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Designing the Banks of the Future: A UX Perspective

Why banks should shift their role from payment processors to trusted consumer advisors by focusing on the customer experience

It’s official: We are living in the age of the customer. With real-time access to all sorts of information like prices, loan rates, product features and competitors, technology has empowered consumers to be more informed than ever before. As a result, companies that are meeting the needs of these empowered consumers are outpacing, if not replacing the more traditional players in their industries. The more well-established and entrenched that industry is, the more drastic the changes and innovation opportunities are. Just look at banking and finance.

There are three main trends that make it critical for the customer experience to drive innovation in the banking industry:

1. The effect of good customer experiences on loyalty and profitability
2. The pervasiveness of digital disruption and disintermediation
3. The opportunity to provide service through customer insight

Customer Experience —> Loyalty —> Profitability

In the age of the customer, customer experience is king. It becomes important for companies not only to deliver utility and direct value but also to focus on the outcomes for the customer. That means innovation through the lens of the customer experience in order to build solid long-term relationships and generate trust and loyalty over time.

But this isn’t just a designer’s wishful thinking – there is actually a direct relationship between customer experience and profitability. The relationship is shown in Forrester’s Customer Experience index (CXi), which measures how well a company delivers customer experiences that create and sustain customer loyalty. Consider the chart below, Forrester’s research shows that CXi leaders financially outperformed the S&P 500 by 29%, and the customer experience laggards by 75%.

artefact-customer-experience-banks-cxi-chart

The report also finds that for US consumers, customer experience trumps the price-value perception as a loyalty driver for banks and retailers. This means that old school marketing and incentives won’t mask a mediocre experience, which can ultimately hurt a bank’s profitability

In the banking industry specifically, a different Forrester survey shows there is still a lot of room to improve the customer experience.

artefact-customer-experience-banks-cxi-france-chart

Forrester’s survey measured customer experiences in different industries across Europe. The results are tepid, with the top scores for European banks landing in the Okay category. But if you want to be successful these days, your bank needs to score more than okay to succeed. For businesses to succeed, they need to get serious about the way they define, implement, and manage the customer experience.

Priority 1: Make the customer experience the filter through which you evaluate innovation programs and product and service investments.

Digital Disruption & Disintermediation

Nearly every industry has been dramatically impacted by the disruption of digital technology. New technologies have made it easier for start-ups to enter into the market, creating solutions for unmet needs and previously unaddressed consumer pain points, completely disrupting traditional markets with better, faster, more convenient customer experiences. This isn’t just happening in the digital world, we’re seeing it take place across nearly every industry, from healthcare to finance.

New startups and entrants to the market are blurring the boundaries between industries as they create entirely new kinds of services and business models. Initially, car companies and transit systems did not think of services like Car2Go, Uber and Zipcar as competition. Hotels did not realize they would eventually compete with AirBnB, and it took banks a while to consider crowdfunding platforms like Funding Circle, Lending Club or Kickstarter as competition.

Priority 2: Do not underestimate innovative business models and services. If you cannot build them yourself, think about how you can incorporate them into your existing offerings.

With disruption comes disintermediation. Consumers who are unsatisfied with their options are getting rid of the middleman and starting to take it upon themselves to learn about investment choices and selecting their own investments directly. This process is called disintermediation and it reduces the amount of business available for commercial banks. And with alternative services cutting out the middle man, making transactions easier and cheaper and providing better customer experiences, skipping over the bank has never been easier.

artefact-user-experience-banks-starbucks-app

A great example of disintermediation is Starbucks. The coffee powerhouse created a loyalty program that incentivizes customers to load their Starbucks card with money directly through the Starbucks app. So now instead of banks seeing multiple transactions for three to four dollars each, they see fewer transactions for the lump sum. It’s a truly ingenious business decision for Starbucks (Business Insider reports they are on track to process 1.4 billion US dollars in 2014), but at its core, it’s an innovation that came from thinking about a great customer experience.  The common pattern with successful customer-driven innovation like the Starbucks digital card is that it’s a win-win for both the business and the consumer. While the consumer benefits from their company loyalty through free drinks and other incentives, the business sees the enormous effects of a huge cash float.

Disintermediation also takes form in peer-to-peer (P2P) lenders like Lending Club and Prosper, where individuals can lend and borrow money from each other without going through a traditional intermediary. The biggest draw for P2P loans is that borrowers often receive lower interest rates than banks can offer while lenders see higher returns than they could get from a savings account or other investments. P2P loans can also be appealing to borrowers who have less than stellar credit and may be unqualified for traditional bank loans though some P2P intermediaries are starting to get wise to this trick, declining applicants or charging higher interest rates to borrowers considered a risk.

Priority 3: As more and more companies and individuals find more satisfying alternatives for their need to borrow money, disintermediation can significantly impact the performance of banks and financial institutions. They need to find new ways to deliver value to customers outside of simply enabling financial transactions.

Opportunity area: Service through customer insight.

When you examine financial services for consumers, it’s not hard to find customer pain points that translate into opportunities for radical disruption.

Take savings accounts for starters, the average savings account in the U.S. has a pitiful 0.06% annual percentage yield, with many more of the nation’s largest banks paying rates as low as 0.01%. The market solution to saving money just isn’t a good deal for consumers. You can examine other consumer needs, from retirement planning to mortgages, to college savings and find similar customer dissatisfaction.

Banks must start to harness outcome-focused thinking in order to provide immense value to their customers. There are endless opportunities for banks to remain relevant and trusted. One area that gives banks a point of optimism is the massive amount of data that banks already have about peoples’ spending habits and money management challenges. This kind of insight into finances doesn’t only apply to the big financial decisions like retirement planning and savings, but to the everyday purchases like gas and groceries, as well.

It is these insights and everyday decisions that give banks the opportunity to shift the relationship with their customers from the role of transaction processor to the role of financial advisor. This means pivoting the value proposition to an advisory role by providing financial advice born out of deep financial insights. In this model, building deeply authentic trust with customers is of the utmost importance.

artefact-token-bank

We looked at the opportunity for payment providers and banks to add value at the moment of a transaction through our wearable concept work on Token early in 2014, and this year has been an increasingly dramatic one with announcements and product introductions of Apple Pay, and the forthcoming Apple Watch.

Look at IBM’s Watson Engagement Advisor, which is a Software-as-a-Service that listens, thinks and learns like a human to automate customer interactions. According to IBM, it’s a first of its kind system designed to leverage deep insights to help customer-facing personnel assist consumers more quickly than previously possible.  As an example scenario, a customer asks how much it will cost to send her daughter to college. Armed with some contextual data (the daughter’s age, location, etc.), Watson responds with the projected cost of a four-year college education about both public and private universities in 2030. If implemented in banks, this is just one example of how big data could transform the customer experience.

Systems that only focus on answering questions like Watson, and the interesting expert service NerdWallet, are a step in the right direction and potentially avenues for banks to explore partnerships. However, banks need to be able to recognize situations and contexts and be proactive when they detect the right opportunity. Discovering patterns in consumer behavior and alerting them to situations that can impact their financial health can be a huge step in the right direction.

Charts: Forrester
A version of this article originally appeared on PSFK.