Artificial Intelligence, algorithms, Big Data, Blockchain, Smart Automation to mention a few only, these are the big words that are changing the face of our society. Their impacts on consumer behavior and prediction are unparalleled, and every aspect of our economy is now depending on these technologies to offer better, faster, innovative and disruptive services and products.
These technologies have had a huge impact on the banking industry too. In a rush to digitalization and to keep up with new competitors, banks digitalized and automated their services so much so that human connections and customer proximity are disappearing. The question of the banking dehumanization is now raising from both sides. Banks are losing control over their client loyalty and customers are looking for the best of both worlds: digital for practicality and swiftness and human interactions for more complex matters. This topic is key for the banking industry as its actors have to find the levers to reach the optimal customer experience and cope with the fact that it is and will be continuously evolving. A fast-evolving environment 50 years ago, the first ATMs were installed in Europe marking the beginning of the digitalization of the customer experience. Over the years, retail banking institutions dove into the digitalization of their services so they could answer the needs of convenience and rapidity their customers were asking. From being based on physical branches, banks are becoming digital, using the latest technologies to process data and offer an optimal online experience. The digitalization rapidly impacted all the services a bank could provide from cash withdrawal to account openings. Consequently, contacts with clients decreased leading to a poor customer relation and knowledge. This lack of knowledge and control over their client’s portfolio forced regulatory institutions to come up with major regulations to encourage banks to know their customers (KYC), respect their data (RGDP), control their operations (AML) and so on. In the meantime, banks are facing tougher competition from highly digitalized companies that are offering disruptive digital services such as peer to peer payments or in-store mobile payments. Impacts and challenges on retail banking Retail banking is deeply impacted by the digitalization of banking services. A Sia Partners’ report stated that 50% of the product subscriptions would be made in agencies as from 2020 against 80 to 90% previously. The agencies are becoming less and less profitable and populated. Only 20% of the clients still go to their banking agencies more than once a month. Inevitably, branches are being closed all over Europe. The challenge is quite complex for banks because customer needs are constantly evolving and depending on client’s segmentations the needs are different obviously (elder customer are used to the traditional branches model when younger customers rather use their banking apps). The apparition of new competitors (FinTech’s and BigTech’s with a banking related offer) with new usages and innovative offers also impact customers who expect their banks to offer the same services or the same technologies.
In terms of consumer behavior, the new needs that are to be met are firstly, the need of recognition – a client expectation is counselor to be aware of his financial, professional and personal status and also be aware and sensitive to his projects. Secondly, customers are looking for convenience, rapidity and a seamless customer experience. This means that the online experience must be integrated fully to the physical one. For instance, they would like to be able to book an appointment on their app and be able to have access to their counsellor or fill a questionnaire for a loan and discuss about it with a counsellor. And finally, they want to make fully digital operations independently, yet they want to be able to talk to an agent If needed. In a nutshell, the three key challenges related to the transformation of retail banking are the omnichannel customer experience, the personalization of the customer relation and the transformation of the commercial branches experience. The omnichannel customer experience Whatever the touch point, banks must be able to provide excellent services by removing any frictions and deliver a seamless answer to a client. The UX design is key here, the experience must always be tested and improved based on evolving customer expectations and feedbacks. Personalization of the customer experience The personalization of the customer experience hits new levels with the boom of Big Data and Analytics. The purpose of personalization is to offer services that are accompanying customers in their singular projects. A great case study in this matter is BBVA offering a solution called Valora that helps customers through their housing investment process by estimating and comparing prices, analyzing the neighborhood, planning on renovation costs, etc. Personalization is about taking part in customers’ lives by providing the necessary information and services.
Transformation of the commercial branches Commercial branches play a key role in customer retention. When it comes to complex operations customers tend to seek for face to face interactions. But, as a matter of fact, keeping branches open is expensive. The existing model has to be reshaped in order to create limited but efficient branches with high quality services. The levers that can be activated are the training of the staff, the specialization of the counsellors, the variety and digitalization of the services and last but not least, a pleasant user experience. Let’s not forget that up-selling and cross-selling are way more efficient through this channel, a non negligeable reason to work on that user experience. Corporate banking & Capital markets For years now, automation and digitalization have been the priorities of corporate banks. On the one hand, this was a way to reduce costs for institutions and on the other hand, it enabled business owners to execute any operation, anytime, anywhere, without queuing.
Today the trend seems to come back to a more human banking. However, we are not going backward but instead, humans and technologies will work together to improve the performance. Indeed, technology will offer the possibility to execute transactions and to provide analysis based on multiple data and trends of the sector. The human side is coming back on top as advisory, analyzing information to bring a real added value and advices to business owners in order to provide specific services instead of just assisting to enable transactions. First, data is an excellent way for banks to track SMEs, follow their performance and provide them with tailored services and recommendations for products at the right time. Using a data-driven approach, banks will be able to make decisions which are aligned with the strategy of the company. The decisions and guidance are also more automated to make them more reliable and available anytime. For the banks, it is also synonymous of success and it helps limiting risks as they can analyze companies with similarities and by sector, releasing trends to better understand which factors make a business successful. To do so, major banks have already started to be assisted by Artificial Intelligence. AI enables banks, customers and regulators to be more transparent and aligned in their decisions.
These technologies have first pushed to dehumanization of corporate banking, replacing advisors by virtual assistants and self-service. However, today, banks are trying to reverse this tendency by combining both technology and humans. As for retail banking, data and AI will provide better quality information in a timely manner, making it easier for the advisor to guide the customers. In terms of trust, when well explained, customers will also better understand why the decisions are tailored for them. This full service of analysis and advisory is a real added value for customers that goes beyond financing their companies. Indeed, most business owners do not have neither time nor access to good quality data to be able to conduct a benchmark of the good practices within their industry. By providing deep analysis of cash flow from the whole industry for instance, banks will be able to make more accurate forecasts on the performance and financial needs. This includes services such as highlighting which payables could be deferred, offering short term credit options… as well as which option is the most adapted to a specific business and why, based on competitors’ data. The business grows using this analysis, the bank is limiting the risk and gets more revenue, creating a win-win situation.
When it comes to capital markets, the main tendency over the past years has been to massively introduce High Frequency Trading (HFT). These “black boxes” are replacing traders, dealing on financial markets by buying and selling important volumes within nanoseconds to create trends. Today, almost 75% of trades are made by HFT in the USA and 50% in Europe. This type of trading is only available for major players which have the technical and financial capabilities to afford the technologies, and to buy and sell huge volumes while always updating the algorithms. However, this fully automated system has shown some limits. HFT doesn’t add value by analyzing medium or long-term strategy of a company, but more by playing on instant market emotions. On May 6th, 2010 from 2.42pm to 2.52pm, the New-York Stock Exchange lost 9,2%, Dow Jones was down 1000 points and Chicago Stock Exchange was forced to close. The origin of this mini crash has been difficult to find but 6 years later, investigators found out that a massive selling order of E-mini contracts (replicating S&P500) in a context of tensions due to the crisis of the Greek public debt has pushed the markets down. The role of HFT is still unclear: they didn’t originate the crash but are believed to have contributed to volatility. This example shows that the traditional financial analysis has been partially lost, and today algorithms do not take into account social and environmental impacts on the long term for instance. This analysis can be done by qualified human beings, as the technology driven by algorithm is struggling to replace the experience of experienced analysts on some non-mathematical factors. However, especially before the Covid-19 crisis, the trend was, on the opposite, to replace humans by technologies, with AI systems that are able to scan the news 24/7 worldwide and being able to provide instant reports anytime. While banks are considering human beings as a cost, some of the actors are actually rethinking them to be one of their best assets. Trading activity today is expected to be fully reinvented, with most traders likely to lose their jobs and to be replaced by robots. However, robots will only outperform in the purpose they have been designed for. Humans, on the opposite, have abilities that can surpass the trading robot and are able to do many jobs in various roles. Thus, we are facing a switch from a fully financial activity to a more technological one, but the knowledge of humans is still required on both aspects. Human capabilities are still necessary in capital markets activities. However, on the scope of all the different activities that a bank is performing, it is maybe the one that will be the most dehumanized in the long term. The AI is today assisting humans in their activities but robots being more disciplined and much faster, in the long term, will be able to handle the financial aspect and humans will end up having an IT role, mostly based on activity monitoring rather than really being active.
Re-humanization of the banking industry is the next step following massive digitalization and automation that had the objectives to reduce costs for institutions and to facilitate access to services for customers. Nevertheless, technology is still expected to play a major role, not only to access more data but also to issue trends that will bring added value to the financial management beyond the traditional role of banks. In this context, humans will come on top of the technology, bringing their knowledge to ensure algorithms perform the main analysis and their expertise to tailor these analyzes to customers, corporates and on the financial markets.
Anais Taleb & Jean-Baptiste Brunet