One of the most interesting aspects of the digital banking revolution is that, in some ways, banking is actually going back to its origins.
The concept that connects the original 13th century bancos in Italian squares with the latest developments in today’s fintech hubs is hyper-personalization. Using authorized real-time data to generate customer-specific insights, banks can offer services that are highly tailored to customer needs.
The rise and fall of 13th century style hyperpersonalization
The idea is not new. The original banks were a very good example of hyperpersonalization without technology. They had a deep understanding of customers because many of them served part of one: for example the Medici family or the Republic of Genoa.
They offered unique, personalized financial agreements and terms. In addition, they did not focus on selling products, but on helping a customer achieve a certain unique result.
This personalization was gradually lost with the industrial revolution. When the industrial bank emerged to meet the increased demand, banking was standardized. That meant offering a limited range of standard products to a mass market. Only the richest continued to receive tailored services.
In the late 20th century, the so-called IT bank offered essentially the same products as the industrial bank, but introduced computers and IT to increase internal efficiency and increase profit margins. Changes were driven from within, with little real benefit to customers.
Indeed, some of the consequences of the IT bank could be said to have made things worse for customers: centralization and reduced on-site presence; Branch employees with more sales skills than banking; and the implementation of centralized and rigid “computer says no” style rules. The IT bank focused on the efficiency of the bank and its tech stack. it seemed to forget the customer.
Back to the future: the digital bank and new personalization options
Excitingly, the digital revolution is enabling hyper-personalization again today and is actually putting it at the top of the banking agenda. This time around, however, personalization is technology assisted and provided on a large scale.
With the help of digital technologies, a single bank can serve many thousands of individual customers and still treat them as a segment of one. The banking business is closing, but this time around, far more customers will benefit.
Today’s personalization is essential
Hyperpersonalization is a key way banks can differentiate and test financial conditions. With the effects of the 2020-21 pandemic continuing to be felt and interest rates at record lows, banks can’t just rely on traditional interest-bearing products. Indeed, in its November 2020 report on the future of retail banking, Deloitte went so far as to say that hyper-personalization is an “imperative” for banks today.
The urgency that Deloitte expresses is based on several factors. First, customers see this type of personalized offering all around them – from Netflix referral programs to Starbucks that create bespoke offers for each customer with a loyalty card – and they want the same thing with financial services. Banking is slow here: in 2018, finance industry strategist and influencer Jim Marous concluded that 94% failed to deliver on the potential hyper-personalization offerings, and it’s hard to see how that will have changed dramatically.
Second, there is a clear business model to meet this demand: Deloitte’s analysis suggests that “in terms of revenue, the personalization maturity curve shows that a company’s revenue tends to increase after a certain level of hyper-personalization” .
Third, from a regulatory perspective, it is important: Governments and regulators now expect banks to play a role in meeting society’s financial needs that are not well served by their existing narrow range of products. Personalization is key here.
Get hyper-personal with Open Banking
So if they’re going to get hyper-personal, the question for banks is, how?
The obvious gateway to hyperpersonalization is open banking. Open banking offers banks a rich field of new information – especially when customers allow banks to monitor their entire finances.
This information can be analyzed using AI to gain insights into a customer’s unique circumstances and then used to come up with a bespoke offer that is tailored to that customer in terms of costs, conditions, penalties and bonuses. For big ticket financial services like mortgages, a relationship manager could be involved in talking about these offerings and making suggestions – a hybrid digital-human model.
In return for the transparency of their finances, customers know that the bank can offer a range of highly personalized services that may offer a much better deal than an off-the-shelf product.
Real personalization through fintech partnerships
However, this type of personalization is only the tip of the iceberg. In addition to personalizing their own services, banks should also consider partnerships with fintechs. The bank then becomes the curator of a marketplace on which a customer can be offered highly personalized services from a large number of fintech providers via a single entry point. You can then choose the one that will best enable you to get the result you want.
These fintechs have access to a customer’s financial landscape and can therefore offer products that are exactly right for the customer they specialize in. The bank, in turn, takes part of the profit made by fintech providers.
This may sound like an abomination to banks and may not be as profitable as selling their own services, but what is crucial for the bank is that customers stay on their own website. The bank is becoming a key portal for a wide variety of services, many of which are provided by third parties. Research by Deloitte suggests that when it comes to rating, there is a significant shift towards what is referred to as “network orchestrators” and rated higher than service providers. So there is a good business sense here.
To explore how this might work in practice, as a middle-income bank customer, you may be drawn to a financial offering from Avant, the Chicago-based online lending platform, aimed at reducing the costs and barriers to consumer borrowing lower like you.
If you’re looking to refinance student borrowing, you may be directed to a product from San Francisco’s SoFi that also specializes here. The doctors could be offered offers from Panacea Financial, which are aimed at doctors and offer them special conditions.
A tech SME could be offered Brex corporate credit cards, which offer great benefits in spending on relevant services, from collaboration platforms like Zoom to the delivery of groceries. A small business in dire need of funding may be turned to a proposal from OnDeck – a specialist who offers funds that often arrive within a day.
Thrive by putting the customer first
Whether in loans, investments, savings or insurance, it is hard to imagine that a service bank could not offer this route.
Of course, it’s critical to make the user experience as smooth and consistent as possible, regardless of whether the bank offers its own service or one from a third party. However, developing the front end and the required APIs is much easier than trying to offer all of these services yourself. In addition, banks are in a strong but benevolent negotiating position with fintechs, many of which are still unable to find scale and profitability.
This allows banks to come up with a proposition that, like 13th century relationship banks, is once again firmly about the customer and their results, and not just about pushing products that may not exactly match the actual needs of the customer Customers fit.
Of course, this digital transformation could lead to increased efficiency within the bank, but first and foremost it is being driven from the outside in and not from the inside out: It’s not about the internal product sales goal, but about what works for me as a customer. If banks follow this path and return to the future, they can thrive in a Netflix world where standardized products alone won’t prevent it.