Regional banks: the case for digital transformation

Banking as a concept is one of the oldest systems in the world. It’s at the center of how we live our day to day lives. But the way we live our lives is changing. 

More and more of what we do is taking place online, in a digital setting. And banks need to keep up with this. The core of banking has stayed the same, but the way customers are served has evolved. In today’s world, it’s necessary to modernize technology and legacy systems to support expanded digitization on both the front and back ends of your business.

Plenty of banks have plans for a digital future. But where many are going wrong is still viewing these as a distant goal, something to plan for, rather than something to implement now. The current global pandemic is putting immense pressure on technology capabilities, for example, creating an even greater need for remote experiences, and highlighting new cyber-security threats. It’s accelerated both the market want and need for digital solutions. 

The pressure on businesses to digitize isn’t just a fast-approaching future, it’s here now. 

Caught in the middle: what challenges are regional banks facing?

Regional banks face a wide range of external pressures. You’re being threatened by both big banks (who have access to large amounts of resources) as well as new entrants who are able to rapidly innovate and react to the market. It’s never been more crucial for regional banks to remain agile and innovate quickly to continue to grow market share.

Most importantly, you also face pressure from shifting customer expectations. Driven by on-demand services like Netflix and Uber, customers expect more from your services than ever. They don’t just want things fast - they want them now. This has only been heightened by the Covid-19 pandemic and a need for contactless solutions. But in a competitive market, how do you meet these expectations? 

Banking is all about relationships - and this is where regional banks have the advantage over big banks and new entrants.  Regional banks know their customers well and offer a local, high-touch approach. By re-imagining your customers' digital experience in a way that builds on these relationships, is one step you can take to continue to grow market share.

How do regional banks overcome these challenges?

So what’s next for regional banks? What steps can you take to build out an effective digital transformation strategy?

  1. Take the fight to the competition

The consolidation of US banks along with pressure from new entrants has seen the number of regional banks drop. In 1985 there were more than 18,000. Today there are fewer than 5,000 in operation1. And conventional banks now only account for 72% of the global banking and payments industry, down from 81% at the start of the year and 96% a decade ago2.

Clearly, the market is changing. But that doesn’t have to be a bad thing—it is an opportunity to reinvent. Global Finance Magazine noted that “regional banks gained impressive momentum in 2018, building on their efforts to cut costs and move forward with digitization.” Regional banks have a distinct advantage in being adaptable and reacting quickly to changing conditions. 

This gives you an advantage in four key areas3:

  • Cost. Clunky legacy systems are associated with manual software delivery, layers of complexity, and fragmented and manual operational processes—all of which means more expense. Streamlining and digitizing processes and systems on both the front and back end can help to keep costs down.

  • Time to market. Fast product delivery is restrained by archaic systems. In today’s crowded marketplace, the ability to launch products quickly is a critical differentiator. 

  • Personalization. Customers increasingly expect a personalized experience. Regional banks serve a smaller customer pool than big banks, which gives you an on the ground advantage. You’re closer to your individual customers and will have a better understanding of their immediate needs.

  • Ecosystems. Partnerships are becoming critical to creating the products and services of the future. Older systems lack the connectivity to third parties that would enable innovation.

  1. Embrace the shift to contactless

The Covid-19 pandemic has played a critical part in accelerating our shift towards digital-first experiences. Mobile-banking traffic rose by 85% and online-banking registrations by 200% in the US, during the month of April this year4

This move to contactless banking experiences has been most visible in the payments space. The pandemic has led to an increase in actual cash held by the public, but its rate of circulation has dropped. On the flipside, card payments have grown, boosted by the boom in online shopping and efforts of brick-and-mortar shops to reach customers online5.

Based on The Economist research, it’s thought that the share of cashless transactions worldwide has risen to levels previously not expected until two to five years’ time6.

And it would appear this change in behavior is here to stay. In a global survey, Bain found that 95% of consumers plan to use digital banking post-pandemic7.

This digital shift provides an opportunity to improve your cost to serve customers. Money saved on bricks-and-mortar can be redirected to efforts to improve the overall customer experience, by re-modeling the branches that remain and developing digital experiences. 

  1. Meet customer expectations with an enhanced user experience

Customer expectations have changed. On-demand services like Netflix and Uber have given customers a new perspective. While the need for contactless solutions has been accelerated by the Covid-19 pandemic.

At the same time, new generations like Millennials and Gen Z are driving the demand for digital experiences, and this is changing the trust dynamic in the banking industry. There was a time online banking was considered unsafe and inconvenient. Now we all do it. You have the opportunity to enhance customers’ overall banking experience by making digital easy and showing customers how to self-serve8.

To understand why customer expectations are accelerating the digital transition, let’s consider what the average future customer might look like. It’s 2025, and Sarah is a 28-year-old professional who works as a freelance web designer. She manages multiple income streams and several loans. She tracks her finances and makes payments mainly through voice-assisted mobile devices, often on the go, so relies on digital tools and alerts to manage her money. But when she needs it (for example after receiving a large inheritance from an elderly relative) she wants her bank to be there to offer financial advice and coaching. And she wants all these different channels to be instantly accessible, and work together seamlessly.

To deliver an experience for an average future customer like Sarah, regional banks should look to create three complementary paths9:

  • Make digital easy for customers to use, and encourage them to migrate.
  • Reconfigure branch network and formats to focus on a mix of services: 
    • Providing financial advice and education for things like high-value or complex transactions, loans, etc.
    • Offering self-service options for simple, everyday matters like cash handling and routine payments. 
  • Retrain and raise employees’ skills, equipping them for digital services and sales.
Digital transformation: the key to growing market share 

At the center of a digitization strategy is your customer. And as you move many of your processes and services online, it becomes even more important to know who your customer is - or in other words, verify their identity in a digital scenario.

With a digital identity solution, you can transform how you see your customers and optimize your digital onboarding process. So what are the different ways a digital identity solution can facilitate digital transformation?

  1. Increase customer acquisition through digital channels. Most customers no longer want to visit a branch in-person to open an account. Adding a digital channel as an option for account opening offers customers an alternative. But if you’ve already implemented digital channels, how do you ensure yours is competitive? And if you don't currently offer digital channels, how do you kick start the process? Leveraging an identity verification solution at sign up gives you a scalable onboarding process. And it’s more convenient for your customers—they can open a bank account from the comfort of their own home, which will mean more digital account openings and more business for you. 

  2. Enhance user experience. We’ve covered the fact that customers expect more from your services than ever. A digital identity solution doesn’t just mean customers can access services wherever they want, but also whenever. They expect services fast, and with a digital identity solution, onboarding becomes both quick and easy. Plus it will set you apart from the competition. All regional banks offer the same product at the same price—a new, digital, and more convenient approach will set you apart from the competition. It’s been shown that banks with better customer experience actually grow deposits faster10,11.

  3. Drive efficiency. 60% of operating processes aren’t automated12. Without digital tools, banks are spending huge amounts of money on both their front and back end structures. It’s no longer scalable to manually process and verify each new account opening. And what happens when a customer loses account access or needs to verify themselves when making a large transaction? Moments of authentication like these can become expensive when relying on things like call centers. With a digital identity solution, customers can authenticate simply using a selfie. On average, mobile interaction incurs a variable cost of about 10 cents versus $4 for a teller or call-agent interaction13.

  4. Prevent fraud and satisfy compliance. Comprehensive identity verification means you can navigate KYC and AML regulatory requirements at scale. And we all know that fraud can cost your business—identity fraud is a growing threat, particularly online. With a hybrid approach (machine + human) to fraud, you can keep both your business and your customers, safe.

To find out more about how Onfido’s identity solution can support digital transformation, take a look at our whitepaper: A guide to digital identity verification.

1 https://www.gfmag.com/magazine/may-2019/best-us-regional-banks-2019-winning-digital-age 

2 https://www.economist.com/finance-and-economics/2020/10/08/how-the-digital-surge-will-reshape-finance 

https://www.mckinsey.com/~/media/McKinsey/Industries/Financial%20Services/Our%20Insights/Next-gen%20technology%20transformation%20in%20financial%20services/Next-gen-technology-transformation-in-financial-services.pdf 

4 https://www.economist.com/finance-and-economics/2020/10/08/how-the-digital-surge-will-reshape-finance 

5 https://www.economist.com/finance-and-economics/2020/10/08/how-the-digital-surge-will-reshape-finance 

6 https://www.economist.com/finance-and-economics/2020/10/08/how-the-digital-surge-will-reshape-finance 

7 https://www.bain.com/insights/reimagining-the-digital-branch-of-the-future-lets-get-practical/

8 https://www.bain.com/insights/reimagining-the-digital-branch-of-the-future-lets-get-practical/

9 https://www.bain.com/insights/reimagining-the-digital-branch-of-the-future-lets-get-practical/

10 https://www.mckinsey.com/industries/financial-services/our-insights/rewriting-the-rules-in-retail-banking

11 https://www.mckinsey.com/~/media/McKinsey/Industries/Financial%2520Services/Our%2520Insights/Rewriting%2520the%2520rules%2520in%2520retail%2520banking/SVGZ-Rewriting-rules-retail-banking-Ex3.svgz&sa=D&ust=1603708208259000&usg=AOvVaw25zImDnx7AKP6URWFF7LY9 

12 https://www.bain.com/insights/reimagining-the-digital-branch-of-the-future-lets-get-practical/

13 https://www.bain.com/insights/reimagining-the-digital-branch-of-the-future-lets-get-practical/

 
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