examine how banks can take an AI-first approach to reimagining customer engagement. We focus on three elements with the potential to give the bank a decisive competitive edge.
Redefining the business model with embedded finance
The gradual shift of commercial activities toward digital channels and ecosystems has far-reaching implications for practically every sector of the economy, and each financial services organization should build a detailed strategy for competing in these new contexts. As banks design and offer intelligent propositions they need to make them accessible not only on their own platforms but also in other ecosystems that their customers are part of.
The market to date has been focused on enabling new digital banks to emerge and to embed payments into digital services. However, complexity increases as you move from payments to debit, credit, insurance and investments.
Today customers have to interact with their banks to get debit and credit cards, loans for a car or a house, and there is a lot of back and forth between the customer, the bank, and the merchant, with few options personalised to the needs of individual customers. Embedded insurance is now fast emerging too, enabling your car share service, for example, to come automatically with mobility insurance, or your new camera to come with theft and damage protection right out of the box as part of the overall price. Ultimately, financial services will disappear into the background of the solution being offered to a customer.
Embedded Finance, as opposed to reselling financial services, is attractive to digital brands and merchants because it creates new revenue opportunities at very low marginal cost (the brand already has a customer base). It enables new customer experiences that drive loyalty and repeat purchase and allows merchants to capture more of the economics of the relationship.
Reducing Customer Acquisition Costs
It is very expensive for traditional banks to acquire new customers. The acquisition cost of a retail banking customer could range somewhere between $200 and $800. Now more than ever, banks are under pressure to reduce customer acquisition costs in order to achieve profitability. Challengers banks and FinTechs are winning massive amounts of customers through aggressive growth strategies. These disruptive new entrants are also reshaping customers expectations. Banking is no longer competing on interest rates, fees or rewards. Instead, banking is about competing on customer experience.
Much of the opportunity to decrease customer acquisition costs happens during the onboarding process. Opening a new bank account is the first experience customers have with a bank, so that reducing friction in the customer onboarding journey will significantly reduce customer acquisition costs. This can be easily achieved by completely digitizing and personalizing customer onboarding.
On the other hand, conversational banking should be a hot topic for most high street banks due to its enormous impact on lead conversion and thus on reducing costs of acquiring new customers. Conversational banking creates a cohesive customer experience, no matter how and where a customer reaches out. Also, banks need to rethink their lead nurturing strategies, building relationships with potential customers that may not be ready to buy, but are potentially profitable customers. The best way to nurture leads is to hold personal conversations on the channels that customers prefer. This communication gap represents a chance for banks to address a common pain point for customers, and those who bridge the gap build more competitive business models and decrease customer acquisition costs.
More importantly, by looking at ways to increase your Net Promoter Score, for instance, by including referral programs, your customers will refer your brand to a warm lead from their network who is already somehow interested in your product or service. By providing an excellent customer experience, customers will recommend your product without the need of being rewarded. Their particular CAC will be close to zero if they convert.
Boosting Customer Lifetime Value
Customer Lifetime Value is one aspect of the customer journey that is being heavily impacted by the rise of digital technologies. Now customers are less focused on a particular brand but on finding the right features and services that work for them. Utilising digital technologies such as AI and Big Data can lengthen customer lifetime by reshaping and extending the customer journey.
By servicing the needs of a customer through different stages of their life, customers will require, and therefore be willing to pay for, more services. The bank's role is to satiate these needs in an embedded and contextual manner. The challenges for a bank are how they can meet these needs in a timely, responsive and helpful manner, and this is more critical now than at any other time in history.
The impact of digital technology such as AI, cloud computing, big data, automation and others has already had profound impacts upon customer life journey. To be in a position to offer solutions, advice and appropriate products at relevant times to their customers, banks require a genuine understanding of each customer and their financial lives. It is only by understanding the focus, needs and wants of their customers at each stage of the journey that they will be able to sell more products and services.
Also, one of the prime benefits of moving to digital banking for customers has been that they are free to conduct their daily financial experiences at any time or point in the day, without requiring anything further than their smartphones. This provides boundless possibilities for banks to extend and deepen the customer journey by increasing the likelihood customers will purchase not only financial products but other services when the need arises. The more banks learn about their customers, better new products and services can be derived. This could potentially also involve creating white label added-value propositions that can be sold on to the ecosystem, creating new revenue streams and amplifying the volume of ingestible data. As well as new offerings, data can also be used to make operational savings across front, middle and back-office in the bank business infrastructure.
If you are interested in finding out how Strands can help your bank, or if you would like to get a Free Demo of our AI-powered Financial Management solutions, please fill out this form and one of our Sales Reps will get back to you as soon as possible.