By Abe Smith, CEO of Paymentology

Banks worldwide are currently faced with a multitude of major threats, not least because of the effects of the pandemic. Over the past 18 months, people’s lifestyles have changed dramatically and, in turn, so too have their preferences and behavioural patterns. One notable difference has been the shift towards the digital world in almost every industry conceivable – banking is no exception.

The role of banks is evolving at an unforgiving pace. In the 2021 Ipsos MORI personal banking survey, the top three spots for overall service quality are all occupied by challenger banks, with many high-street retailers falling outside of the top 10. The explanation for these results is simple: the nimble challenger banks, who are completely digitally focused, have been able to provide a better day-to-day experience though their rich features and more personal service than the incumbents.

So, could this be the end of retail banks? In short, no. However, in order to prevent the challenger banks running away, the retail banks must look to get closer to their customers and begin providing a more enhanced service. With many banks now harnessing new technology to better inform their decision making, it is no longer an option, but a requirement, to follow suit. We’re seeing it already.

Data holds the key

For businesses everywhere, data is now considered to be their single most valuable asset. However, without the ability to efficiently harvest and leverage key datasets in real time, some businesses are missing out on huge potential for growth.

Many banks currently lack the tools to flex to new customer spending habits and harness the data at their disposal to provide real time insights. For example, despite spending millions on change requests, banks will still take months to change a set of rules. However, through APIs and Cloud they can do this in a matter of days/weeks – this gives banks much greater control and visibility.

Emerging technologies such as Artificial Intelligence (AI) can also help banks to collate customers’ aggregated spend data over time and access said data in real time, mid-transaction. Using AI, banks can now identify new ways in which they can service customers. If done right, banks will be able to offer services to customers before the customer even knows they wanted or needed a particular product or service.

Our issuer processing platforms already provide banks direct access into the full ISO 8583 protocol, which allows them to utilise all the 120+ lines of data associated to any given transaction in real-time, rather than the just 10-20 lines of data most legacy systems provide. This finally will allow banks to have a back office that joins up with the front office, to automate reconciliation such as Mastercard and Visa fees, significantly reducing operational costs and maximising interchange revenues.

What’s more, with access to enriched customer data, banks can in fact offer new service lines that transcend the traditional bank-customer relationship. For example, banks could allow consumers to buy-now-pay-later (BNPL) without retailer involvement; purchase travel/product insurance at point of spend; and use pre/post spend reward points. Customers could browse insurance options in real time when purchasing a new vehicle, for instance.

Partnerships bring innovation

When it comes to retail banking, very few traditional banks stand out for innovation in customer interaction models or branch formats. As previously mentioned, customer expectations are constantly reshaping the role of a typical retail bank. Consumers today expect interactions to be kept simple, yet seamlessly connected across physical and digital channels.

This is where fintechs come in. In collaboration with certain fintechs, banks can benefit from payment processing platforms that enable them to receive a live feed of all spend traffic. This data allows the banks to formulate more meaningful partnerships with retail shopping brands. Offers by banks through retail partners is nothing new. But, understanding  customers better means that banks can connect the consumer and the retailers far more efficiently. Connecting the right offers to the right customer. A win for the consumer and a win for the retailer.

According to EY’s 2020 survey, ‘Banking in the new decade’, fintech adoption among SMEs has grown to 25% and could surge to 64% based on current trends. It is clear, then, that fintechs hold the key to future success. With the right technologies and the right partnerships, banks have the potential to reform the way they interact with their customers and reclaim some of the market share lost to emerging challenger banks.

Challenger banks are setting the example. They are the ones getting close to their customers, reflected in their undeniable success over the past few years. The banking landscape is changing rapidly and, if traditional banks are to keep pace, they must take note of the challengers and get closer to their customers. The good news is, traditional banks have accrued the invaluable currency of customer trust and brand equity, through their longstanding presence in the industry. This, combined with the benefits of a modernised card-issuing infrastructure, gives large banks the perfect foundation upon which to build new services that speak directly to customer needs and wants. The opportunity is there – banks just need to take it.

About Author:

Abe Smith is an entrepreneur and investor with a successful twenty five year leadership record in technology. He has founded, built and sold three fintech companies and helped drive the value of multiple other technology businesses participating in eight exits in total. His current role is as CEO of Paymentology – the world’s fastest growing cloud-native payments processor, powering a new generation of banks including Revolut, Standard Chartered’s Mox Bank and Natwest’s Mettle.