When Bain & Company surveyed 83,000 customers in 22 countries recently, we found that more than one-third of them bought a banking product from their primary bank’s competitors during the past year. The rate of defection reached an average of 28 per cent in developed countries and 47 per cent in developing countries.
If that many bank customers were closing their current accounts each year — completely defecting — bankers would be up in arms. Yet the hidden defection, often involving more lucrative products, goes largely unnoticed by banks because they seldom know their customers were shopping in the first place or that they lost the business.
This trend is accelerating as digital start-ups and specialist firms, less encumbered by creaky old IT systems and a thicket of banking regulations, offer better, simpler solutions and make it easy for people to find them. Strong demand for peer-to-peer lender Lending Club’s recent initial public stock offering is just the latest sign of investors’ and customers’ confidence in alternative business models.
Meanwhile, banks’ classic advantages — personal relationships between bank managers and customers, big branch network and a reputation for security — have been crumbling. Even regulation in some countries, such as the UK, has grown more accommodating, as regulators who once frowned on new business models now want to promote competition.
As a result, bank revenues and profit margins look more and more vulnerable. In Germany, France and Italy, for example, Bain estimates that at least 30 per cent of retail bank revenues are at risk of migrating or disappearing by 2020.
When Bain & Company surveyed UAE bank customers in 2013, 40 per cent out of about 2,500 respondents said that online and mobile banking would become their preferred way to bank. This does not come as a surprise, as UAE residents lead the Menap region (Middle East, North Africa, & Pakistan) in smart phone penetration rates. Among UAE mobile owners, 78 per cent have smart phones, according to Nielsen. Many UAE banks are taking advantage of this fact by creating leading-edge mobile banking applications to attract and retain customers. In the iTunes UAE App Store, seven of the ten most popular finance applications are related to mobile banking, with ENBD, ADIB, and ADCB on top.
Exclusively online
Globally, younger consumers in particular are willing to try companies with relatively short track records but plenty of online reviews; like Fidor. Licensed as a bank in 2009, Fidor is based in Munich but operates exclusively online. Fidor customers can earn €50 (Dh202) if they create a “user-help-user” video on YouTube. In one campaign, Fidor cut its lending rate and raised its savings rate by 0.1 per cent for every 2,000 “likes” it received on Facebook.” Likewise, a growing number of customers are using nonbank online lenders because of the convenience. Lenda in San Francisco, for instance, has shortened the process of a mortgage approval to 21 days and is aiming for seven days.
Which of these digital start-ups will thrive remains to be seen, but they, not traditional banks, are currently the source of most of the digital innovations that appeal to customers. So digital firms are starting to siphon off many of the most profitable lines of bank business, especially the pools of lazy profits such as foreign exchange fees.
Who will emerge the winner out of all this turmoil? That’s easy: customers. Just as online shopping adds convenience and flexibility to holiday retail shopping, the digital transformation of banking will mean more convenient, faster, cheaper options when it comes to handling one’s finances.
Better yet, your bank may work harder than ever to earn your loyalty before your business melts away. Many banks have already realised the value that consumers place on the convenience of mobile apps. Mobile has become the most-used banking channel in 13 of 22 countries, our survey found, and accounts for around 30 per cent of all banking interactions worldwide. The share of customers using mobile apps rose by a stunning 19 percentage points in the past year.
Hana Bank in South Korea, for example, has made it easier for people to move money through any device. Customers can withdraw cash from ATMs via their smartphones, parents can send money to their children’s phones and Hana’s mobile app includes near-field payments technology that can be used to pay at many stores. Wrapped into Hana’s digital services are engaging location-based offers and coupons, as well as the ability to borrow for larger purchases while in the store.
Your traditional bank really has no choice: It needs to offer digital tools as good or better than any in the market — and use those tools to earn your loyalty. If you demand that it does, you might just save its life.
Julien Faye is a partner with Bain & Company and leads the firm’s Financial Services practice in the Middle East. Maureen Burns is a Bain & Company partner, based in Boston, and a member of the firm’s Financial Services practice.