Mobile and online banking’s prevalence has reduced physical branches’ importance, but these brick-and-mortar establishments are still vital to customers’ financial lives.
Even millennials, who heavily lean on remote banking, still visit physical bank locations for more complex functions, such as loan applications. A recent study found that 75 percent of this generation’s members visit financial institutions (FIs) at least once per month.
Banks looking to make the most out of these rare visits must use the latest technologies. Digital-first transformations can improve personalization and operating efficiencies, but they also bring challenges, including adoption-related costs and new avenues for fraud.
The following Deep Dive explores the benefits digital-first banking can offer customers as well as the challenges inherent in such transformations.
Digital-First Banking’s Advantages
One of digital-first banking’s top benefits is in the personalization of services. Every customer interaction provides FIs with valuable information about their banking habits and financial lifestyles. This knowledge can be used to tailor recommendations, making targeted consumers more likely to continue doing business with that particular FI.
A recent study found that 62 percent of consumers expect businesses, including banks, to adapt to their needs, and only 47 percent are satisfied with current personalization efforts. This gap represents a significant segment of the banking market that could be captured with personalized banking services.
Digital-first banking is also helping FIs reduce their physical footprints by eliminating redundant branches and shifting remaining ones to highly automated offices in strategic locations. Technologies such as predictive analytics and target marketing enable employees to help more customers per hour, and advanced self-service stations equipped with touchscreens may eliminate the need for customers to interact with human bankers. This enables banks to reduce their overhead by decreasing their real estate costs, and customers can use these tools to quickly and efficiently access in-branch services, even if they have to travel farther to do so.
Surveys have found that digital-first technologies can improve branch effectiveness by up to 70 percent, both in terms of sales and the cost savings realized by streamlining their real estate portfolios. BMO Harris is one bank enjoying the improved efficiencies that come with digital-first banking. Its employees save up to 30 minutes each day on processing forms, adding up to thousands of saved hours across the organization.
Other digital-first banks are leaning heavily on ATMs to reduce their overall footprints. Recent innovations have enabled these machines to perform more functions than ever, including connecting with live tellers at off-site locations via webcams. Features such as these allow customers to perform a range of banking interactions that would be impossible at traditional ATMs, such as opening accounts and obtaining new credit cards.
Alabama-based Regions Bank deployed advanced ATMs as part of its digital push, replacing human tellers at many of its drive-thrus. These machines can even connect with a bank-wide artificial intelligence (AI) system, granting remote tellers the same access to targeted services that its branch employees leverage in customer interactions.
Digital-first banking can also help branch workers access online and mobile services to provide more consistent customer experiences across all channels. A customer who filled out half an application on his smartphone could pick up where he left off at a physical branch because core banking systems keep consistent records — even for small details. This consistency aids employees as well, giving them up-to-date knowledge about customers’ banking interactions.
Digital-first transformations come with their share of trials, however. Only by understanding the breadth of these challenges can banks be equipped with the knowledge — and technology — to counter them.
Hindrances to Digital-First Implementations
These issues are especially harrowing in the highly regulated and intensely competitive financial sector. Any struggle can shake customers’ and investors’ faith that such overhauls are the right decision, meaning banks should be well-versed in the challenges they may face.
One such obstacle is the growing competitive threat from FinTechs, which often specialize in the technologies that FIs are trying to implement. This causes banks to compete with FinTechs on the latter’s terms — a problem made even more difficult considering the same regulations do not apply to FinTechs. The issue can be likened to a soccer team playing at an opponent’s home field but, in this case, the opposing team is allowed to use its hands.
The sheer cost of updating existing systems and implementing new ones represents an obstacle for digital-first banks. Financial services spend an average of $45 million per year on digital transformation efforts, with components such as advanced ATMs with touchscreens and high-speed internet connectivity costing as much as $25,000 each. These expenses can be prohibitive: Approximately 88 percent of financial services chief information officers reported difficulties with digital projects’ high costs, and that they had to either reduce these efforts’ scopes or cancel them entirely.
Several areas contribute to such costs, including regulatory measures and the need for fraud protection. Bank services become more vulnerable as they are digitized, and fraudsters can cause more damage with a keyboard than would be caused by any in-person heist. A recent study found that legacy fraud attempts, like check fraud, were stopped 90 percent of the time, but experts predict that electronic fraud methods, such as phishing and email account compromises, will become much more prevalent over the next year.
The amount of money necessary for fraud prevention measures may make chief financial officers sweat, but it is nothing compared to the potential cost of an uncontained data breach. Studies have found that businesses with automated security technologies can reduce the average cost of a data breach by approximately 50 percent, with secured companies only losing $2.65 million compared to unsecured companies’ $5.16 million. This is before factoring in data breaches’ massive opportunity costs; 66 percent of bank customers would stop doing business with an organization that suffered a data breach.
Whether the benefits of a digital transformation are enough to overcome its challenges is a decision every bank will have to make. Those that have pulled the trigger on these initiatives, like BMO Harris and Regions, have found the transformation to be worth it. Other banks could follow their examples and enjoy similar successes.