API Business Models

The Future of Bank Distribution

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He started his career in retail banking in 1995. In 2022, he was part of the traditional banking scene and held several C-suite-level retail banking and wealth management positions. He focused on sustainable and in-depth digital disruption. This resulted in a few successful projects like Skiply. the UAE’s number one school payment app, an end-to-end insurance platform, a card companion app, the first virtual prepaid card, and the first steps into Robo advice.

In this article, Frederic discusses the future of bank distribution.

I knew that today’s traditional banking environment would not last forever. I took the bold decision to leave and focus on how banking products can be distributed in a better and more personalized way. Because the world is changing, and looking at other industries like retail, transportation, and hospitality, we know that the financial sector can’t sail its own course. The technological revolution moved the customer to the center of the decisions. Until a few years back, banks were the gatekeepers to the industry, but today we see a radical shift in Customer Self Service. The tables are turning; banks realize that holding to old concepts like a primary bank, high product penetration per customer, the share of wallet, and customer loyalty is going for a toss. To survive, innovative financial institutions will redesign their operations and embrace the new concepts of open banking, banking as a service, and embedded finance, not because they like to but because they understand they have to.

Experience journeys are at the heart of the new now. They trigger customers’ behaviors in different ways, and they drive decision-making and consumption. How financial institutions deal with their changing environment demonstrates how challenging the New Reality is for them.

An Accenture study published after the pandemic provided some clarifying insights. They interviewed 60 of the most prominent banks in the 20 highest-ranked economies. It showed that of those institutions, only 12 had a clear digital strategy, 38 had at least something, but half could not offer a concrete plan for the future. And that is a very scary situation.

Three significant elements exist in how banks are paralyzed by their current environment. There’s a massive disconnect between what they think is customer experience and hyper-personalization and how their customers perceive it. On the other hand, customer acquisition costs become unbearable, staying attached to the old-school distribution models in the direct sales force branch and telesales. Lastly, because of the vast market transformation, financial institutions start shopping around to get pieces of the puzzle without following a master plan to transform every customer touch point.

Let us look at other industries to learn how customer behavior changes and transforms. The hotel industry, for instance, went through an important transition. With the success of Airbnb and similar initiatives, the hospitality industry had to develop new initiatives to keep the customer on board. One important aspect of behavioral change is how consumption has changed. While in the past, people were buying products like renting a room, today, they want to buy experiences and packages that meet specific needs on a very personal level. 70% of the interviewed said they would go for experiences above products, an example you can extrapolate to other industries today or tomorrow.

This trend shines a different light on the concept of experience.

We know the old definition of customer experience that resonates with service happiness and brand loyalty. Keeping a customer happy so that he will keep returning is how financial institutions think about the experience concept. But unfortunately, in most cases, it is only a marketing tool. But customers think about meeting tangible needs and the experience. Experience is the new buzzword, and Net Promoter Score is its friend or tranquilizer.

Banks are trying to hold on to the single primary brand concept. It is how they can stay the sole owner of the customer’s wallet, and that is not how customers think. Customers don’t think in terms of banking products and services. Financial products and services are not the primary need. With technology, financial products will move to a secondary level in the customer experience. Embedded finance and banking as a service will automatically become a norm. Banks should learn this trend and focus on what they are good at. This means building quality products, real-time risk management engines, and APIs reaching the customers where and when they need them.

Brand loyalty has decreased since the 1990s. Customers are slowly stepping away from single-brand loyalty and buying products from multiple providers. They have learned to go where the best dealers and technology will further accelerate that behavior. Getting new customers by direct marketing is cumbersome as well. Many market studies about retail banking show that the brand or single product offer is not persuading customers to join, and the ones that join might, in most cases, not be served by their existing banks. So, the customers you get are not always the customers you want. This creates extra costs and energy to keep your portfolio profitable. When customers join, it is expensive. Newly acquired customers start the relationship with a negative P&L. High acquisition costs also hurt the FinTech population. All ideas are not sustainable, burning loads of marketing money that could go into further application development. The financial industry is struggling. Banks are in a vicious circle of aggressive sales to meet volume and profitability numbers in their existing portfolios due to the lack of new customers through direct channels and the price that has to be paid for a new relationship.

What was acceptable 30 years back is now rejected, creating friction between retail clients and banks. When trust melts away, the relevance is questioned. When we speak about an economic revolution, we talk about many small initiatives that would later go into history as one major change in the evolution of humanity. Small initiatives create big ways. However, that only occurs when a specifically coordinated undertow can bring all these small waves into one tsunami.

What we see today is that there is a lot of activity and initiative on many sub-tracks, FinTech, Blockchain, etc. Billions of dollars flow into trial and error, new ventures, failures, and success. It is time to connect these initiatives to make them accessible for the individual user, personalized and need-based. The future needs will come from two sides. First, the customer will push innovation towards a sole benefit through their bargaining power. And on the other hand, financial institutions will go for cheaper distribution channels with the least resistance, which means strong product penetration against an acceptable acquisition cost.

But the financial industry is evolving as well. It is only progressing slower than other industries over the past few years past ten years. You can say this has several reasons. Banking is complex and regulated. It isn’t easy to persuade financial regulators to accept new frameworks and concepts. There is, of course, also lobbying and refusal. For instance, take contactless payments in the US. Merchants have been investing in POS machines and refuse to make a next-level investment in contactless machines.

So, what does the future look like? While web and mobile cover most funds, transactions, and account inquiries, the human interface will increasingly evolve into videos and calls. High-net-worth individuals would still have access to on-premise hospitality. But while the automation of processes is revamped, the value of the branch as a channel will erode further.

When OpenAPI-led banking gets more regulatory support, embedded finance will replace standalone financial products and service distribution. Those products will then reposition as supporting elements in the wider positive-buy experience of tangible goods and services. In this case, the brand will become less important as well. The trust element related to today’s brand is a little bit exaggerated. Loyalty is related to pricing.

From the moment we achieve that level, the concept of embedded finance will automatically replace the current traditional distribution models. Being short or mid-term, or even long-term, the integration of financial products and services into daily customer-consumer routines is inevitable. Embedded finance and open banking concepts will become the new oil in the engine of experiencing consumption. It will reduce the cost of distribution, which will support customer profitability and hyper-personalization. Today’s need to sell standardized products to cover costs will automatically disappear. Forced cross-sell will be replaced by cross-buy, in which customers can make informed choices about what is best. It will open the door for strong partnerships between banks as product providers and distribution partners. All this happens only because of the support of one main engine technology, and APIs are playing a significant role in this revolution. While we need to clean up old legacy systems, APIs connect what is crucial for the industry to proceed.

Over time, we learned that building a one-core system containing the future is impossible. For instance, in 2013, Citibank declared itself as a technology company. In 2018, the CEO had to come back to correct that statement. Banks were there for the reach, while technology partners needed to make the change for them.

APIs are the key to enabling seamless access for customers to tailor-made services. They provide operational excellence and are the currency of data exchange between systems and databases. As always, there are challenges. Open banking and embedded finance require a complex regulatory framework to safeguard customers from wrongdoing or fraud and ensure the security and privacy of the customer’s data. Security standards would help in this matter to make data sharing more transparent and auditable. It would put financial institutions more at ease to share data with customers’ consent for mutual benefit. Technically, this all comes down to API reliability and robustness. If one standard language or data currency existed between the many actors in the industry network, it would make life much more transparent.

Last, but not least, there is the issue of digital identity. Government bodies need to play an active role in safeguarding the identity of their citizens, like in the offline world where they are today, the ones issuing passports and identity cards.

Frederic de Melker de Melker

Frederic de Melker de Melker

Founder of Stealth Mode Startup
I'm a C-level intrapreneur and entrepreneur. Over the years, as an intrapreneur, I built a robust reputation around setting up, enhancing and improving retail banking segments across European and MENA markets. My digital strategic vision has a proven track record of success, counting on an extensive external professional network of senior banking, payment, insurance, digital, fintech and regulatory specialists.

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