Can customer-centricity solve banks’ productivity problems?

Today banks face a major profitability challenge

2018 is set to be a momentous year for banks as transformative regulations come into play. PDS2, MiFIDII and GDPR have been announced to be earthquakes that will shake the entire banking industry. While we may not yet see their full effects, we are already feeling the tremors. The transformation efforts still underway inevitably mean expenditure on compliance is rising, sucking IT budgets out of other forward-looking projects such as service innovation, process renewal and customer engagement.

Higher expenditure without increased revenues inevitably means reduced profitability. A recent study from global tech advisory firm, Accenture, shows the consequences if regulations are banks’ sole preoccupation. For many, especially those in developed economies, increased profitability is now their prime concern. These two issues are linked: new regulations cause higher business expenditures and in turn lower productivity. Already in the UK ONS data showed banking, which makes up 4.4 per cent of the economy, accounted for a fifth of the slowdown in productivity growth.

The importance of identifying the best customers and relying on partners

Bain & Company estimates global banks derive roughly 20% of profits from corporate clients. Within that group, perhaps just 1% account for most of the value. At the other end of the profitability spectrum, some 30% of clients fall below the threshold for economic profit, with about 1% having the greatest negative effect for the bank as it currently serves them. The first step to renew with profitability, banks need to identify their most profitable customers and nurture their needs.

A reactive approach to compliance and competition from FinTechs, can force banks into being aggressive in order to retain customers. This turns Open Banking from an opportunity to benefit customers and win long-term customer loyalty, into a land grab, or worse, a ‘rush to the bottom’. Clearly, a toxic ecosystem which serves neither the banks nor, ultimately, the more valued customers they most want to keep.

Digital transformation due to new regulations is also a factor in the banks’ productivity slowdown.  A major overhaul of IT systems can sometimes go incredibly wrong, and have a very negative effect on customer experience. Banks not only need to identify their primary customers, but also adopt a partner-based model where trusted partners can help complement their weaknesses and bring in the top of the range services where banks could be lacking. This partner ecosystem model, bringing the best and most relevant services to primary customers, could solve banks’ productivity crisis.

Nurturing customer relationships with the platform ecosystem

At a time when IT budgets are artificially diminished due to compliance woes, banks should focus on beating the competition with service levels. Even better, service levels can be prioritised to nurture their most profitable customers and improve their customer experience by including them in a platform ecosystem that will make them feel valued in the bank/customer relationship.

Identifying “primary customers” becomes a top priority for banks wishing to remain competitive and retain valued customers but this needs to be done efficiently, especially as Open Banking allows competitors to see details such as balance and transaction details.

However, ‘Best customers’ does not mean financial services organisations should focus solely on cash-rich customers. There are many external factors, such as how influential the customer is on his or her peers, families and networks, their future life trajectory and need for ongoing financial services. The proper measuring tools to evaluate potential customer value are essential for success.

The same thing is true for partners. Bringing in valued partners to build a successful ecosystem is crucial. Partners should be identified and chosen with care to provide primary customers with the perfect customer experience. This is the level of granular knowledge that is required in today’s platform economy.

Know your past, predict your future

Proper data analytics and data management can help banks find out who their most profitable customers are. Banks have enough data on their customers to find out through several factors, which customers should be treated as “primary customers”, considered valuable to the bank and nurtured. Most though, are not set up to exploit this.

Legacy systems do not have the capacity to collect and manage the data and so struggle to identify these customers. Smart middle layers that unite data silos and insert seamlessly into the system, answer this need without overhauling the banks’ entire core IT system.

Once identified, banks need to nurture “primary customers” and offer them a personalised and unique customer experience.  According to a recent EY study, consumers’ top three bank rewards were: better rates/fees (24%), better online experience (21%) and access to different products and services (21%). In order to truly answer customer needs and increase satisfaction, banks should start with these three points.

Building a customer nurturing plan should factor not only these profitable customers’ immediate needs but dynamic pricing and product bundling as well. Using real-time personalised offer management, such as that pioneered by SunTec, means banks can offer better rates and fees, while customers get access to products and services tailored to their needs.

Smart use of IT makes the difference for banks

Strategic account planning and customer management for profitable customers are important. Within profitable customers, creating mini-segments in order for the sales and marketing teams to have the chance of moving the customer up the revenue chain.

This new capability, way beyond what non-bank Open Banking rivals can deliver, is thanks to the large amounts of data banks have at their disposal. This strategy would not only improve profitability as truly valuable customers are given the service they expect and are fully onboard, it would also by extension improve brand image, and attract new valuable customers.

Prioritising which customers are profitable is the first step in the Open Banking world for any bank. The second would be to build a partner ecosystem that can offer tailored solutions to customers, each partner bringing the best answer possible to a customer issue, tailored to meet their needs. Over time, data analytics and management will become vital for banks to understand which clients are profitable and how this should affect their customer services. Such an approach will yield long-term benefits for banks that do not wish to miss out on the opportunities of the platform economy and build a new, deeper level of customer satisfaction. Customer-centricity is the ultimate win-win scenario.