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Forward Bank is aiming to improve client interactions and to spend more time and effort in the advisory space with the launch of new automated capabilities. The $897 million bank seeks to increase customer engagement through its automated “geofencing,” process, which uses mobile location services granted through the bank’s app, radio frequency identification (RFID), Wi-Fi […]
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Brian Stone
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Americans are leaning on the use of digital banking and its associated tools to help feel financially resilient amid economic uncertainty. Digital adoption has continued to grow, and the 46% of Americans who consider themselves financial experts rely more on digital tools now than they did in 2021, according to KeyBank’s “2023 Financial Mobility Survey.” […]
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Brian Stone
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Fifth Third Bank announced the addition of Early Pay for federal tax refunds through its Fifth Third Momentum Checking digital banking platform as part of the bank’s ongoing tech modernization initiatives. Web- and mobile-based Momentum Checking, which launched in 2021 and has more than 1 million customers, offers quick access to cash, avoidance of overdraft […]
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Whitney McDonald
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Bank of America continued to invest in technology and people during its fourth quarter amid global economic uncertainty. WHY IT MATTERS: The $3 trillion bank’s Q4 non-interest expenses rose 8% year over year to $5.1 billion, “primarily driven by investments in technology and employees, including hiring, higher costs from return to work, and client engagement,” […]
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Brian Stone
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Financial institutions today are teetering into a Nash Equilibrium.
A Nash Equilibrium, named for mathematician John Nash, occurs when players in a game can fully anticipate the choices of other players. When all players’ actions are considered, everyone is able to achieve their objectives. Every player wins.
The concept was a groundbreaking contribution to game theory study and continues to be widely used by economists — but it also has practical applications. In the banking industry, financial institutions can benefit from Nash’s work by adopting a holistic approach to personalization, better understanding individual customer needs in order to make business decisions based on real market demand. This strategy is proving to be an effective way to connect with customers and win business.
The expansion and adoption of digital banking has unlocked the opportunity to create a highly individualized customer experience known as “hyperpersonalization.”
Deloitte defines this as “using real-time data to generate insights by using behavioral science and data science to deliver services, products and pricing that are context-specific and relevant to customers’ manifest and latent needs.”
Personalization powered by real-time data and analytics to serve each distinct customer has quickly become an expectation. A Salesforce survey found that 56% of customers expect banks to anticipate customer needs and make appropriate recommendations even before initial contact.
Banks are using automation to serve individual clients by tracking transactional activity and extracting unique data. They use the information to provide services that best fit specific customers’ needs. Based on customer expectations, banks are aggressively pursuing these strategies. HSBC executives expect hyperpersonalization will become a new standard of service, and JPMorgan Chase is investing $12 billion in cloud and AI technologies to strengthen the customer experience.
Financial institutions understand that technology is the gateway to achieving hyperpersonalization.
In a survey conducted by information technology services company Wipro, industry leaders listed “improving the user experience with greater personalization” as the most valuable use of AI technology. However, most financial institutions are not equipped with the infrastructure to collect and process data, conduct pertinent market research and retain qualitative feedback from customers.
To bridge the technology gap and advance the integration of hyperpersonalization, banks are partnering with fintech companies like Plaid, MX and Alloy, which provide the mature and future-ready technology that banks need to foster a custom experience and better connect with customers.
With access to the right technology, the potential for hyperpersonalization is infinite. Leveraging automation and machine learning technologies gives banks an opportunity to connect with potential customers, solidify existing customers and serve as a differentiator in an increasingly diverse marketplace.
At its core, this strategy is simply a means of better understanding customers and the market. Technology can reveal subtle insights into customer patterns and behaviors and the trends shaping the market to deliver individualized solutions. Banks are able to use data to assess the risks and rewards, and make a decision that is best for the organization’s goals.
The strategy should also include an analysis of competitor activity, including niche submarkets and emerging specializations. Information about other industry players will reveal market gaps or unmet needs as well as overserved demographic groups or areas of the market with the potential to become overheated. Digital banks can use this information to decide which market areas to pursue and where the company’s product lines and expertise best fit within the existing market dynamics.
Banks are not the only beneficiary of a hyperpersonalized strategy. SMBs will benefit from individualized analysis, intelligent insights and personal communication. The strategy will not only win customers but establish a meaningful connection that will evolve into a trusted and loyal relationship. According to research from Deloitte on hyperpersonalization in banking, “emotionally connected customers are more than twice as valuable as even highly satisfied customers.”
To achieve a human connection, a personalization strategy should include progress reports for customers tracking financial performance, support and consultation, and education about how a company’s financial objectives are linked to broader economic, social and environmental trends. This is where customers will see the qualitative benefits of a bespoke platform.
With hyperpersonalization, the digital banking industry is playing a positive sum game, one where both banking customers and financial institutions win. The trend is redefining competition in the financial services industry and delivering better banking to small businesses. That truly is a victory.
Mike Butler is the chief executive of digital bank Grasshopper which offers small businesses products and services for specific industries such as commercial real estate lending and yacht financing.
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Mike Butler
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The rapid rise of digital platforms has raised new challenges, including unregulated digital lending apps, cryptocurrencies and cyberattacks, according to MK Jain, Deputy Governor of the Reserve Bank of India.
He also said Indian banks and financial institutions should increase investments in technology as their legacy systems may not be suited to rapid changes in product design and computation.
Speaking at the National Institute for Banking Studies and Corporate Management (NIBSCOM), Jain said, “Technology revolution has certainly enhanced the efficiency of financial entities and resulted in significant improvement in doing business with banks, it has also posed new challenges. Several concerns emanate from the mushrooming of unregulated digital lending apps, cyrptocurrencies, cyberattacks, etc”
He said that banks and financial institutions should be ready to scale up their investments in technology. “In many cases, legacy core banking systems designed in the pre-mobile app era may not be amenable to swift changes in product design, computational capabilities, API integration, etc,” Jain added.
In addition to technology, the main differentiator for success is quality human resources.
“With a dynamic and rapidly changing environment, the skill gap is widening. To address this, banks and financial institutions have to attract, train and retain talent. Further, there is a greater need for employees to be flexible, agile, open to new technologies and proactively pick up new skills to remain useful. Consequently, upskilling and reskilling of human resources is a sine qua non to face the emerging challenges. This is where capacity building will play a major role in the financial sector,” Jain said
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BL Mumbai Bureau
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Wells Fargo launched its new AI-powered digital banking platform Vantage on Monday to create a more customized banking experience for its commercial, corporate and investment clients. Vantage allows for personalization using AI and machine learnings (ML) and is able to connect back to legacy data, Reetika Grewal, executive vice president and head of digital transformation, […]
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Whitney McDonald
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Core provider Temenos is growing its international footprint as more financial institutions (FIs) turn to its microservices and API-powered technology amid increasing cloud adoption. Temenos’ expansion in areas like the Middle East is largely due to FIs integrating cloud architecture — a departure from traditional banking norms in the region, Robert Wint, senior product director […]
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Brian Stone
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This blog is the first in a series on the impact of challenger banks on the Swiss market. It provides insights into how challenger banks threaten to disrupt traditional banks, the different types of banks that are entering the market, and the need to adapt the challenger banks’ operating models to grow successfully.
Today, banks are changing rapidly to keep up with their customers, who are demanding better experiences and more sophisticated products and services from their providers. For most people, visiting a bank branch used to be the main way of interacting with their bank. However, more and more people are choosing to interact with their banks digitally rather than through a traditional bank set-up.
This has led to the rise of challenger banks, allowing new entrants to gain momentum and increase their market share in the Swiss banking sector. They have achieved this by offering a superior digital user experience compared to traditional players, by leveraging strong capabilities in technology and focusing on customer centricity. Naturally this raises the questions:
• To what extent are challenger banks a threat to the market share of traditional banks?
• Are traditional banks able to keep up with the rapid pace of innovations and customer-centric offerings?
A problem for traditional banks today is that they are bound by legacy systems and have rigid operating models and governance structures. Even so, many market players have been innovative in adopting new systems and technologies, and in customising client journeys. Upgrading to highly customised systems is costly and does not always justify the cost, ultimately leading many banks to hold back their system upgrade plans. Additionally, the systems of traditional banks have been pieced together over years by internal developers and external outsourcers. This has made them sluggish in keeping up with innovative challenger banks which are changing the banking market status quo.
Swiss bank development – Source: Deloitte internal research
The legal and regulatory framework of the Swiss banking sector played an important role in allowing Switzerland to become the banking powerhouse it is today. Since the foundation of the first public bank in Switzerland in the 16th century and up until today, five centuries later, their dominant position was not challenged. Historically, banks owned the entirety of their value chain and differentiated their offerings by creating product and service packages for customers at slightly different rates than their competitors. However, the core operating model has remained the same and has always consisted of building customer relationships and distributing services through brick-and-mortar branches.
Business models in the banking industry evolved slowly until the creation of the first challenger bank in 2009 which accelerated the business model transformation to keep up with changing customer demands. Backed by private funding, challenger banks have since filled a gap in the market by addressing the increasing demands from customers for innovative features as well as “real-time” transaction speeds. With their new operating models, challenger banks are building large customer bases and are intent on dominating the market. However, they need to obtain a banking licence and address a multitude of regulatory requirements − just like traditional players, which are more experienced and still hold a majority share of the Swiss market.
Although challenger banks aim to compete with traditional banks by using mobile-centric technology and targeting specific customer segments, they face some challenges to successful growth. We identify four distinct types of banks in the market, each with their unique challenges.
Categorization of challenger banks – Source: Deloitte internal research
Main regulatory and operational challenges for challenger banks in the Swiss market include but are not limited to:
Licence vs. no licence: Without a banking licence, organisations can still offer prepaid cards, permitting customers to cap the foreign currency fee. However, to generate revenue and make profits, expansion is needed into other financial products and services, such as personal loans, mortgages, credit cards and digital assets. A question is whether it would be more profitable to partner with existing traditional players or to undertake a rigorous and time-consuming banking licence application process.
Client due diligence and ongoing monitoring: To provide adequate evidence of compliance with Swiss banking regulations and banking secrecy laws it is necessary to establish a client risk assessment framework, relevant policies/procedures and appropriate transaction monitoring alerts. A lack of regulatory and compliance expertise and poorly defined processes might result in failure to gather sufficient information to identify high risk customers, such as politically exposed persons (PEPs), sanctioned individuals and money laundering organisations.
Governance and internal controls: The governance of Swiss banks is characterised by a strict separation of activities between the board of directors, which is responsible for oversight, and the executive management. There may be a lack of clearly defined roles and responsibilities for each core product offerings and internal functions, and insufficient monitoring of compliance with applicable regulatory requirements. This leads to increased FINMA scrutiny, exposure to financial fines, and reputational risk.
Compliance risk management: This is a major concern for challenger banks of all sizes. The complexity of region-specific banking rules and regulatory risks means that even major banks with large compliance teams struggle to stay compliant.
There are only limited differences between the regulatory and financial crime risks faced by challenger banks and those facing traditional retail banks. Unlike traditional banks, which have large legal and compliance teams, challenger banks are thinly resourced and face increasing pressure from regulators. It is therefore vital for challenger banks to evaluate and mitigate their risks continually, in line with their evolving business model. The most critical and urgent areas for both new and existing challenger banks to focus on are summarised below:
Banking licence: Before engaging in business operations to offer a wider range of financial products and services, challenger banks should obtain authorisation from the Swiss Financial Market and Supervisory Authority (FINMA). Applications for a licence must be submitted to FINMA in an official Swiss language, containing general information with supporting documentation about their intended operations. The lead time for obtaining a licence is between 6 to 12 months, depending on the quality, completeness and complexity of the application.
Operating model: Banks should build a robust target operating model with clearly defined roles and responsibilities, to ensure that their various business functions are lean and compliant. They should enhance the customer journey with innovative and risk-based measures to meet their ambitions for growth and profitability.
Client risk assessment: They should define a robust and flexible risk assessment framework to determine standard and enhanced client due diligence checks,
with the ability to identify the ultimate beneficial ownership in complex structures, manage financial crime risks and trigger adequate transaction monitoring alerts.
Control framework: They should avoid regulatory risks relating to anti-money laundering, KYC, banking secrecy, PEP, and sanctions, through risk-based customer screening and appropriate systems. They should enhance their reporting and operational resilience with quality assurance controls.
As challenger banks continue to attract more customers and expand their operations in Switzerland, they must pay close attention to the requirements of FINMA and the Swiss Bankers Association (SBA). Balancing regulatory compliance with achieving internal operational growth can be a challenge for many newcomers. It is therefore crucial that challenger banks should manage regulatory and compliance risks effectively by establishing a robust operating model, to position themselves for growth and operational resilience in the Swiss market.
If you would like to know more about the landscape for challenger banks and how Deloitte can help, please reach out to our contacts below.
[2] https://www.fca.org.uk/publications/multi-firm-reviews/financial-crime-controls-at-challenger-banks
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Lena Woodward
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