Smartphone apps, gamification and proactive support are some of the ways operators can engage the digital natives of today and tomorrow
Baby boomers might have a majority of global wealth today, but tomorrow it will be different. Indeed, by 2030, Europe’s younger generations – millennials and gen z – are due to inherit around £2.3 trillion from their parents, according to recent estimates. How can financial service operators cash in on this great wealth transfer?
In 2022, client-facing teams operating in the financial service industry can – and must – leverage technology to build meaningful relationships with younger generations who are digital natives.
Indeed, over a third (34%) of 18- to 34-year-olds would choose a different financial services provider if they were expected to visit a branch in person, according to VMware’s recent Digital Frontiers 4.0 report, which surveyed over 2,000 UK consumers.
Similarly, Marqeta’s 2022 Consumer Money Movement report reveals generational differences. Over half (54%) of gen z – born between 1997 and 2012 – can’t recall their PINs, and more than three-quarters (77%) feel confident enough with contactless payments to leave their wallets at home and just go out with their phones.
Consider a Chase study from 2021 indicated that 99% of gen z and 98% of Millennials use mobile banking apps, compared to 86.5% of gen x and 69.5% of Boomers.
“Younger markets live on their smartphones,” says Ben Johnson, CEO of digital transformation consultants BML Digital. “Everything needs to be available via the app, and the mobile experience has to match the ease of something like Snapchat or Pinterest.”
Prakash Pattni, managing director of financial services digital transformation in EMEA for IBM, agrees. “Ultimately, younger consumers want to access their accounts, lock missing cards, make virtual payments and transfer money to others swiftly and securely,” he says. “Financial institutions must develop easy-to-use applications with superior uptime that can easily integrate with other apps.”
Gamification and proactive support
How can financial services operators generate trust with younger generations? “Technology is the answer,” posits Somya Patnaik, a market product manager specialising in real-time payments at ACI Worldwide. “They must bring more innovative features that will engage young people and improve their consumer experience.”
Gamification in financial services is winning a lot of trust among young consumers, suggests Patnaik. So, for instance, insurance companies might build an app that tracks fitness activities against pre-agreed goals, which, if hit, unlock rewards like cheaper insurance or gym memberships. This insight chimes with George Ioannou, managing partner at design experience company Foolproof. Learning patterns around digital activities differ according to age. Where the older generations turn to Facebook for information, younger generations are growing up using gaming platforms such as Fortnite and Discord servers.
“This may speak to using gamified models of education within financial applications to facilitate learning, perhaps even in a sandbox, and therefore a safe environment,” says Ioannou.
Ioannou argues that technology enables financial services organisations to become more proactive in supporting customers, and younger generations want more advice about money matters now than ever. “Operators need to step up and actively educate their users,” he adds.
Research from Personetics, a global fintech, published at the end of June shows in the past three months only 22% of UK customers feel their primary bank has communicated with them about dealing with the cost-of-living crisis. Further, over half (53%) would consider moving banks if a rival offered better money management support and personalised advice.
Reliable source of truth
Financial education is now starting young. NatWest is currently offering a children’s pocket-money application for free to customers. “Last year, we acquired Rooster Money, a children’s prepaid debit card and app,” explains Fay Wood, head of acquisition and digital security authentication. “We wanted to do more in the space for children.”
She also stresses the importance of working with expert partners to provide access to apps at speed. “Five or ten years ago, we would have built something like Rooster Money in-house.”
Alongside proactive apps, social media is an invaluable tool for sales and marketing teams in the financial service industry looking to use tech to appeal to younger customers. Here, states Amanda Le Brocq, head of strategy at Marcus by Goldman Sachs, is where organisations can add value.
“Young people are increasingly getting financial information from social media platforms such as TikTok and Instagram,” she says. “But with so much content available, people can easily get the wrong information. Today, it is essential that financial services companies provide a compelling digital offering, so young people can consume content online and know it is coming from a reliable source.”
Operators wanting to engage younger customers must look further and deeper, says Meghana Nile, insurance CTO at Fujitsu. “Social media and peers influence a lot of the purchasing decisions, meaning financial services companies that have a reputation for having ethical and sustainable practices will attract buyers from gen z, who in 2030 will be the dominant purchasing demographic.”
A whole array of emerging technologies could grant a crucial edge to banks that can apply them successfully. How do their innovation specialists go about finding a winning combination?
In the long shadow of the 2007-08 global financial crisis, concurrent advances in three technologies – smartphones, 4G cellular networks and cloud computing – sparked an explosion of innovation in financial services. Their convergence enabled mobile banking: the sector’s most significant development in generations.
Just over a decade later, the industry is again “on the cusp of another inflexion point”. That’s the belief of Prakash Pattni, MD of digital transformation at IBM Cloud for Financial Services. He predicts that progress in tech including 5G, blockchain, artificial intelligence and quantum computing will trigger “another spurt” of innovation.
“People talk about data being the new oil,” Pattni says. “Well, blockchain is the new oil rig, and AI is the new refinery. The coming together of these things makes it an exciting time to be part of the industry.”
Given that R&D is notoriously costly and success is never guaranteed, how do banks approach experimenting with tech that might just as easily fall by the wayside as revolutionise their industry?
As head of innovation, global functions, at HSBC, Steve Suarez is particularly well qualified to answer this. He believes that the secret to successful innovation is to stay focused on “how to make things cheaper, faster and frictionless for people”. The bank is “constantly scanning the horizon to see how we can apply new technologies. We want to gather data that enables us to personalise banking and give our customers what they need, quickly but also securely.”
The London-based American applies what he calls a “three horizon” approach to innovation. Horizon one concerns “the stuff that we already know well and will incrementally improve things in the short term. Horizon two, which is about two or three years from now, concerns technologies that are fairly new to the industry – blockchain, for instance. We look at how we can provide use cases with these to make the bank better.”
He continues: “And then there is horizon three, which is about the long shots. Right now, they include the metaverse and quantum computing, which could turn out to be a game-changer for financial services.”
The possibility that a horizon-three punt might come off is clearly exciting to Suarez, but he’s careful not to get too preoccupied with the potential benefits of such tech.
“We’re all betting on these technologies to achieve an advantage. There are huge opportunities, but we also need to look at the risks from a security perspective and work out how we might need to structure ourselves,” he says. “As we process 1.5 trillion transactions a day, we understand our great responsibility to protect all customers.”
HSBC’s recent horizon-three R&D activities have included hiring experts in quantum computing and announcing a three-year collaboration with IBM to explore applications for this nascent tech and so ensure its “organisational readiness” to take full advantage of it.
The bank has also bought a plot of virtual real estate in an online gaming space called The Sandbox, marking its first significant foray into the metaverse.
People talk about data being the new oil. Well, blockchain is the new oil rig and AI is the new refinery
The term ‘metaverse’ was coined by sci-fi writer Neal Stephenson in his 1992 novel Snow Crash. He was referring to a digital realm in which humans, avatars and software programs could interact and where property could be purchased. Suarez indicates that HSBC intends to stay loyal to Stephenson’s original meaning.
“We will be building on our plot, putting in virtual stadiums and working out how to better serve our customers,” he says, hinting that the bank might seek to engage with sports and e-sports fans in the metaverse.
Jehangir Byramji is senior innovation manager and fintech lead at Lloyds Banking Group. He also revels in exploring potentially transformative emerging tech and “analysing weak signals from other markets and regions that the bank can use in the future”.
Byramji’s approach is slightly different from that of Suarez, though. He organises the bank’s IT innovation work into three broad categories: data; AI (particularly machine learning); and Web3 (tech based on decentralised systems such as blockchains) and the metaverse.
“On the data pillar, there’s this whole idea of ‘hard’ and ‘soft’ identities. Younger people are more worried about losing their social media profile than their passport,” he says. “They are more likely to embrace machine-to-machine payments. As a bank, you therefore need to think about non-traditional ways of processing their data.”
In this category he also places digital twins – virtual representations of real entities “to help you understand both your own organisation and its customers and clients”.
But Byramji is most enthused by the latest developments in machine learning. “You’re going to see more intelligent agents, just as much in the physical world as in the data realm,” he says, adding that the internet of things will play a key role in this field. “Some of our clients have connected factories or farms – the latest combine harvesters are covered in sensors, for instance – so we’re asking how we can use the data these smart machines gather in an intelligent way and work with clients to better serve them.”
Given the sheer range of possibilities, banks must remain focused on use cases that are most likely to benefit the customer, Byramji stresses. Otherwise, it’s a waste of time, money and effort.
“We’re starting to see quite gimmicky AI, with deep-fake videos and things like that,” he says. “While they are interesting developments, we have to remember our first principle: better serve our customers.”
That said, Byramji can’t help but be fascinated by the longer-term potential offered by Web3.
“Banks are unpicking blockchain technologies more effectively than they did a few years ago. We are starting to understand smart contracts and other capabilities that minimise risk and build trust,” he reports. “With these related technologies, I think we can form relationships with fintech firms, build ecosystems, develop new markets and unlock some exciting opportunities.”
Composability, partnerships with fintechs, and meeting customers on their preferred channel are all vital, according to a roundtable of experts. Watch the full roundtable here
Financial services operators were, according to ServiceNow’s Keith Pearson, “the white knights of the pandemic”. They came to the rescue of people and businesses stricken by the fallout of the coronavirus crisis. But, with the global economy in peril, they must saddle up again.
And yet, despite being saviours for many in the last two-and-a-half years, there is an incredible demand for banks, in particular, to evolve rapidly and offer personalised services and an omnichannel customer experience to rival the best in other industries.
To gallop along with change, steer clear of disruption, and continue to fight the good fight, those wishing to lead the way in the future of banking must partner with fintech experts, argues Pearson, AVP of financial services industry go to market at ServiceNow.
He points to a recent Gartner report, 2022 CIO Agenda: A Banking and Investment Perspective, which captures the challenge. “We are in a time of indefinite volatility, making it difficult for banks to plan for an indefinite future,” it reads. “Mastering business composability prepares banks to maximise business value regardless of ongoing uncertainty.”
Fay Wood, head of retail strategy at Natwest, sets the scene. “There is a looming cost-of-living crisis after unprecedented events – a global pandemic and a war in Europe – that few would have predicted three years ago,” she says. “Money management and supporting customers with budgeting and financial tools will be critical for the industry. As a result, these services are becoming much more embedded in people’s lives.”
Increased duty of care
Concurrently, regulators argue there is a greater responsibility on regulated firms to hold customers’ hands, metaphorically, and support them. Interestingly, some new financial terrains, whether it’s cryptocurrencies or buy now, pay later products, for instance, are not yet regulated.
Indeed, the Financial Conduct Authority’s final regulations on its new Consumer Duty will be available at the end of July and, following consultation, appear likely to force regulated firms to deliver “the best outcomes” for retail clients, says Wood. As an example of how NatWest better educates customers, the recently acquired Rooster Money app, with a pre-paid pocket-money card for those aged three and up, is currently free to access for the bank’s 17 million customers. “We wanted to do more for children,” she adds, highlighting the role acquisition is playing in the future of banking.
Metro Bank’s David Thomasson, managing director of digital and products, concurs that banks have to support customers better, whether online or offline, and build on the trust generated in the last two-and-a-half years. “Now, more so than before, they need to talk to somebody at the bank,” he says. “While digital is clearly becoming more important, seeing someone face to face is also vital. Our data shows that customers might not use a Metro Bank store for two months or even two years, but knowing that there is someone in a trusted environment nearby who can speak to you at a time that suits you is crucial.”
You must be prepared to think differently about your organisation’s structure and operating model and follow that through with your technology investment
It is not just individuals who crave that support. Thomasson states that 80% of Metro Bank’s business customers gained since the start of the pandemic operate within an eight-mile radius of a branch. “This shows the importance of the bank within a community,” he continues. “A service-led proposition and being there for communities will differentiate financial services organisations going forward.”
Banking in the metaverse
The “big difference” identified by Nadya Hijazi, global head of wholesale digital channels at HSBC, is that banks have to go to customers, not vice versa. In March, HSBC revealed it had bought a plot of virtual real estate in The Sandbox, an online gaming space, marking the bank’s first significant foray into the metaverse. She says: “It’s about ensuring your services are available wherever your customer wants to be, whether that’s in the metaverse or using WeChat in China. You must embed your services and be at the heart of the community.”
Banks can’t afford to ease up on innovation, and a mindset change is required to develop products and services that don’t need to be fixed, per se, Hijazi warns. “When you’ve got a revenue stream, there is no driver for change,” she says. “Usually, things change because something is not working. But now it’s dangerous to be complacent because if you don’t keep improving, then you will lose connectivity with customers.”
This concept chimes with Jasmeet Narang, chief transformation officer and head of operations at Santander UK. “Customers want choice and convenience, not just a load of off-the-shelf products,” he says. “The old stack-them-high and sell-them-cheap approach doesn’t work anymore. Instead, you have to understand customer needs, and most critically, you have to have that human touch.”
He stresses the importance of collaborating across the business and “organising design around the customer”, using their predicted wants and requirements as the guiding star, and justification, for any innovation. “Otherwise, you’ll always function in silos.” However, humans must be involved in the service, whatever technology is used. “It is those touch points with customers that are gold dust and will define the winners and the losers in the future of banking.”
Culture conundrum and composability
Narang says leaders have to activate a cultural change to drive innovation. “Top-down sponsorship is essential,” he adds. “Once you have that and a clear, long-term structure, other things follow. Also, you have got to be true to your convictions. The world will throw pandemics and wars at you, and at times you might have to be agile and flexible, but those that will succeed will keep the overall destination in mind.”
Yorkshire Building Society’s chief commercial officer, David Morris, believes the “evolution of banking distribution models is going to have quite pronounced effects, whether that’s embedded finance or banking in the metaverse, among many examples. New entrants, whether challenger banks or technology companies, will find ways of competing in the value chain in different ways. Therefore, that’s going to have big implications for business models.”
He continues: “How do you make sure you’re not left behind or not investing in the wrong technology? And how do you build that in an environment where you have to handle legacy infrastructure, macroeconomic uncertainty, and evolving regulations? Running an enterprise and building something different is incredibly difficult, and requires careful prioritisation and creative solution design.”
ServiceNow’s Pearson counters that bold banking leaders who look to partner with fintechs, use the agility of the cloud, and are willing to rip up old plans will triumph. “You must be prepared to think differently about your organisation’s structure and operating model and follow that through with your technology investment.”
He suggests the quicker banks can focus on building “composability” – essentially, a system design principle that deals with the interoperability of components – at scale, the better. “That’s what the future of banking will look and feel like,” Pearson concludes.
Roundtable highlights: Technology may be the great enabler for banks and their customers, but to achieve holistic risk management, culture change and education are equally important
Charlotte Branfield, Head of operational resilience, Citi
Andrea Brody, Chief marketing officer, Riskonnect
Marc Leaver, European chief operating officer, Standard Chartered Bank
Jason Maude, Chief technology advocate, Starling Bank
Ralph Nash, Chief compliance officer, HSBC UK
Suresh Viswanathan, Chief operating officer, TSB
Q What is the current state of personalisation in banking in the UK and around the world?
Ralph Nash Last year’s events have accelerated some of the trends already emerging in banking. These include the increased use of automation and digitalisation and the concept of “the bank in your pocket”. Branch networks will remain important, but increasingly we see demand-led interaction around digital and that’s something we need to satisfy. A greater digital focus creates both risk and opportunity from a stability and resilience perspective. There are some risks, both technical and ethical, but if we get it right, it could be a win-win scenario for the bank and the customer. We are at an exciting juncture.
“Driven by demand for seamless customer experience and fintech partnerships, banks will become hubs where products can be plugged in and out. That’s pretty revolutionary” Charlotte Branfield
Jason Maude In the next decade, affording customers immediate and secure access to their data in the same way they have access to their money will become a requirement, rather than a “nice to have”. If you, as a bank, cannot offer that connectivity or application programming interface (API) capability, you will be like a town the railroad missed out, and you will weaken and die. Customers, including small and medium-sized enterprises, are not going to do business with a bank that relies on paper processes.
Charlotte Branfield What makes a good bank is how fast they reach the customer, to solve their problems and provide financial services conveniently, efficiently and responsively. Therefore, the concept of a bank is evolving from the traditional bricks-and-mortar bank to an “embedded finance” model. Driven by the demand for high-quality seamless customer experience and fintech partnerships, banks will become hubs where products can be plugged in and out. When you think about banks’ business models, that’s pretty revolutionary. The whole system is changing and it’s an exciting time to be involved in operational resilience.
Marc Leaver I agree that we are at an inflexion point in banking: if we don’t change the traditional way of delivering products and services to clients, we will be redundant in the digital age. We see ourselves as a bank that connects clients, products and markets. To do this we utilise digital offerings to tap into the digital needs of our clients. Three pillars to build this: innovative partnerships exploring disruptive business models; investment in fintechs; and, arguably the most challenging element, greater internal innovation.
Suresh Viswanathan The definition of where a bank starts and finishes is transforming. Previously we have been constrained by physical infrastructure and analogue systems. As we emerge from a post-pandemic world, the march to digital is inevitable. However, as we move towards a world driven by open banking and APIs, you lose control of when demand hits. People trust banks and I think now it is obligatory to ensure we deliver more value to customers than just a current account, a loan, a mortgage and a card. It’s a unique position to be custodians of customer data and leverage that trust, and it means we, as banks, can offer them more connectivity.
Andrea Brody We talk with our financial services customers all the time. The same topics are discussed; the drive for greater automation and data analytics is taking centre stage because of the need for connectivity. It’s imperative to leverage technology, but improved risk management in corporate strategy is required and the pandemic has exacerbated the need for better reporting.
Q What are banks’ biggest operational challenges in 2021 and what problems are on the horizon? RN The last year emphasised the importance of banks as a transmission mechanism of government policy to support individuals and businesses through the coronavirus crisis. We have effectively done years of lending in a few months, at an unprecedented level. Managing the exit from government support schemes will be a significant operational challenge for HSBC and the industry, this year and next, particularly in the UK. Customers’ payment holidays will end, but some will be unable to resume repayment on their debt. Historically banks have been worried about cash and keys, and now they should treat data and systems as crown jewels and focus on building resilience for the latter. The operating model and technologies need to support that, as well as meeting regulatory and societal expectations.
JM To keep pace with those expectations, it’s essential to have the architecture to operate faster. It’s often thought that for banks there is a seesaw-like balance between security and reliability on the one side and speed of delivery on the other. At Starling Bank, we have constructed a system that makes these two things mutually reinforcing. We rapidly deploy feature changes, new products and services, and seek bugs daily to increase resilience. This system will be vital as we look to enter new markets globally in 2021.
“We are marching to the cloud. As networks become smarter and 5G is more widespread, we can push more content into the hands of devices customers hold” Suresh Viswanathan
ML Standard Chartered Bank has moved to a cloud-first strategy and we are looking to shift our core banking platform into the cloud by 2025, subject to regulatory approvals. Regulators are beginning to become more comfortable with banks’ evolution to digital and familiar with safe data storage. Certainly, the strides made by Starling Bank and others are fabulous for the industry and the customers we serve. Partnerships with technology specialists are critical to our strategy because we know clunky platforms and traditional banking methods are not sustainable, frankly.
SV Today, 90 per cent of TSB’s customer services are digital, as is 70 per cent of our sales. In terms of operational resilience, it is very important to have a multichannel approach because you want to comfort and support customers and be readily available. We are marching to the cloud and, as networks become much smarter and 5G is more widespread, we can push more content through the pipes into the hands of devices customers hold. That capability gives us the ability to educate customers and improve financial literacy. A key imperative, though, is to become more holistic in our management of risk.
CB I agree that banks need to embrace holistic risk management and think about processes differently. At Citi, our priorities lie in better understanding our clients’ experience of using our services and improving upon it. As an industry, we have to move away from the mindset that cybersecurity, for example, is only a tech expert’s responsibility. That approach causes a disconnect concerning operational risk because, in today’s digital economy, the fundamental commodities at risk are trust, data and connectivity, not just money. If we want to manage cyber risk properly, we are going to have to have far greater engagement from the client relationship managers, the user experience designers, and the product sales and development teams, and not just within banking, but in the public sector as well.
AB Considering the customer’s viewpoint is a perfect way to look at risk holistically. Every department in a bank is responsible for risk. Thus, silos need to be broken and communication between the different functions improved, and this can now be enabled by technology.
Q How can technology help optimise risk management? RN Increasingly, we feel there are some challenges in using data from an ethical perspective. How do we ensure we don’t end up with unintended consequences due to modelling our customers’ data? For instance, if we become more sophisticated at modelling the propensity of a customer to commit financial crime, or pose a compliance risk, do we end up inadvertently becoming less inclusive and less able to target the unbanked at a time when probably we should be trying to do the complete opposite? There is also the question of staff surveillance; what is legal but fails on the “creepiness” test?
ML The debate about vaccine passports has dominated the news recently, showing that the ethics of handling customer data is no longer a horizon risk. As banks, we are grappling with the same challenges: we know if we use data-driven insights, we can make better business decisions and we can improve the way we serve our clients. But what is the tipping point? While customer data protection has long been part of the design of a bank’s processes and systems, with increasing digitalisation, data management best practice needs to be embedded into its DNA. Ultimately, the customer’s data is a gift and we must keep it secure.
JM We think of cybercriminals as competitors who are trying to steal our business, so we combat them by making it too expensive for them to spend time trying to hack our systems. A security bug is a big draw because it allows you to hit multiple people all at once and in banks no one has coded everything from scratch. Chaos engineering is going to become more prevalent in our industry. We deliberately attack our systems in a controlled manner to test and prove we are resilient.
SV There is a lot of artificial intelligence (AI) and machine learning in the banking industry, though some applications are more mature than others. Smart partnerships that drive innovation will be vital to delivering super specialisation, for example if you want to optimise the noise-to-signal ratio in ATM fraud. It’s about adding value to the customer, but not at the cost of impacting operational resilience. For this reason, we need to be bold, be innovative, fail fast and move on.
CB There are so many shiny new tech toys and it’s easy to think a bank has to have the latest gadgets and be deploying the latest piece of AI, but without actually understanding why. It’s critical to go back to basics and back to your first principles. Ask yourself, “What benefit is this bringing to either the business or my customers?” It’s an exciting time to be involved in resilience and risk management because it means looking carefully at your organisational structure and culture.
AB It is indeed an exciting time and there is clearly a real focus on operational resilience in the digital age from those in the financial services space. There are many challenges, but a bank’s technology stack must support the desired outcomes. It will be fascinating to see how the ethics and compliance concerns evolve in the coming years.
This article was originally published in The Times, as part of Raconteur’s Future of Banking report, in April 2021. The videos for the roundtable session, which I moderated, can be accessed here