As late as 2019, only 1 in 4 banks or credit unions had a digital transformation strategy, according to a study from Cornerstone Advisors, a banking consulting firm. Then came COVID-19, which presented multiple digital challenges, from accelerating consumer demand for digital apps and services to connecting employees working from home.
In response, many banks and other financial institutions are keen to become digital innovators, says Ron Shevlin, Cornerstone’s director of research.
“When you ask banks what’s driving their digital transformation, few mention product innovation,” says Shevlin. “That’s a flawed mindset because, by not innovating, their customer base could be nibbled away by more focused competitors.”
Digitalization can open the door for new product offerings and better connections with business partners, Shevlin says. In an interview, he explained how banks, credit unions, and others can develop new digital products and services aimed at niche markets, to improve profits, customer satisfaction, and other key metrics.
Certainly not by solely focusing on outdated services, like checking accounts, which people no longer value. But they could be offering value-added digital services with those accounts.
For instance, a company called StrategyCorps is marketing a solution for financial institutions where, for a monthly charge, they’ll bundle cell-phone damage protection, travel insurances, and other services with checking accounts. They say they can generate $500,000 of new, recurring revenue per $1 billion of assets for financial institutions.
Banks aren’t gravitating toward value-added services, but should be.
There are probably a million reasons, but I think it comes down to banking cultures where everything is predicated on making money from interest. There just hasn’t been a lot of focus on innovating on the deposit side of the coin.
Most institutions want to give customers checking accounts, have them put their money into them, then lend it. Even when those that have thought about innovating take a look, they realize it would take a ton of time and money to develop and roll out new products, and they end up not doing it.
It’s amazing that, in our survey of midsized financial institutions last December, about half said they still have not made investments in cloud computing. The reality of the financial services world now is you’ve got to be connected with your vendors, partners, and service providers. Operating in a world where you have not set up in the cloud becomes very expensive from a software-development and integration standpoint. You need that technical infrastructure to get connected.
The question shouldn’t be what digital technologies should they invest in today. It should be: Where are the underserved markets? Where are the unmet needs? How can we best serve those needs?
The technology choices then become more clear, whether it’s cloud computing, artificial intelligence, or something else. Institutions need to start with the business problem and opportunity and figure out the technology later.
Instead of trying to develop all sorts of products, focus on building a platform where you can offer all sorts of products and services. The typical bank isn’t in the position to develop 15 different products for niche markets. But there are other companies out there doing that who would love to partner with the banks to deliver solutions.
Think about it: Apple is considered a very innovative company. Yet they didn’t develop everything that went into the iPhone or iPad. They offered innovation from other providers through their marketplace. The challenge and opportunity for large institutions will be to build their own platforms for products and services.
Smaller institutions should think about their target market as a bull’s-eye where they put specific customers in the center. USAA does this, for example, by delivering insurance products and services for active military members.
If you’re a smaller institution trying to build products for the mass market, you’re going to get trampled by larger banks who can outspend you. You’re better off, therefore, focusing on niche customer segments.