Traditional banks are struggling to make the pivots necessary to keep up with the latest technological trends while still delivering on customers’ needs. With many depending on legacy systems to conduct daily operations, it has been difficult for these long-established players to be nimble, and they often lose out to competitors that can launch the newest technology.
During the PaymentsJournal podcast, Tom Kleinsorge, Vice President of Global Software Sales at Euronet Worldwide, and Brian Riley, Director of Credit/Co-Head of Payments at Javelin Strategy & Research, explored the delicate balance traditional banks must strike to attract the new generation of banking consumers while keeping longtime loyal customers happy.
Neobanks Continue to Scoop Up Traditional Bank Profit Margins
Neobanks have been disrupting the traditional banking system for some time. Without the time and costs allocated to staffing and maintaining physical branch offices, these new online banks are freed up to be agile and pour their efforts into delivering top-notch customer service, using the latest in innovation to enhance the overall consumer experience.
Where are traditional banks missing the mark?
“Banks are challenged with understanding who their customers are and how they can serve this wide variety of customers that they have to deal with,” Kleinsorge said. “Traditional financial institutions are in business to make money, and they need to provide the services that their customers are going to use.”
He added: “What FIs around the world are grappling with: How do they provide this, maintain the stability, and offer the services their clients need? The next challenge is: How do they expand for the next generation of customers coming in? They’re challenged with this in a lot of different ways. They need to be able to adapt quickly.”
A banking customer’s lifecycle, Riley said, is the key to unlocking what a customer needs.
“People go through cycles,” Riley said. “You have different needs as you go through financing. That’s why it’s important to capture this segment because it’s like your first date. You always remember it. And you remember that first relationship you have with a bank. And people go through this lifecycle, they start coming out with college loans, which was not something that was prevalent a few decades ago to the extent that it is now.”
The cycle continues after that, Riley said.
“They start getting their first job, finding a partner or a spouse or whatever that means. And then moving into a spending mode,” he said. “Then they start maturing and it’s time to shift from spending to saving and investing. They’re going to ultimately get into financial service products, like shelter products, mortgages, and so forth.
“So it’s so important to address this universe of people that are aging through the process.”
Adopting new technology is not without associated issues. Traditional banks can still rely on being the stalwarts of stability.
“New innovation brings its own challenges with compliance, regulation, and security,” Kleinsorge said. “The traditional FI has always been the bank. It was a trusting place to do financial transactions of financial activity.
“New entrants and new emerging technologies are coming out with PSPs (payment service providers), wallets, and alternative channels and new providers. The fintechs are coming out with all kinds of really cool technologies that challenge the banks and the traditional way they do the business. They (banks) are trying to find the balance of how they can support the new emerging customer requirements and needs that are coming out so fast, as well as providing the stability and the legacy capabilities that they’re known for and the world depends on.”
Critics continue to focus on the reasons traditional banks should modernize their legacy systems. Not doing so will pose a significant hindrance to their ability to compete with more nimble competitors, they say.
“The legacy technology is real because it’s reliable, it’s stable, it does what it does,” Kleinsorge said. “It’s been around for a long, long time. But there’s also emerging technologies that are coming out that these legacy applications just have a hard time adapting to.
“Euronet has been working in international and emerging markets for the last 30 years. And we keep seeing this leapfrog where you’re seeing the smaller economies, the smaller banks, some of the new entrants like the new digital banks, they’re leapfrogging some of the established providers and players in the market because they don’t have that legacy infrastructure.
“So they’re able to use some of the newer (technologies) that are coming out quicker. We have some customers that are jumping right into contactless and cardless technologies.”
Although new technology is always welcome, the two features that should be table stakes involve security and the user experience. Younger consumers want speed and convenience. The older folks don’t mind waiting but also certainly like to have the “wow factor.”
“There’s a different expectation, but that security theme goes throughout, and that’s where the process can blow up,” Riley said. “The nimbleness of these systems is important. A lot of this stuff has to be real time, and that’s how you keep a competitive edge.”
Why Stay with a Traditional Bank?
Even with all the innovations in the fintech industry, something about the bank as an institution gives off an air of stability. Kleinsorge agrees that banks still have robust stabilizers in place to protect them, by harnessing consumer trust.
“I think you still have the stability of what the financial institutions do and the regulation, the insurance and the FDIC in the U.S. and just the stability of the economy,” he said. “The economy relies on the banking and the financial services industry to maintain that level of requirements compliance (and) structure that that’s out there.”
With innovative new products coming to market, consumers will still have to face potential risk. As a result, financial institutions will always have a key role to play in the financial space.
“There will always be a requirement for the financial institutions to do the money management, the regulation, the compliance, and everything that the stability that is still out there,” Kleinsorge said. “But there will be new entrants that are going to offer new services that are going to be different. So, some of this is going to come down to an individual decision about what level of risk they want to take and what they want to tolerate and see where that goes.”
How Banks and Credit Unions Can Be More Competitive, Convenient, and Streamlined
Amid all the rapid changes, technological innovation, and new entrants disrupting the financial industry with new solutions, what can traditional FIs do to stay relevant and competitive? Kleinsorge said it’s about knowing customers and their needs and delivering those things fast. It’s also about making an abrupt change from current legacy systems, especially if those systems are in-house.
“It’s important that FI’s and the banks know that they can move forward with new technologies without destroying what they’ve already done, because a rip-and-replace technology is terrifying, it’s scary, it’s expensive, it’s risky,” he said. “So being able to move forward with some of the newer capabilities and work with companies that can provide those new services (is the answer).”.
This may go against what is typically advised in the financial space, but it provides FIs with a middle-of-the-road solution that can be more cost-effective and less risky.