March 8, 2019

How Can Banks Survive and Thrive in a World of Automated Finance?

AUTOMATED FINANCE IS COMING

Self-driving cars hold great promise to completely revolutionize transportation, making driving not only effortless, but – more importantly – safer. While convenience will be viewed by many as a selling point, safety is the critical benefit that will make driving accessible to those who lack confidence behind the wheel or are unable to drive.

The automation of money management and financial decision making holds a similar promise. While many could benefit from self-driving cars, all of us can use help managing our money – from day-to-day spending to big financial decisions, such as buying a house or investing for retirement. And although bad financial decisions may not have the same kind of immediate impact as bad decisions made on the road,  they do nonetheless have dire consequences – ranging from our ability to meet ongoing obligations to how well we prepare for the future and our overall personal wellbeing.

Ironically, financial advice is available today mostly to individuals who need is least and are already well off. Self-driving finance can democratize financial guidance, making it accessible to the billions of people who actually need it. 

A vast majority of bank executives understand that automation is imminent – almost three quarters of them believe retail banking will be at least 80% automated in the very near future. The question remains: what will be the role of banks in a world where managing our finances is increasingly automated?

It will clearly change how people interact with their financial services providers, and banks that fail to adapt risk being left out. Banks that position themselves as providers of automated finances will be the beneficiaries, but they have to start today. 

THE NEED FOR BETTER FINANCIAL DECISION MAKING

By now, the often-cited statistic that 40% of U.S. adults could not cover an unexpected $400 expense has become ingrained in our minds. With the personal savings rate at a mere 7.6% for 2018, the retirement savings gap in the U.S. increases by $3 trillion every year and is estimated to hit $137 trillion by 2050. Compounded by a record-breaking $870 billion in credit card debt and $1.5 trillion student loan debt, a majority of U.S. households are ill-prepared for emergencies and the future.

Consumers elsewhere are not fairing any better. A recent survey showed that one out of every two adults (46%) in the U.K. is in debt. In fact, British families started 2019 owing a record of £15,385,  referred to as a “crisis level” debt by the Trades Union Congress. Despite reporting a monthly average disposable income of just £370, the average spent on non-essential items is as high as £1,100 a month.

Small business owners – the true drivers of the economy – face their own financial challenges, many of which can quickly spiral into a “make it” or “break it” situation. Almost as many small businesses that are being created go out of business each year (205,000 out of 220,000 in 2014). More than 40% of U.S. small business owners report having been at risk of missing payroll due to cash flow issues. This is not surprising when the median small business holds just 27 days of cash reserves while 81% of invoices are at least 30 days past due. Entrepreneurs have little time to manage their finances, so it is understandable why so many fall behind.

WHY BANKS FALL SHORT TODAY

Not surprisingly, the challenges experienced by consumers and businesses are closely reflected in their relationships with their banks.

To begin with, there is a wide gap in the trust consumers place in their banks when comparing transactional and advisory relationships. According to Celent research, 86% of U.S. adults consider their money to be completely safe with the bank, while only 44% trust their bank to provide competent and unbiased advice. These results go hand-in-hand with the lack of personal relationships customers have with their banks. The Celent survey revealed that less than half of customers believe their primary bank knows and understands their financial needs — a disconnect that continues to reinforce the trust gap.

For now, that trust gap is a formidable hurdle to overcome but it is not insurmountable. In fact, data indicates that consumers might just want this gap closed more than banks do, or at least more than their efforts indicate. Research from J.D. Power shows that 78% of retail banking customers are actually seeking personalized advice from their banks, and an overwhelming 89% of those that received it reported benefiting from it. Yet, according to the same survey, only 28% of customers recall receiving advice from their bank.

With a market that is ripe for such personalization, why is it so difficult for banks to really know and understand their customers?

The first barrier that many bank’s face is a lack of strategic focus across their organization to drive toward such a transformation. Efma’s Innovation in Retail Banking report found that while 73% of banks were focused on being innovation leaders, only 37% had a strategy to achieve this innovation.

Banks may also need to overcome a variety of issues arising from the current state of their data including silos, poor quality, accessibility, processing speed, and even a lack of data analytics talent. Capgemini research indicates that close to half of financial institutions (44%) are unable to analyze data and deliver personalized insights quickly enough to make them effective and useful to their customers.

WHAT IS CHANGING: CUSTOMER EXPECTATIONS

Banks do not operate in a vacuum.

When U.S. Bank began preparations to rebuild their mobile app from the ground up, they looked outside the industry to digital solutions delivered by Fitbit, Delta, Facebook, and Uber. Tim Welsh, the bank’s vice chairman of consumer banking, told American Banker that “customers’ expectations of a bank are set by their experiences in other industries. You can push a button on your phone and a car pulls up, why can’t I push a button and get a mortgage?”

Likewise, Huntington National Bank looked at the customer experience in today’s world and found that expectations have been set based on experiences provided by the best digital-savvy brands which dominate ecommerce and online life.

Companies like Google, Apple, Facebook, and Amazon have conditioned customers to expect instant, frictionless, and personalized experiences that cater to their unique interests and anticipate their needs. Now, no matter which brand or industry they are dealing with, consumers expect that same level of superior value, personalization and simplicity with every interaction.

To survive the next evolution of the industry, banks will need to find a way to make customer interactions as relevant at the individual level as those delivered by the most insightful and attuned digital leaders in other areas of our lives. At the same time, the revolution in customer experience is not only banks’ biggest threat, it is also their greatest opportunity to increase engagement and loyalty.

WHAT IS CHANGING: TECHNOLOGY

In the same article published over half a century ago in which he predicted the invention of self-driving cars, Intel’s founder Gordon Moore laid out the theory for his namesake law, predicting  that computer processing power will double every two years. In reality, we have seen a trillion-fold increase in processing power in roughly the same span of time since Moore put his theory to paper.

Now, in the same world in which some banks are scrambling to find IT support familiar enough with COBOL to maintain their legacy systems, the number of mobile connected devices has exceeded the global population. Digital engagement is ubiquitous with more than 80% of Americans owning a smartphone, and their average daily usage is exceeding the amount of time spent watching television. Banks looking for their customers can find them, at least for three hours and forty-three minutes every day, on their mobile phones. And if they are looking to engage with millennials, they have approximately 150 chances per day to do so, as that is how many times they check their phones.

Last but not least, AI algorithms have become ubiquitous enough to play a role in our day to day lives. In banking, the use of AI allows financial institutions to readily transform customer data streams into recognizable patterns.

Combined, these three technology trends provide a pathway for banks to deliver personalized insights at scale and make them available to customers in real-time on any device, creating new and exciting opportunities to transform the everyday banking experience.

WHAT IS CHANGING: COMPETITION

It has been a quarter of a century since Bill Gates observed that while banking is necessary, banks are not. For banks, the rapidly growing rate of consumers and small businesses that are turning to alternative providers of financial services is alarming. According to EY’s Global Fintech Adoption Index 2019, the adoption rate for fintech services clocked in at 68% among consumers and 25% for small businesses worldwide.

Challenger banks around the world are capitalizing on the demand for digitally centric, customer-focused banking experience. European challenger bank N26 alone has seen its customer base grow from 100,000 to 3.5 million in just three years. US-based Chime has opened over two million online checking accounts and is signing more new customers each month than either Wells Fargo or Citibank, while U.K. digital-only bank Monzo has built a customer base of 2.2 million in just four years.

Alternative options are also challenging traditional banks in the lending space, with the promise of easier online application processes, quicker approvals, and direct access to cash. These benefits are particularly appealing to younger, more digitally savvy customers who are used to online interactions. They also attract less-qualified applicants who may be reluctant to engage with traditional banks.

SoFi, an online finance company founded in 2011 that focuses on student loan refinancing, currently has funded over $40 billion in loans to over 700,000 of their members. Meanwhile, online lender Kabbage is offering small business owners the opportunity to skip the bank loan approval process for quicker access to operating capital, qualifying in ten minutes or less for lines of credit of up to $250,000.

Perhaps the biggest threat looming over traditional banks comes from the big tech firms. A survey by Bain & Company shows that most people trust at least one big tech company more than they trust banks in general.

In India, consumers are itching for big tech banking, with 91% of those surveyed ready to do their banking through a major tech player. In China, mobile payments have surpassed 40 trillion USD in 2018, with non-banking platforms Alipay and WeChat Pay handling more than 90% of this volume. And in the U.S., 65% of Amazon Prime customers said they would try out a free online bank account if Amazon eventually offered one.

The writing on the wall is clear, and banks are taking notice. As Jamie Dimon, Chairman and CEO of JPMorgan Chase said: “You know that they’re out there. You know they’re coming. You know they want to eat your lunch. Assume it. And it might not be the ones we see. It might be the ones we don’t see.”

HOW CAN BANKS POSITION THEMSELVES AS THE PROVIDER OF CHOICE IN THE AGE OF AUTOMATION?

Banks are investing substantial resources in digital transformation. Having spent at least $1 trillion on digital technology and solutions over the last four years, the pace of these investments is only likely to increase as competition accelerates.

But a digital transformation that simply makes banking services faster and easier to access is not enough for banks that want to engender trust and loyalty. The leaders in this space will be the providers that successfully turn banking into a personalized experience that speaks directly to each customer’s financial circumstances and helps them improve their lives in a practical way. According to research by CEB (now part of Gartner), banks that help customers take the right steps in their financial journeys generate one-and-a-half times as much loyal behavior (which directly translates into increased revenue) than banks that do not.

Focusing on the customer experience and advancing the bank as a true and trusted advocate for their clients is a win-win proposition that lays a firm foundation for sustainable growth. Personalized guidance, presented as simple, specific, bite-sized insights with clear calls-to-action, empowers customers with the knowledge and means to better manage their accounts. With day-to-day advice saving them money in tangible ways, customers’ trust in the bank as a source of unbiased financial guidance will grow in lockstep with their improving financial wellbeing.

Small business, who are largely underserved by their banks — with only 41% of owners currently banking digitally — will also see substantial benefits from better tools for managing their money. Alenka Grealish, Senior Analyst at Celent Banking Practice, said: 

Historically, delivering value-added services to small businesses has been cost prohibitive for banks. AI allows banks to customize service and provide advice digitally, thereby lowering costs and democratizing services that were only available to large businesses in the past.

As the trust gap closes, banks directly benefit from happier customers as they spend more time in-app, providing new opportunities to engage with them about new products and services. These customers not only bring more of their own business to banks, they also bring their friends and family as they spread their satisfaction through word of mouth. This provides financial institutions with the opportunity to not only increase their share of wallet with current customers, but also expand their base with new customers.

NEW SOLUTIONS REQUIRE A NEW MINDSET

For a long time, banks have attempted to address customer advocacy by offering financial education in various formats, such as articles and lectures. These may have been helpful to some individuals, but have failed to generate broad levels of engagement and a measurable impact on customer behavior.

In contrast, one of the most effective tools available to make financial journeys successful is the “nudge,” a personalized and actionable tip that helps move a customer toward the smart choice that benefits them most. Pioneered by Nobel Prize-winning economist Richard Thaler, the “nudge theory” recognizes that people are predisposed to take the easiest path or take no action at all, even when it might work against their financial wellbeing.

In the context of everyday banking, a “nudge” presents a clear and easy choice to fix the problem, such as “Do you want to click here to cancel one of your two redundant music subscriptions that is costing you extra money?” This is an easy choice to make and an easy action to fulfill, and one that they probably would not have pursued without the notification.

“Nudges” can also help keep customers on track to meet budget goals and prompt them to safely move money into interest-earning savings accounts when not needed for impending payments. Spending too much at restaurants this month? With a spotlight on the total your current dining expenses, a “nudge” can be just the encouragement you need to cook a few more meals at home.

How this experience is delivered makes a world of a difference. Telling a customer that the average person should be saving 15% of income every month can be annoying and stressful. In contrast, the same customer would be delighted when prompted with a timely tip pointing to an extra $23 in their checking account that they can safely move to their savings account right now, without risking overdraft.

From cutting redundant expenses to adding money to savings to staying within budget, personalized insights and guidance offered to customers result in tangible improvements to their financial wellbeing, boosting the position of the bank as a trusted partner and advisor.

THE PATH TO AUTOMATED FINANCE

Just like self-driving cars, self-driving finance is not an all-or-nothing proposition but rather a multi-level framework with increasing degrees of autonomous capabilities. Each level provides a foundation for more advanced capabilities that can be added to the bank’s offering while delivering immediate value to the customer and to the bank.   

1. Data to display what is happening: Transaction categorization and account aggregation to provide an integrated view of the customer’s financial history. 

1. Insights to display what is important: adding a layer of analytics to highlight exceptions and important events, including predicted upcoming risks and opportunities. 

1. Advice to tell customers what to do: Moving from descriptive and predictive to prescriptive analytics, offering just-in-time advice to help customers improve their day-to-day finances and reach their financial goals. 

1. Automation to act on behalf of the customer: the ultimate level of self-driving finance automates decisions to help customers save more, increase investments, and pay off debt. 

At its most advanced stage, automated finance moves customers towards a hands–off / mind-off experience in which the decision-making and follow-up actions are made on their behalf. Whereas insights and advice guide the user towards a recommended action, now the action is automatically taken with their informed consent, giving customers the freedom to take their focus away from the chore of everyday banking.

For instance, consider the case of a customer who has long wished to increase their savings but rarely finds the extra money to allocate toward this effort. Powered by AI, the bank can now analyze this customer’s transaction data to identify patterns that reveal when money can be safely allocated to savings without risking an overdraft. These calculations are performed in real-time, maintaining a constant look-forward to safeguard the customer from future trouble, as the money is moved frequently and in small amounts as opportunity arises.

Whether it is saving money, paying down debt or some other money management task, this automated process removes the emotional bias from the decision-making and replaces it with a data-driven strategy that pursues success in the most efficient manner.

DELIVERING AUTOMATED FINANCE ON TIME AND AT SCALE

Creating a new experience that is focused on the customer and positions the bank on the path to success in the world of automated finance is not a trivial task for any bank. Starting with a blank drawing board, the journey towards a personalized banking experience and self-driving finance might seem like a long and winding road. Even at the largest financial institutions, internal teams are already stretched to their limits maintaining and upgrading current systems. Where would they find the time and resources to reinvent the wheel?

By partnering with the right provider, banks can short cut the process, allowing internal teams to focus on keeping the car running while they upgrade to a new set of tires that have already been redesigned and road-tested for them.

Any solution a bank opts for must address their needs beyond here and now. Looking over their shoulders at the threat of new financial services providers, bank executives recognize the dynamic nature of the competition and the need to continue adapting to customer expectations. According to an Economist survey, 52% of bank leaders see product agility as their top strategic priority.

The ability to customize at every level, from appearance to messaging and functionality, is necessary for banks to differentiate themselves from their competitors. Such flexibility empowers banks to quickly adapt to performance results, tweaking the solutions as needed, creating new ones to address emerging customer needs, and dropping those that fail to resonate.

Delivering at scale also means that banks must avoid recreating the very same silos that have slowed them down so far. Any new solution the bank is considering should have the ability to serve multiple business lines with a single platform – retail, small business, and wealth clients.

ENABLING CUSTOMERS, BANKERS, AND INTERNAL DELIVERY TEAMS

Data from J.D. Power shows that the most satisfied customers are those that do their banking both digitally and in-branch because, put simply, “They want to have a conversation,” according to Joe Wheeler, J.D. Power’s Senior Director, Mid-Size Bank Practice Lead. In fact, their research shows that 78% of ‘emerging affluent millennials’ are interested or very interested in receiving relevant advice from branch staff.

Although it might sound counter-intuitive, automated finance platforms should also reach out beyond mobile and online interactions, providing equivalent customer experiences across channels and empowering frontline employees in branches and call centers to engage through the same personalized insights and advice delivered digitally to customers.

As Bob Meara, Celent’s Senior Analyst, stated, “enabling bankers to provide AI-powered personalized advice that is synchronized with the insights delivered directly to customers helps create a seamless experience across all channels and improve in-person customer engagement.”

LEADING BANKS ARE ALREADY TAKING BOLD STEPS

Millions of bank customers across the globe are already experiencing the benefits of automated finance through deeper insight into their finances, additional opportunities to add to savings, and heads up notifications to safeguard against money management missteps.

So far, banks that have taken bold steps forward toward personalization of the banking experience have seen dramatic improvements in digital engagement, customer satisfaction and Net Promoter Scores (NPS), as well as double-digit growth in product adoption.

With consumer sentiment now increasingly linked to helping customers reach their financial goals, the ability to deliver personalized and relevant insights and advice is critical to customer engagement. Personetics’ data from banks around the world shows double-digit response rates for bank offers that are highly personalized, presented at the right moment, and designed to deliver value to the customer.

In Canada, RBC’s customers who use NOMI Insights™ and NOMI Find and Save™ login in 60% more and spend twice as much time in-app as their mobile users who don’t use NOMI. Furthermore, with a nearly zero opt-out rate, NOMI is delivering higher NPS results, and is on track to become their #1 driver of new savings accounts. With the newly introduced NOMI Budgets, customers now have the opportunity to take even deeper control of their spending.

In the United Kingdom, Metro Bank’s Insights help customers stay on top of their finances. These timely tips are greatly appreciated by customers, earning an average satisfaction rating of 4.6 out of 5. In Europe, BGL BNP Paribas launched Genius, an AI-powered digital assistant that provides advice, notifications, and recommendations to promote smart decision-making and healthy money management behavior.

Across the pond, Americans are getting personalized notifications from Huntington Bank’s aptly named Heads Up, keeping them on track to fulfill their financial goals. U.S. Bank’s latest mobile app now offers features such as Money Mentorship enabled by personalized insights. Leveraging advanced AI capabilities, the bank is striving to anticipate customer needs and be prepared to deliver the right solutions.

And in Thailand, UOB’s TMRW, a digital bank tailored to millennials, promises to be the bank that keeps their customers “one step ahead.” 

WHAT THE FUTURE HOLDS

Calling it the ‘End of Fintech,’ Chris Skinner feels that we have reached the point where technology and finance are inseparable.

It is no longer a question of whether or not personalized insights and advice will become a standard feature of everyday banking, the question is when will lagging banks finally catch up and offer it. Banks that cannot deliver on the growing expectations of customers for a personalized experience will disappear, pushed aside by those that embrace a customer-first culture.

AI-powered automated finance will be a ubiquitous component of everyday banking across the industry in very short order. While some institutions will be tempted to use AI for short-term gains, the winning banks will be those that successfully meld automation into a personalized experience that makes the financial wellbeing of the customer a top priority – positioning the bank as the financial partner of choice in the world of automated finance.