To stay ahead of FinTech, banks need to get to know their customers

November 2017 | PROFESSIONAL INSIGHT | BANKING & FINANCE

Financier Worldwide Magazine

November 2017 Issue

The second Payment Services Directive (PSD2), which comes into force in January 2018 as part of the Open Banking Initiative, will make banks share their customer account data with other companies and open up the back end of their programmes to third-party developers. Aggregators will be able to siphon customers’ data from various accounts onto one platform. This will enable customers to access and make recommendations as to how they could switch providers to save money and get better rewards, meaning banks will have to work harder to market themselves and show the value they can provide.

In recent years, a variety of new FinTechs have arisen to challenge traditional banks, and are gradually carving a share of the market. By championing consumer rights, they are getting the customer on side and gaining increasing popularity. Offering reduced transaction costs, tailored retail discounts and specific advice on how they can move their money around to make the most of it, these challengers offer customers tangible value exchange that rewards them for their custom. This represents a very real threat to established financial providers. In a recent survey by EY, 40 percent of people said that they had used non-bank providers for financial services, reporting a decreased dependence on their bank as a result. While established banks have been able to rely on their dominance, these new competitors are taking business away from traditional banks service-by-service.

At the moment, traditional financial services providers can rely on broad customer bases that, while they may use other digital providers for particular services, do not fully switch banks and still leave most of their capital in the hands of an established provider. But a recent survey by Which? found that large established banks such as RBS, HSBC, NatWest and Barclays are rated worst for customer satisfaction. Often, dissatisfied customers do not change providers due to the sheer complexity of switching and because the value offered by other competitors is not always easily compared – rather than an overwhelming sense of brand loyalty.

But this is all likely to change following the Open Banking Initiative and PSD2. This will make it much clearer to customers which provider offers the best value. It will also let third parties make payments from accounts directly, without having to go through the bank or payment services companies, so switching money around electronically will be much easier. This will place competitors on a much more level playing field, and place increased pressure on banks. Kasasa recently found that eight out of 10 millennials would change banks if a competitor offered superior rewards and these regulations will make it much easier for customers to switch.

With a new generation of increasingly brand-agnostic customers, traditional banks will soon have to meet like-for-like with their newer competitors and offer real value to their customers. Keeping ahead will require adapting smarter marketing strategies to each customer and customer data will prove indispensable for this. Banks have access to a huge amount of data about their account holders and this can tell them very important information about what kind of customers they are. Using key data, marketers can separate the customer base into distinct segments, based on spending and saving habits, account size and how long they have been with the bank.

A variety of strategies can be developed, targeted to each one, such as tailored discounts or reduced charges. By then splitting these segments temporarily into a variety of sample groups, different marketing strategies can be tried out as an experiment. The effect on revenue of each initiative can be measured through customer transactions, finding the best rewards for each segment. This insight can give banks the competitive edge to develop a spectrum of marketing strategies that make each customer feel that they are getting real value from their relationship with their bank.

This process can be continually refined and improved. Artificial intelligence (AI) programmes can then be used to analyse these results and find the members of each group who respond the best to each technique, so that the group can be split into more relevant microsegments. This helps marketers to find which data is useful for distinguishing different types of customers. For instance, younger customers may be more open to discounts and longer-standing customers may want rewards for their loyalty. These trials can be self-optimising, each one using the data from those before it to improve on marketing strategies.

Over a series of trials, marketers can progressively identify a selection of different customer personas who respond in similar ways and value particular rewards highly. Of course, no customer is exactly the same, or stays the same forever. Over time, AI can also be used to trace the way different customers develop, moving between different microsegments. This way, by using AI to enhance the observation of human marketers and data scientists, banks can gain a fleshed out understanding of how to interact with their customers in an emotionally intelligent way. This will help them to create a mutually beneficial relationship that is tailored to the preferences of each individual, but automated on a manageable scale.

As more FinTechs and challenger banks emerge to compete with traditional financial services providers, established banks will need to be on the lookout. These competitors are slowly taking away custom and, as the Open Banking Initiative prepares to democratise choice in financial services, customers will have a much clearer idea of which companies offer the best value. Established providers have to get a head start on their competitors, and offer their customers the best deal for them. But to find out what value means to each customer, they need to make the most of the data available to really get to know their account holders, developing personalised relationships that communicate with them on an emotional level.

Alon Tvina is managing director of EMEA at Optimove. He can be contacted by email: info@optimove.com.

Alon Tvina

Optimove