The pandemic and the resulting digitization of many consumers’ lives didn’t create the digital transformation in financial services; that was already underway.
But it has accelerated the process dramatically and across the board — and is in some sense leveling the playing field, Ondot Systems CEO and President Vaduvur Bharghavan (VB) told Karen Webster in a recent fireside chat.
He said that while small banks, credit unions (CUs) and regional players deeply fear being swept aside by the great digitalization wave that the pandemic has set off, their concerns aren’t actually unique to the financial industry’s smaller end.
“When we were having this conversation in January or February, my sense was community banks and credit unions [were] feeling a sense of being left behind in the digital race,” VB said. “Now we are seeing in the past couple of months inbound requests and calls from a lot of larger institutions that are looking at taking a three-year road map and trying to compress it into three months. So, I think the sense of urgency and concern about not being able to fulfill accelerating consumer needs is very acutely [felt] by smaller banks, but also larger banks.”
Meeting that accelerating consumer demand is key for all financial institutions (FIs), according to recent data from PYMNTS and Ondot. According to that research, roughly a third of consumers would consider switching financial services providers to get better digital services attached to their cards.
As structural and psychological barriers to card issuance fall, VB said, it becomes ever more likely that FinTechs will expand their forays into financial services and compete with traditional FIs by offering upgraded digital experiences. FIs can hold their own and even bring some advantages to the table, he said, but it’s not just about going digital. Instead, FIs must go digital in the ways consumers are seeking.
The Three Things Smart FIs Must Offer
Larger and national FIs are feeling the heat, but they do carry a narrow advantage in terms of keeping hold of their customers, VB said.
By contrast, smaller regional and local players are more at risk of having their customers’ heads turned by players with better digital offerings. The difference is “not major, but perceptible,” according to VB. That small difference is an advantage that is going to larger and national banks and was the first major takeaway from the data.
The second — and VB said in his opinion more eye-catching — trend relates to consumers of financial services, rather than the FIs that provide them. As it turns out, digitally engaged consumers are easy to attract, but hard to keep as they are more likely to switch banks even when they report being happy with their current offerings when they perceive a better one out there. Digitally engaged consumers, he noted, are more directly concerned with value than relationship building with providers.
VB said that’s particularly noteworthy when paired with the study’s third finding — that users are increasingly open to the idea of switching their primary card relationship to an Apple or Google if they can get better digital servicing.
The big takeaway for FIs big and small is that those that don’t want to get innovated out of the market like Nokia or Motorola did with cellphones “have got to be moving with the times,” he said. That’s not just about adding digital services but adding the right ones — those that consumers most want.
VB said first on that list is digital self-service, especially when customers can’t access the bank physically. Second is digital commerce, as “digitally savvy institutions have seen a tremendous increase in their transactions, particularly in card on file wallets,” he said.
Third is digital customer acquisition and instant digital issuance.
“We are seeing that as being a very significant trend, particularly among the super-regional banks,” VB said.
He said digitally savvy firms are going after those three areas to the greatest effect because consumers limited by the pandemic need to be able to seamlessly manage their financial lives online.
Fortunately, modernizing a card portfolio to accommodate such customers doesn’t actually require retrofitting an entire offering set. Rather, providers like Ondot can build a digital layer on top of an FI’s existing card portfolio. That generally allows firms to build and roll out those services in six weeks instead of six months because FIs don’t have to change their underlying infrastructure.
FIs Have One Thing Tech Firms Don’t
Given what we’ve seen over the past three months with the pandemic, trying to predict what happens in the industry over the next three months is hazardous territory. VB said he started 2020 with a lot of predictions he was pretty proud of — only to see them all dashed.
However, he said he believes consumers’ switch to digital commerce is a permanent new feature of the ecosystem rather than a temporary response to an upside-down world. He said he thinks the demands for such services will only get steeper — and the competition from tech players only tougher — as more players enter the arena.
But he said he is encouraged that many digitally savvy FIs have emerged at all of the industry’s levels, from big national banks to small CUs. And traditional FIs already have something that big tech firms find it hard to emulate — the consumer’s trust.
Combined with the right digital tools, that long-term trust might just be the glue that holds even digitally focused, easily poached customers in place at their current FIs.
“Even in this environment, we found people trust their banks more with their money — and not just the money, but also with their privacy,” VB said. “One of the things that we found was that folks are interested [in] these new entrants not because of privacy or security, but in spite of it. … Inherently, they trust their banks more.”
He said customer loyalty “to some extent is emotion-driven as much as value-driven. So, you can draw consumers in with value, but you retain [them] with engagement. … That is the best way in for financial institutions, banks and credit unions to combat flight to tech players.”