Why The Current Approach To Digital Banking Is Unsustainable

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The promise of lower fixed costs and better efficiency ratios that heralded the introduction of online banking was based on the belief that the Internet could be used to create a self-service environment that would reduce the staffing and technology requirements. In fact, adoption of online banking took longer than expected, and consumers did not abandon the other channels they used to access the services and products offered by their financial institutions.

Just as online banking adoption was starting to reach a critical mass that might allow for the realization of some operational effectiveness, Apple introduced the smartphone, and then a tablet. To say that consumers fell in love with these devices is an understatement. The iPhone introduction marked the beginning of the age of ubiquity for smartphones, and adoption rates for the tablet were faster than for any other technology to date.

To retain customers and members while hopefully attracting new ones, most financial institutions felt it necessary to respond as quickly as possible to the introduction of these new digital devices. To do so, many deployed separate mobile channels to service smartphone and tablet users. They aimed to satisfy the customers’ and members’ appetite for all things digital with new features and services. The disparate channels and services resulted in an inconsistent user experience, one that was often both inconvenient and frustrating.

Financial institutions were not only battling the “rise of the devices,” but also a new level of consumer expectation around the digital experience developed from a booming e-commerce market. Companies such as Amazon and Apple had been busy delivering a digital service experience that was user friendly, personalized and predictive. The fragmented, disparate channels and services that banks and credit unions deployed seemed like a trip back in time to consumers who were more accustomed to the smooth, intuitive experience they had when shopping online.

In addition to disappointing customers and members on the user-experience front, this segmented digital approach raised costs and lowered efficiency ratios. In the process of establishing multiple digital delivery channels and licensing new and existing services, financial institutions increased the number of vendors they had to manage and multiplied the implementation, maintenance and use®? fees they had to pay. In short, banks and credit unions were losing control of the user experience on the digital landscape and paying more for the privilege.

The numbers speak for themselves. One bank I spoke with pays $1.10 per month for each of its 70,000 online users, plus an average of 50 cents for bill pay transactions and an additional $1.50 for mobile banking users and transactions. After adding additional costs for personal finance management, person-to-person and account-to-account services, the bank pays more than $4 per user per month. An executive from the bank remarked to me, “It is cheaper to service the customer in the branch than online.” This bank is not an exception to the rule; many are in similar situations, some of which have never even calculated the costs. 

This strategy, built on a set of reactive responses, cannot be sustained as digital devices increase in number and Internet connectivity extends into new areas such as our cars.  Financial institutions that want to remain competitive over the next 10 years are taking specific steps now to position themselves for success.  The next 270 Degree blog posting will discuss those steps.