by Vik Sohoni
North American banks are moving from the first wave of innovations such as check deposits via mobile devices to the next level, investing in offering developer tools and APIs, digitizing processes, and creating digital-native business models. In part, banks are reacting to consumers’ widespread migration toward digital channels. And they’re also reacting to the perceived threat of digital attackers.
However, in stark contrast to Europe, where in many countries digital channels now account for more than 30 percent of the personal banking revenue pool, in the U.S., digital channels have to date accounted for only 5 percent of checking account openings, only 14 percent of credit card originations (with some exceptions), and only 6 percent of originations of some other lending products. Very few new homeowner mortgages or auto loans are originated digitally. In other words, consumers are using digital channels to access their banks, but they haven’t as yet fully embraced them as a channel in which to purchase banking products and services. Banks may therefore need to contemplate strategies to enhance new customer appeal and revenue generation from digital banking channels.
Conversely, if one was to take a linear view of this, one might consider curtailing investments in customer-acquisition through digital channels—and instead, stepping up investments in digitizing back-office functions and enhancing data capabilities.
However, we believe that would be a shortsighted and erroneous move. Here’s why: Across markets, banks’ capabilities to acquire customers digitally fell far short of what they required once digital customer acquisition hit inflection; in addition, banks that led in such capabilities were consistently able to eke out advantage and market share relative to those that took a more wait-and-see approach.
So how should banks direct their investments? In our view, they have two strategic paths:
1. Use digital to capture the consumer’s attention at the start of each purchase journey, including in spaces outside the traditional banking ecosystem. The ‘top of the funnel’—initial consideration—has moved toward digital channels in almost every product and service category. For example, consumers are increasingly going online as a first step toward buying a car. As a result, visits to dealerships have fallen from 4.0 to 1.8 per sale. In similar fashion, 45 percent of checking account shoppers prefer to seek information online, compared with 36 percent who prefer to visit a bank branch. Capturing this ‘battleground’ early in the purchase journey is therefore exceptionally important.
“Search” illustrates why. Many banks don’t even make it to the consideration set. A simple Google search shows which banks show up ‘above the fold’ on the search results page, where research tells us 90% of users will click (39% for the advertised links on the top of the page, 45% for the search results above the fold, and 5% for the promoted results in the sidebar).
This may require engaging with the ecosystem around the purchase journey—into the ‘commerce’ and not just the ‘financing’ bits of a purchase journey. Just like the payment for a restaurant bill can be made a seamless experience by a restaurant-reservations app, fitting financing into the broader purchasing ecosystem to capture the top of the funnel will become critical for banks.
This could also in many cases require changing or improving the customer experience to better suit the overall purchase journey, and new partnerships with other players in the ecosystem. And it will require more mastery of levers like search engine optimization, retargeting and personalization, in the context of the overall purchase journey.
Once banks have captured the attention of those customers at the start of their journey, banks with multiple channels can offer customers the channel that is most appealing to them.
2. Focus on key digital-forward consumer segments, that are more likely to be receptive to digital offers. The share of U.S. consumers who prefer to engage with their bank through digital channels, particularly mobile, has grown at about a 10 percent annual rate in the past three years. These consumers are switching banks at two to three times the rate of other consumers, in part out of dissatisfaction with their existing banking relationships, and a growing share of them are giving digital attackers a try. It is a challenge to serve these customer segments, but they often skew younger and more affluent and will become increasingly important to banks over the next 10 years. Appealing to these segments will likely require different offers, experiences and platforms which in turn may need a more rapid rate of innovation.
Banks could also pursue both strategies simultaneously, generating near-term revenue and profit improvements through better consideration management while also making a long-term play for key customer segments that are receptive to digital.
Vik Sohoni is a senior partner in the Chicago office.