Knowledge digitisation empowering data-driven consumers – the secret sauce that will drive the future of banking
The traditional banking model is based on the bank pushing products towards the customer with little or no tailoring to individual customer needs. What could banking adopt from other industries and what is "a data enabled customer"?
By Pål Krogdahl | 10 minute read | Thu, April 16th 2020
In my view, the banking industry has for several years been facing a dramatic and accelerating fundamental digital disruption, driven predominantly by changes in customer behaviour. Customers today are used to instant gratification and services tailored specifically for them and aligned to their situation in life. And for these services to be delivered just-in-time on an on-demand self-service digital platform. This change in customer behaviour will force the banks to move away from their current product focused business model to one focused on advisory services supported by AI and data. As my good friend Paolo Sironi, author of the book “Financial Market Transparency” so elegantly puts it – this shift will push the banks past the notion of the “data driven bank” and into “data enabled clients”, where the bank drives new revenue from enabling the clients with data insights and focused advisory services built on a platform business model that spans traditional industry verticals.
I live in Finland, a lovely part of the world where (normally) the ground is covered in a thick layer of white snow for the winter months. Last weekend I was undertaking the twice a year ritual of changing between winter and summer wheels on my car. My neighbour wandered over and kicked up a discussion about the current Covid-19 situation and the impact it will have on our economy and his financial stability. “Should I request a repayment holiday on my mortgage?” he asked me. In part bewildered and confused I looked up at him with one hand balancing my wheel on the wheel hub, and the other hand holding the first lug nut I was going to use to attach it to the car. My brain stopped focusing on the wheel now badly balancing on the wheel hub and started processing his question. I have a job that still feels secure, my family is still infection free and I am productively working from home. I had evaluated the impact the current situation might be having on my financial life and made adequate arrangements, and assumed so had everyone else. But all that changed in a second as he continued to talk about how much he had lost on his investments as he had not sold them early enough. It became obvious to me that he was confused about what options he had, and was hoping to get advice from me on what was the best option for him and his family.
The wheel slipped off the hub, falling on my foot (why did I not put on protective footwear?) as my focus and attention had shifted. I realised through the now thumping pain in my foot, that I was witnessing first-hand the gaping asymmetry of information and product proliferation the banks have generated, and which is confusing their customers. “Have you not reached out to your bank?” I asked him, to which he answered “I get confused by the options and products the bank is offering, and it is not very clear to me what is best!”. I have been talking about this and making it a central element in several keynote presentations since the start of last year – but here it was up close and my neighbour was a prime example of everything I have been repeatedly stating must change in the current banking landscape!
As my neighbour is currently experiencing a confusing time about offerings and products that he is not sure are helping him make the right financial decisions for himself and his family, so are established banks large and small also experiencing in an industry that is disrupted by the growing number of new entrants like digital only neo-banks, Revolut and Starling for example. Moreover, a growing number of FinTechs are working to unbundle banking and create fantastic new customer experiences in thin vertical digital offerings, BigTech companies are seeking a slice of the banking cake with focus on payments and customer engagement, and also the incessant flow of new regulatory requirements is constantly stifling the banking industry such as PSD2, MiFID2, etc. And we should not forget the continued pressure on transparency and reduced margins for our trusted incumbent banks. But the most significant and disrupting change to the financial industry will be the Corona virus. The spread of the virus and the subsequent government measures to control the spread of the virus will have a lasting global impact on banks. This black swan will change everything and will put digital transformation back at the centre of every bank’s strategy.
But back to my neighbour. The issue as I see it, is that the traditional banking model is based on the bank pushing products towards the customer with little or no tailoring to individual customer needs. This approach is based on an analogue world and an old push economy model, where the focus is on selling as many generic products as possible with high and hidden margins. And when the product is not moving fast enough, the bank just create some different ones and with luck will develop something the customer will take. But this creates confusion for the customer and they start to realise they no longer understand the bank or trust the institution. This asymmetry of information has been growing for years and in the past was beneficial to the banks. Colgate has more than 32 different toothpaste to select from, whilst choice is a nice thing to have, without appropriate advice and insights I as a consumer find myself wondering which one is best for me and my family – the banks have for years been using the same approach.
There is no secret in the fact that the growing FinTech trend has been seeking to take advantage of this complexity and confusion, by attacking vertical banking offerings and building sleek customer focused solutions that deliver a better user experience. And the consumer is again facing a growing proliferation of offerings and solutions as the simplicity they seek is delivered as unbundled banking services in a multitude of mobile apps – same products but in new digital wrapping. The consumer is not seeking a future where the banking experience is spread over a multitude of mobile apps. Banking should be bundled and simplified in a way that it is relevant to the individuals and their current phase in life – putting the traditional banks back in the spot light, and a chance to rebuild trust.
So what is the answer? Of course, there is no one answer that fits all banks. But as the banks drive to become more digital to align with the changing needs and expectations of the population and their customers, they need to change from an established push model to a pull model. In a digital world, where the consumer lives in a self-service paradigm, the old ways to reach them via a push economy is failing. Digital is after all a pull technology, and the consumer will select what they focus on and where to put their time and efforts. Additionally, as the banks are pushed to remove the asymmetry of information that they have relied on to date, by regulations and a need for transparency, dramatically squeezing their margins, they need to make a shift from products to advisory services. This will require the banks having to learn how to digitise knowledge to support their customer and the relationship.
Let me give a good example from one of the more common leaders of digitising knowledge to drive value for their customers and revenue for themselves – Amazon.com everyone’s favourite on-line book shop. You have a thirst for knowledge and want to expand your horizons, so you head on over to Amazon to find a good book or two that will give you what you seek. There are two key things that Amazon do to strengthen this digitisation of knowledge in a self-service pull paradigm:
- 9 out of 10 times the customer does not have a clear view on what book he is going to purchase, so confused by the overwhelming options to select from, he turns to the advisory capabilities and services supplied by Amazon, powered by the customer reviews and ratings. You see, Amazon do not sell books as such, they sell advisory services that front the products (the books). You go there to get recommendations and advice on what is the best book for you at this moment in time with your current life scenario.
- Taking insights from your engagement with Amazon over a period of time combined with the collected data from others in your demographic, Amazon is able to guide you and filter out the products that are not relevant to you currently. As such based on your current tastes and requirements, Amazon will guide you in an appropriate direction empowering you to make a choice that is appropriate for you.
You see, Amazon empowers the consumer to become “data enabled customers” that pull the most relevant products to their needs based on advisory services. You could argue that Amazon is charging you for the tailored advisory services that guide you to the best and most appropriate solution for your current requirements and needs, rather than the book. Let me ask you a question, would you be willing to pay a premium for Amazon ensuring you got the best and most appropriate book, which they sold you at a reduced cost. Or, for Amazon to put an uplift on all books and just throw every title at you hoping that something will stick? Which model do you feel your bank is using today? Bottom line, for Amazon, this advisory based pull model rather than a product centric push model is driving higher customer engagement and a higher level of customer trust.
But there is an even stronger argument for the banks to focus on the data enabled client, even more compelling for the banks than it is for Amazon or Colgate. After a client purchases an investment fund they cannot simply return it, as you can with a book you purchased based on bad advice. The banks at the end of the day don’t really sell products but access to uncertainty over time. In this new model, the banks give the client more transparent advice ex-ante and ongoing, which is what they should truly sell. And as such the banks will be nurturing their clients with knowledge digitisation to create a holistic behavioural awareness.
There is another critical element to this discussion, the emerging platform economy within banking and the blurring of banking services driven by BigTech and platform companies such as Apple, Google, Facebook, WeChat and others. The focus on Open Banking which has had mixed levels of success globally to date, is a starting point for this transformation within the banking industry, and another shift that the banks need to adopt if they want to stay relevant. I am convinced that the future of banking will be platform driven, and as I have mentioned in previous blogs, the banks that survive will adopt a platform business model either as providers or contributors to one or several platforms in the future.
Adopting a strategic platform business model will become the delivery mechanism for the banks to empower the future generation of data enabled customers. In a close collaborative partnership between technology providers, TechFin and FinTech companies, the banks will utilise Artificial Intelligence (AI) capabilities and their wealth of data to drive new insights and capabilities to deliver tailored, just-in-time financial life advice to their customers combining banking and non-banking services and products.
If we return back to my neighbour again, who is concerned with how the current Covid-19 epidemic will impact his financial life and what options are open to him. As someone who is probably a good representative of the general population with a basic but adequate understanding of banking products for a normal every-day scenario, it is not surprising that he finds himself bewildered and overwhelmed by the complexity and options available to him. What he desires is the Amazon or Facebook for his financial life. A platform that gives him the ability to pull in a self-service model, relevant advice which empowers him to make the best financial decisions for him and his family as a data enabled client.
Will the banks know everything? After all, the banks themselves are not clairvoyant, but they should be a trusted partner in a complex financial universe. The banks should have the data, insights, knowledge and capabilities to enable us all to become data enabled clients.
I am starting to see some banks making moves in this direction, but believe they can not make the journey alone – this is a partnership and ecosystem game. I know I have stated a number of points and important questions, but not said much about the “how”. I will follow up with another blog post focusing on the next steps soon. But until I do, how would you attack this problem? Do you have any good examples or ideas you want to share?