The merger between Virgin and CYBG offers a tantalizing glimpse of what the retail banking landscape of the future might look like - and with retail banking practices increasingly bleeding into the corporate banking experience, the lessons and opportunities that will arise are as relevant to businesses as they are to consumers.
The past 10 years have shaken up the retail banking scene. From the financial collapse to the advent of apps, both consumers’ demands and banks’ offerings are vastly different from what they were back in 2008.
CYBG’s proposed purchase of Virgin Money for £1.7bn is another shift that hints at the changing landscape. The two new partners met on September 10 to discuss how the merger will work, and the outcomes are sure to give us some hints as to where the sector might be heading next.
Behind the headline numbers lies a key strategic reason: matching the personal feel of regional branches with the technological capabilities to answer the growing digital demands of modern consumers. Being able to offer at once the immediacy of digital with the human touch will separate the banks of the future from those destined for extinction. Building customer loyalty is therefore key in an increasingly competitive and globalized retail banking sector.
Data comes first
The large banks have both strengths and challenges with their own IT departments and legacy systems. Their huge customer databases and long-established reputations give them great influence. Yet some are still relying on a siloed business model that doesn’t allow the greatest value to be drawn from their data.
Where these banks have merged and reformed over the years, there may be numerous profiles of one customer in the systems at any one time. As banks innovate and adapt, they often create a hybrid IT environment in which systems can’t or won’t ‘talk’ to each other. This leads to missed opportunities and the stilted customer journey that can’t identify the Joe Bloggs looking for a mortgage with the Joe Bloggs who just bought a house.
However, many of the UK’s high street banks are investing in digital transformation. A key example is HSBC, whose recent results reflect its policy of technological investment to grow customer engagement and future business. Through this innovation it is also bringing to life the concept of Open Banking.
By allowing customers to view their accounts at all banks, whether HSBC or not, through the HSBC app, they become the first port of call for all financial product needs. The particular genius of this is that Open Banking is going to happen regardless – it’s inevitable. Therefore, rather than resist the change and find themselves on the back foot, banks need to find more boundary-pushing strategies to ensure they are innovating the customer journey at every level of the business.
Online experience
Banks are also catching onto the features that, originally limited to hip FinTech start-ups like Monzo, now typify the modern retail banking experience. For example, financial institutions are adding online and app-based features which break down spend sorted by vertical or brand.
However, although these features do give customers what they want, banks are not leveraging this to improve their offerings for individual customers in the future. As useful as these features may be, they don’t build long-term loyalty, because they do not generate the contextual offerings that demonstrate how the bank understands the customer on a one-to-one level.
Meanwhile, FinTech start-ups that specialise in a digital-first approach to customer experience are growing rapidly but are in constant need to finance their growth. Let’s take Monzo for example. We’re seeing more and more luminous orange cards dotted about the place, often accompanied by an ever-eager client base of young consumers demanding contextual services. They are capturing the next generation who will become a key profitable segment in the future as their financial product needs grow and become more complex.
However, Monzo’s 2017 results show staggering losses. Ultimately, the demand is there, but start-ups are nervous to capitalize on their well-built customer loyalty through new services. However, features like account charges and optional overdrafts make banking one of the oldest ‘as-a-service’ industries. By expanding their offering to include products like the recently released ‘Revolut Metal’, the FinTech movement can not only secure its existing customer base but also attract high-net-worth customers looking for a digital-first customer experience.
Regulatory hurdle
The next hurdle may be regulation – it may be difficult for disruptive companies such as these to expand into long-life products like mortgages without the legacy systems, expensive permissions, and well-known brand name often found in older financial institutions.
The FinTech approach may be risky but there’s no doubt that it is shaking up consumer expectations significantly and catching the attention of the bigger, more ‘traditional’ financial organisations.
Mid-sized banking institutions like the CYBG group are ideally placed to rapidly challenge the status quo without the funding risk. Building on a digital-first approach mixed with its regional/personal appeal uniquely places them to provide the seamless online and in-branch experiences customers crave. By unifying these, staff can give a more human feel to banking and focus on the next best experience for the customer.
As new regulations such as Open Banking and the switch guarantee ensure customers have more power to vote with their feet, banks need to be thinking not just digital-first, but experience-first.
The human touch might still be valuable, but banks will struggle to deliver this without ‘smart’ technologies such as customer data platforms to support them. The Virgin and CYBG merger show a key strategic manoeuvre that financial institutions, big and small, should be watching over the next few months and years. The combination of regional reach and fast digital services could be the key to building customer loyalty in a sector where the emphasis is increasingly on experience.
About the author
Ian Matthews is a data evangelist at NGDATA.