How will traditional banks respond to gen Z’s digital demands?

My focus at Articulate is on Financial Services and FinTech media and analyst relations. This means I spend my time looking for ways our clients can join – and own – trending conversations. One discussion that continues to grab my attention is that of the rise of the challenger banks.

Banking Technology recently listed the key players in this space from a UK perspective, and it’s clear that the playing field is big and getting bigger. So, are traditional banks being phased out? And what can they learn from the challengers before it’s too late?

This conversation intrigues me because it’s a clear example of what is happening across the business world right now – the need for digital transformation and the risks of not acting quickly enough.

Findings in Forrester’s 2018 predictions are sobering: Over 60% of executives believe they are behind in their digital transformation. Forrester states that digital transformation is a CEO issue and an economic question, and further predicts that “20% of CEOs will fail to act: As a result, those firms will be acquired or begin to perish”.

My question is, will we see some traditional banks falling within this 20%? Their predicament is surely worsened by the rise of the challenger banks who have digital transformation in their DNA.

Let’s first look at why the challenger banks have been so successful. It’s widely reported that they’ve been outperforming the market when it comes to ROI, performance and cost. Considering their business model and use of cloud technologies that’s logical to me, as they can scale quickly with lower set up fees.

Arguably less logical, is the fact that they are also doing extremely well when it comes to customer experience satisfaction levels. In the J.D. Power 2017 U.S. Retail Banking Satisfaction Study, the overall satisfaction score for direct banks* is 865, which is 49 points higher than the overall satisfaction score of traditional branch-based retail banks. Direct banks also perform well vs. retail banks with respect to advocacy and loyalty in the study, with 76% of direct bank customers saying they “definitely will” recommend their bank and 72% saying they “definitely will” reuse their bank. These compare with just 57% and 56%, respectively, among traditional bank customers. So why is this? I believe that it’s down to the consistent service level you get from a digital provider. There’s no fluctuation in queue time because of the time of day, and you won’t be met by a cashier having a bad day. Instead, the customer service you signed up for and expect is what you get.

I also think it’s down to the challenger banks’ ability to understand the preferences of their target audiences. It’s no secret that they are aiming to please the Millennials and Generation Z, seeking to gain their loyalty for the future. The older generation want the personal experience, the physical touch of a traditional bank. The younger generation aren’t motivated by physical presence; they are impressed by easier and immediate ways to conduct their banking, and certainly don’t want to have to trek to a branch. And my generation, we’re somewhere in between – I think it’s fair to say we want the option!

But if we come back to that growing market segment, Gen Z and Millennials, it’s about using technology to deliver the experiences these consumers have come to expect. While traditional banks are launching apps and providing digital touchpoints, the challengers are taking it that step further with the likes of facial recognition, for example.

Traditional banks are behind the curve, mainly because they are not embracing outside technology. The reasons why are understandable – there’s an expectation that they will deliver technology solutions in-house and their compliance and cost burdens are higher. Just think about the size and complexity of their legacy systems and the data migration implications. In contrast, the challenger community have been partnering with technology experts from the beginning, giving them speed-to-market and access to best-of-breed technology.

Where does this all leave us, and what can we expect the traditional banks to learn from the digital community so they can start catching up? In my opinion, the transformation we are going to see will be in two areas:

  1. A focus on digital, from a marketing and customer experience standpoint. It will be about segmenting each consumer group and offering an experience in line with their needs.
  2. Technology partnerships with FinTech specialists to enable speed of change. We’re going to see more traditional banks looking for external help to digitize their customer experience.

So, in conclusion – I don’t think the traditional banks are going anywhere just yet., But I do think we’ll see a marked change in the customer experience they offer in the coming 18 months.

*Direct Bank definition – A direct bank is a bank without any branch network that offers its services remotely via online banking and telephone banking and may also provide access via ATMs (often through interbank network alliances), mail and mobile.