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Adults 04 Jul 2016

‘Millennials’ are driving the digital transformation of the banking sector

The habits of this new generation are bringing a paradigm shift in the financial sector, one that favors digital channels.

Millenials prefer using digital bank channels to carry out their transactions, and this conduct is re-shaping the future of banking and this is forcing institutions how they interact with their customers.

The millennial generation consists of over 83 million digital natives, which are becoming the most important demographic segment across all economic sectors. In the case of finance, the improvement of online channels, fewer branch visits and the increase in the cost of non-digital transactions are resulting in a change in mindset in the use and consumption of financial services.

Two elements worth taking into account:

  • More than one-third of millenials do not use physical offices
  • The average number of monthly transactions has dropped over the past decade

These data are taken from The digital disruption of retail banking published by Business Insider Intelligence, after polling 1,500 U.S. millennials. The goal: to gauge their behavior with different devices and find out what their banking preferences are. This generation represents the highest proportion of active population in the United States.

New banking models

In this context, digital-–only banks such as Atom or Ally Bank are picking up steam. These banks can reach out to potential customers in remote locations quite easily, without having to invest on a branch network.

Smartphones enable financial institutions to fine tune the advisory services they can offer

External technology providers, such as Apple Pay, are also able to reach customers regardless of their location, without branches or being subject to regulatory compliance.

Indeed, these technology providers pose the biggest threat for the traditional financial ecosystem, as they are able to bypass, precisely, the regulatory costs linked to the provision of fully-fledged banking services.

Also, their products and services simulate an actual bank account. The biggest problems that these technology providers will generate for banks (if banks do not take on a digital transformation process) are the following:

–  Loss of differentiation: if banks end up being relegated to fulfill a back-end service provider role, it will be very hard for them to differentiate themselves from their competitors. Their competition will be based on a commission battle.

– Cross-selling opportunities will decline. With a purely traditional strategy, if customers do not visit branches as often, it becomes more costly and difficult for this type of banks to offer additional products.

New channels: towards an omnichannel model

Although it may now seem unthinkable, ATMs will go the way of the telephone booths did in the past, i.e. disappear little by little. These are the reasons reflected in the aforementioned report:

– Technology providers, such as Apple, Google or Samsung will drive higher use of bank cards instead of cash. Also, 27% of respondents said that they had used their handsets to shop.

– P2P payment apps such as Venmo or Dwolla, are replacing cash and check payments (a very popular payment method in the U.S.). This type of services allow users to exchange money without having to visit the bank.

– More and more small shops are accepting card payments, thanks to low cost mobile services offered by platforms such as ShopKeep.

The smartphone will become the foundational bank channel, it has the ability to collect user data, and is already used for making purchases. Banks that develop and offer optimized smartphone services will face a brighter future.

Many institutions have already started realizing how important it is to offer mobile-based services and have developed mobile experiences. That is the case of the BBVA Wallet service, an app that allows users to do much more than just make payments using their smartphones.

Why is the smartphone the channel with the greatest potential:

  • 71% of millennials think that bank applications are essential
  • 51% have used their smartphones to make purchases during the last month
  • 60% think that having at least one payment app is essential
  • 91% use their smartphones to access their account
  • 41% chose their bank because based on the convenience it offers (mobile features)

Also, smartphones enable financial institutions to fine tune the advisory services they can offer:

1. Data: for users, smartphones are like just another part of their body, and this allows institutions to increase their customer insight: they can gain further insights, for example, into their purchasing habits, based on which they can provide more personalized advice.

2. Context: With these devices, customers can process more information, set objectives and access more products and financial services.

3. Gamification: smartphones are capable of going beyond the mere provision of advisory services, and act as personal financial trainer. For instance, Qapital is an advice that invites you to compete against your friends to achieve your savings objectives.

But there still a long way ahead: 39% still prefers to use computers to carry out their banking transactions. And this could change rapidly with better mobile interface solutions.  Many institutions are already taking notice of the paradigm shift.

Financial institutions need to act quick and offer the best user experience to avoid losing customers. That is the transformation challenge that traditional banks face. Now is the time to reinvent or die.

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