Innovation | 09.04.19
Banks without Bricks: Reshaping the Customer Experience
In prior decades, traditional brick-and-mortar banks spurred innovations by challenging one another, as anyone who has ever used an ATM or received a paycheck via direct deposit can attest.
But, over roughly the past 10 years, a new breed of financial technology providers, facilitators and startups, aided by cloud computing and data science advancements and a mountain of private capital, has dramatically transformed — and indeed disrupted — financial services.
“Fintech” players have delivered an array of new apps and offerings, from purely online checking and savings accounts to automated investment strategies to e-mortgages. Banking’s bread and butter has been digitized and streamlined.
At the same time, a confluence of other factors helped enable these digital upstarts: a global financial crisis (shattering faith in the system, opening the door to new entrants) followed by a booming stock market; the rise of the low-cost ETF; the proliferation of the smartphone; rapid advancements in voice-activation technology; e-signatures; and artificial intelligence (AI) allowing for more processes to become more easily automated.
Fintech players have delivered an array of new apps and offerings, from purely online checking and savings accounts, to automated investment strategies, to e-mortgages.
“The digital transformation of the customer experience has forced banks to take a good long look at how they interact with customers across the widest possible spectrum,” said Keena Pettijohn, a strategic partner and innovations advisor who specializes in the banking space. Her forte is bridging gaps that can stand between the various technology goals banks have set, the providers with which they might partner and the end-game integration of many various moving parts.
“The banks that function purely online have come at this with fresh, clean slates and no legacy systems to break out of, so it's been an intriguing question for the traditional players to be asking, what can we learn from these banks without bricks?” Pettijohn said.
Across the globe, the banking industry is fast embracing a mobile-centric customer experience, according to a 2018 Deloitte study. It found banking consumers have “a stronger emotional connection to technology brands like Apple, Amazon and Google than to their banks.”
Venture capital funding in fintech has reached upwards of $7.5 billion, according to some industry estimates. That kind of money, akin to the GDP of a small nation, drives a lot of innovation.
Among the leaner upstarts making hefty strides are:
❯❯ Acorns, described by Nerd Wallet as part robo-advisor, part automated savings tool
❯❯ Stash, which seeks to demystify investing via theme-based strategies built around ETFs
❯❯ Marcus, Goldman Sachs’ online lending and savings business which took in $35 billion in deposits last year
❯❯ A host of low-fee, online checking account providers, such as Ally, Aspiration and Chime.
Launched in 2014 by co-founders Chris Britt and Ryan King, Chime, a purely digital bank, targeted what it considered to be an underserved working-class segment of banking clients who may not have been able to open a regular banking account (thus considered to be “unbanked” or “underbanked”). By 2016, Chime had all of the mobile-app features that one associates with digital banks. Today, Chime has roughly two million accounts, according to PYMNTS. On average, it has added 150,000 new accounts per month for the last 12 months ending December 2018, and during that period processed about $10 billion in transaction volume across its cards.
The next phase for Chime in 2019, according to PYMNTS, will be to expand into credit services. As of its last round of private equity funding, Chime was valued at $500 million. Fintech startups, such as Chime, having garnered customers numbering in the millions, are now shifting their focus to adding new products and services — and even building out full-scale banking platforms, said Associate Intelligence Analyst Max Abramsky at CB Insights.
“Over the last decade, consumer fintech startups have focused on unbundling products and services, cutting margins, and acquiring customers,” he said. “But today, as fintech startups mature, they are attempting to compete directly with banks.”
Specifically, a relatively new subset of fintechs — “challenger banks” — have emerged to attack traditional bank checking accounts, he said. Today, challenger banks have combined to amass over 15 million accounts, Abramsky said.
Not having the overhead of branches means being able to offer lower fees and higher rates. But the “challenger banks,” as the fintech industry calls them, also have become more efficient \ across front and back office functions.
“Digital banks have had a unique chance to take advantage of their clean slates to take inefficient processes, like onboarding, and making them more efficient,” said Mike Sha, CEO of SigFig, a digital wealth platform for advisors. “With the rise of these apps, the next phase will be how various products and services are integrated holistically. I’m not sure the digital banks are going to have any greater advantage doing this relative to traditional banks, which have several advantages, such as connectivity with banking infrastructure, and being heavily regulated, and also their physical workforces.”
Bank technology spending is aimed at growing their digital channel. The industry total is estimated to reach $13.7 billion by 2020, up from $12.3 billion in 2018, according to Deloitte. Such digitization initiatives can boost U.S. banks’ return on total capital employed from the current levels of 12% in 2017 to 18% by 2022 and will likely improve efficiency ratios by
350 basis points over time, according to Deloitte. “The term digitization gets thrown a lot, but it spans across a whole host of perspectives, so it’s a very broad category. It’s enhancing customer experience but it’s also taking mundane tasks and automating them.”
Many industry members, including players within fintech, consultants and bankers themselves, seem to agree that, contrary to hype and some circles of conventional wisdom, there is not likely to be a doom-and-gloom period awaiting banks without bricks, which have built-in strengths that will never be matched (just as Amazon’s Alexa has a technological edge that the typical credit union will never be able to replicate).
The importance of the branch in attracting and retaining customers should remain, Deloitte said. According to their survey, bank branches will continue to have value, especially as they continue to add greater digital augmentations.
“The need to create a seamless omnichannel experience to improve customer experience has been around for some time,” Deloitte said. “With the available technologies, retail banks are expected to make significant progress in operating in a fluid, post-channel world.”
The age of Alexa is spoiling people, industry members point out, recognizing that need to try to keep up with client expectations. The idea of being able to snap a photo, click once and have a check deposited is not something that would be nice, it's expected, Pettijohn said.
“It’s the Uber-ization of financial services,” she said. “People want an Amazon-like experience.”
One of the more impressive adaptation stories at the intersection of banking and fintech has to be Cross River. It began as a single branch bank in Teaneck, New Jersey and evolved over a decade into an online lender. Then, more recently, using its FDIC-insured status as a beachhead became an enabler of bank/fintech integration, an astonishing run culminating in a $128 million private equity growth round that closed at the end of last year and drew a who’s who of heavyweight investors. Cross River has been valued at $1 billion.
Bank branches will continue to have value, especially as they continue to add greater digital augmentations.
CEO Gilles Gade is said to have described his company as uniquely being able to “simultaneously protect customers and deliver more and better services to them.”
To do that, Cross River partners with fintech companies — enabling them to focus on their own growth without hindering innovation — while building a comprehensive platform of solutions and products encompassing lending, payments and risk management.
Another newly emerged digital-only player, Ethic, is looking to capture younger retirement savers by enabling an easy way for them to invest responsibly, however the client defines it. Ethic is geared to serve advisors working on behalf of retail clients. Swimming upstream as many banks have been known to do, Ethic is also targeting institutional investors.
“Ethic is focusing on empowering wealth advisors to offer their clients a differentiated approach to both sustainable investments and tax-efficient index exposure,” said Blake Grossman, managing partner at venture capital firm ThirdStream Partners, which is one of Ethic’s backers.
Grossman knows the industry from his prior days as CEO of Barclays Global Investors (iShares).
“We believe that by powering investors to become sustainability experts, they can accelerate the adoption of sustainable index investments among both advisors and institutional investors."
But, it’s not all rainbows and unicorns for the digital banks (although based on its valuation, Cross River has been called one).
SigFig's Sha pointed out the single biggest challenge facing digital companies: a lighter human touch.
“Investment decisions are scary for people young and old,” Sha said. “You can't underestimate the need to have your hand held.”
But, population demographics are changing, and the trend lines suggest that tomorrow’s banking clients are going to have tall expectations for ease and inexpensiveness.
“The younger generation will gravitate toward brands that provide the best user experience and the best value,” said JMP Securities’ Devin Ryan, speaking to CNBC. “And, ultimately, those that can help them reach their financial goals.”
Rich Blake is a veteran financial journalist writing for publications, such as Institutional Investor, ABCNews.com and Forbes.com.