Direct to Customers - Will FS firms be upping the ante?

In the early days of computing, monolithic stacks of mainframe computers used to command an enviable proposition. Scores of scrunched up users waving punch cards had to fight it out to have their programs processed through an excruciating time-sharing system as computing resources were scarce. The advent of personal computers spawned an era of self-sufficiency as users could finally scale the relegation barrier and access applications exclusively. Digital had discovered its primordial watershed moment.

The world of financial services mounted on the back of an appurtenant “intermediary-network” has reached many major milestones. For the unversed, “intermediaries” serve as the medium or channel for products and offerings to reach the customers. Be it through the triad of agents, advisors and aggregators or a vivid manifestation of branches, acquisition and service of customers by banks and insurers have seen a tactical interplay of cost, efficiency and conversions. Major players around the world have made significant investments in state-of-the-art branches to woo the new age svelte customer with a promise of heightened agility and experience. Advisors for long have influenced customer psyche in a bid to reinforce financial acumen pertaining to goal-oriented products. The underbanked territories have legendary tales of innovation woven around correspondent banking and last mile connectivity.

Digitalization stepped in as a critical game changer in the last decade to empower customers with the ability to transcend dependency and take autonomous decisions. Banks and Insurers have been engaging directly with their customers more than ever before in the omnichannel universe. Gen Z customers are rooting for premium experience, personalization of products and services, adaptive tariffs and tactile innovativeness. Millennials are taking a leaf out of the same playbook to seamlessly blend with app-banking and online portals. Aggregators have hitched a ride on the digital bandwagon as well especially in the insurance space to present customers with differentiability around new products and offerings.

Intermediaries have traditionally nurtured the FS ecosystem with a systematic recipe of accessibility, coverage and guidance. But, with the arrival of the self-governing customer, the right-to-choose for oneself independently aided by innovation becomes a discernible factor. Branchless banking is now helmed by mobile apps, chatbots take over the mantle of financial guides and AI shapeshifts into multiple avatars helping decision making. As open banking ushers in an era of commoditized data marketplace, the role of digital aggregators in the value chain risks a symbolic dilution.

All in all, it is the “mainframe vs PC” redux and is now being played out at scale as players scurry to cover lost grounds in view of competition, efficiency and customer affinity.

The pandemic situation has created an asymmetric carte blanche for incumbents to rewrite the business code, in ways, that augur disruptive trends and harness radical transformations. Leading financial entities across the world have gone “belly up” marred by years of profligate spending and impulsive investments. With social distancing bringing in fewer footfalls in branches and a recessionary squeeze around topline growth, many banks will be staring at a potential wipeout. For most of them to remain competitive, the underlying course-correction shaping up the transition from “run the bank” to “change the bank” has to thrive with hyper-tech elements such as API banking, AI /ML, agile development providing customers a sense of ownership and flexibility in their banking approaches.

Is it an opportune moment for banks and insurers to go solo by devouring the multiple layers that exist between them and their customers? Will the new churn flip over the rule of intermediaries as players clamour for the most exclusive attention of their customers? While the jury is still out, a peek through the survival strategies of the players should provide an idea. With the cost-income ratios of banks under duress, they look for newer ways to excavate incipient revenue streams, pare operating costs and own relationships in a hyper-competitive and unfavorable economic scenario. Research suggests that banks typically invest millions of dollars to open branches including high street presence and an additional half a million per year to operate them. Branch closures have increased significantly in recent times, imparting pressure on the banks to focus exclusively on digital channels in order to put a tight leash on their profitability. Leading studies have propounded an operating cost reduction in the range of 35% - 50% depending on scale play, if banks migrated to an exclusively digital medium at the expense of the branches. Apart from cost, another factor is the established threat from fintechs who have already annexed substantial parts of the value chain.

A platform-centric business model gaining mileage in Europe, predominantly in the UK and Germany, could hold the shining light. A new breed of banks referred to as neobanks and digital challengers have successfully promoted an intermediary-less framework into adoption. Their “digital only” template based on mobile apps offers higher rates on savings, simple and intuitive services and convenience for customers. Without a brick and mortar presence resulting in negligible cost overheads, these players pass on the benefits to their customers while providing cutting-edge experience thanks to AI and data analytics.

The tenets of an optimal “direct-to-customer (D2C)” strategy will count on the ability of banks and insurers to seamlessly translate the nuances of the branch-based relationships to the digital medium. Customers would not consume the direct model in the same vein as an OTT or web streaming app. They would continuously seek differentiation, value, flexibility and security. Elements pertaining to data protection, privacy and security will form a crucial component of the design aspects. Players would need to invest in developing the full technology stack with focus on platform appeal and immersive experience.

Customers are expected to have a field day, as stakes are set and FS firms go about upping the ante.