Ask any financial services leader at the end of 2019 about the upcoming year and no one would have predicted a worldwide pandemic that would shutter businesses, introduce social distancing and push consumers to embrace digital banking overnight.
However, these experiences are shaping the perceptions and priorities for financial services leaders heading into 2021. According to the 2021 BAI Banking Outlook research, financial services leaders have identified improving the customer digital experience as both the top business challenge and the top investment priority in the coming year. Investment in technology integration and platforms will be vital to retaining existing customers and acquiring new customers digitally.
Leaders developing plans for 2021 will need to ensure they are addressing changing customer expectations by focusing on the digital channel and customer experience while accounting for a changing industry structure driven by the rise of direct banks and nontraditional models.
The Increasing Importance of the Digital Channel
Since the beginning of the COVID-19 pandemic, digital adoption and usage has accelerated unexpectedly, providing both challenges and opportunities for financial services leaders. Our 2021 Outlook research found 84 percent of consumers felt their primary financial services organizations are meeting their needs during the pandemic. More than half, 52 percent, of consumers increased digital usage during the pandemic and 87 percent of those who increased expect to maintain that level of usage after businesses and physical locations fully re-open.
This increased utilization, along with forced behavioral changes from the pandemic, has implications on the future of branches and investment in brick and mortar. Customers are discovering that they can perform a wider array of their banking without the branch. The pandemic has helped many discover the speed and benefits of using the digital channel.
Digital acceleration is leading to less friction. Moving from one provider to another has become easier for customers. Relative to 2019, in 2020 fewer customers expect to be with their primary financial services provider within one year. This is especially true with Gen Z and Millennials. 66 percent of Gen Z and 75 percent of Millennials surveyed said they would switch financial services organizations for a better mobile banking app or for better digital capabilities.
Direct Banks are Gaining Market Share
Direct banks have benefited the most from the pandemic-related accelerated digital adoption, accounting for seven out of ten online accounts opened this year. This is an increase from six out of ten last year, resulting in market share gains.
This reflects the changing habits of consumers within many industries. For example, consumers are opting to skip the shopping mall and big-box retailers for online purchases and delivery. Compared to last year, more customers prefer to work with a direct bank and say they do not need branches. In 2019, seven percent of Gen Z preferred to bank with a direct bank and said they did not need branches. This number now stands at 33 percent. Millennials went from 20 percent to 25 percent, Gen X from 16 percent to 27 percent, and Boomers from four percent to ten percent.
Gen Z has the most dramatic change in likelihood to stay with their primary financial services organization in the next year dropping from 87 percent to 61 percent. A year ago, 67 percent of Gen Z said they banked with the same financial services organization as their parents. That number has dropped to 61 percent in 2020. As members of this generation mature, they will start to chart their own course and make more independent decisions.
While the traditional providers look for ways to better compete with direct bank offers, direct banks are beginning to face additional growth challenges. Features such as no-fee accounts, debit cards, budget tracking and user-friendly apps are becoming pervasive.
Traditional financial services providers can build strategies that incorporate new digital tools with existing technology infrastructure. Many fintech providers now offer digital banking modules that can sit on top of existing core systems, enabling organizations, including smaller ones such as community banks and credit unions, to roll out new services without the cost and risk of a core system replacement.
Nontraditional Players are Emerging as Serious Competitors
In recent years, the rise of nontraditional players such as PayPal, Apple, Amazon, and Google in the financial industry has drawn the attention of both financial services leaders and consumers. Nearly 66 percent of respondents to our 2021 Outlook research report they would consider a nontraditional provider such as PayPal, Apple, Amazon, or Google for their financial needs. This is an increase from 48 percent in 2019 to 63 percent in 2020.
While traditional providers continue to innovate to attract and retain customers that are being courted by direct banks, they also need to consider working with nontraditional providers. One trend that will likely see traction in 2021 is the growth of embedded banking, where a bank inserts its services into a broadly used tech service, such as Amazon or Google. For example, Citi announced collaboration with Google on its Citi Plex account by Google Pay and Apple launched its Apple Card in partnership with Goldman Sachs.
This will be especially critical as nontraditional players move further into small and medium-sized business banking services, an important segment focus for financial services organizations in 2021. Stripe launched Stripe Treasury this year as a banking-as-a-service API that enables platforms like Amazon to embed banking services with a few lines of code. So far, Stripe has partnered with Goldman Sachs, Evolve Bank and Trust, Citibank and Barclays to provide banking services for this new product.
To compete with the growth of nontraditional players, financial services leaders should consider ways to easily integrate into their customers’ value chains. This might include adding accounting and payments services for business customers that can be incorporated into their existing back office platforms. Additionally, financial services leaders could look at creating digital payments or rewards programs that sit inside a Google Wallet or Amazon account.
Customer Experience is Central to It All
What does an improved customer experience look like? Our research shows that consumers want tools and options to customize their own solutions. They also cite improving the omni-channel experience and better use of data for improved product and service recommendations in their top three priorities.
However, financial services leaders should also consider generational differences and their own target audiences. The younger generations (Gen Z and Millennials) want their primary financial services organization to help them manage their money with faster payments and quicker transfers. Automated savings and investment tools are their number two priority.
The later generations (Gen X and Boomers) identified these features as well, but they place a higher priority on better fraud and identity theft protection. The importance of fraud and identity theft protection increases with every generation. Making relevant product and service recommendations also becomes more important as customers move through life stages.
Traditional financial services providers have physical presences, established reputations, expansive product offerings, and superior brand awareness. Nontraditional players and direct banks are not encumbered with the cost structures of branches and legacy systems. Effectively leveraging respective advantages along with understanding consumer sentiment will be keys in the battle for customer attraction and retention in 2021.
Karl Dahlgren is managing director of BAI, a nonprofit independent organization that delivers the financial services industry’s most actionable insights.