Banking as a Platform of Trust

Why it’s key to customer centricity and staying relevant in the digital age

We are in an age of currencies going digital, fintechs receiving major funding rounds, large non-bank platforms such as Amazon building financial services such as payments, lending services at a record pace, and capital market businesses continuing their slow down. While this may seem bleak for incumbent banks, they still have some unique advantages that they can leverage to retain their customers and improve their customer loyalty. However, these advantages are unlikely to remain as the pace of change continues to accelerate.

The challenge, despite much of the media coverage, is not from fintech or startup disintermediation. In fact, today’s ecosystem is balanced between fintechs eager to work with trusted firms and traditional firms keen to tap into the capabilities of fintechs via partnerships, innovation labs, investments and even M&A activities. No, the challenge for banks is in their ability to bridge the gap between legacy systems and new digital requirements to build a platform that not only engenders trust but also embodies customer centricity.

The platform challenge

Innovative leaders within banks will continue to leverage their advantage of “rational trust” and data, augmented with third party sources in line with the overall strategy, transforming to become core platforms at the center of managing customer financial life instead of only a manager of money. This platform strategy is critical because it will ensure your bank doesn’t become just a fulfillment engine for another platform that serves your customers.

The average consumer already has 15.6 connections per bank account, which includes third-party applications connected to the account as well as a litany of recurring billing payments from utilities to insurance and investments, according to a 2016 Plaid study. And, companies such as Amazon are blurring the definition of traditional retailer by getting into areas where no one expected them to enter. This is all based on their “guest-like customer experience” that earns trust and delivers a simple experience to build a loyal customer base.

For example, the recent deal between CVS and Aetna highlights how the “A” word (Amazon) potentially played a role in the transaction with Amazon eyeing a potential move into the health and pharmacy industry.

This makes it crucial for banks to adapt, innovate and extend their own platforms. A recent interview with JP Morgan’s Jamie Dimon demonstrates how smart leaders within banks are learning from programs such as Amazon Prime to better offer services to their clients. JP Morgan is also hiring away talent from platform companies to focus on customer centricity.

Beyond US-based retailers like Amazon, the Asia Pacific region has seen the rise of retail giants such as Alibaba and Rakuten. These companies are extending their services into payment networks, money lending, asset management and business-to-business services. What’s more, companies such as WeChat are already serving as distribution platforms for financial transactions in China.

A recent report by McKinsey shows that non-bank platforms are focused on origination and sales, which accounts for 65 percent of profits and delivers a 20 percent return on equity (ROE). The same study also highlights how for the seventh consecutive year the financial services industry’s ROE is stuck in a narrow range between 8 percent and the 10 percent, a figure that most consider the industry’s cost of equity.

Banking as a platform of trust

Banks have a unique value proposition. Whereas the non-banking platforms might be able to sell to their customers, banks have a unique edge with data and insights into the financial life of your customers such as how much that customers earns, what he/she spends, whom he/she spends it with and where he/she spends it.

The trust the banks have established, the consumer data available and the third-party relationships banks have can help banks establish an incredible digital distribution and sales platform focused around their customer needs.

Digital business transformation as I’ve mentioned in my previous articles is not just about technology or a mindset that defaults to building a mobile app. It is thinking about new ways to do business while building on existing core capabilities. That means getting over internal dysfunction to operate in a completely new way.

Banks will have to build strategies, extend their services and execute on capabilities to continue to fend off non-banking competitors. This is possible by building platforms and a partnership ecosystem in the supply chain.

Just how insurance companies like Aetna are looking at wellness as a relevant adjacent growth area, banks can look for similar opportunities. If a customer goes to your bank and you understand them as a customer, the bank can build a relevant partnership supply chain ecosystem by being the originator and fulfillment engine of that request (e.g., if your customer wants to buy a house or a car). And, your customers trust your bank to help them make large decisions such as buying a house or car, you can take center stage and be the platform of choice for fulfillment too.

Welcome to 2018

In 2018, we will continue to see partnership models accelerate with fintech and less rhetoric around fintechs as a threat. Banks will continue to bridge gaps between legacy systems and new digital requirements by leveraging data. A better understanding of customers will emerge as well. Banks will realize that a mobile-only solution is not the return people were expecting. Automation, machine learning and API ecosystems will get past the lab environment to real life use cases, which will start to show productivity and an actual customer value proposition.

For banks, creating the platform of trust with inherent customer centricity will be vital to increase their customer wallet share and extend the trust connection across adjacency.

As Kendrick Lamar said: ‘‘I am trying to better my craft and stay relevant”. Welcome to 2018!