Four Trends Shaping Financial Services Strategy in 2021
Ask any financial services leader at the end of 2019 about the upcoming year and no one would have predicted a worldwide pandemic that would shutter businesses, introduce social distancing and push consumers to embrace digital banking overnight.
However, these experiences are shaping the perceptions and priorities for financial services leaders heading into 2021. According to the 2021 BAI Banking Outlook research, financial services leaders have identified improving the customer digital experience as both the top business challenge and the top investment priority in the coming year. Investment in technology integration and platforms will be vital to retaining existing customers and acquiring new customers digitally.
Leaders developing plans for 2021 will need to ensure they are addressing changing customer expectations by focusing on the digital channel and customer experience while accounting for a changing industry structure driven by the rise of direct banks and nontraditional models.
The Increasing Importance of the Digital Channel
Since the beginning of the COVID-19 pandemic, digital adoption and usage has accelerated unexpectedly, providing both challenges and opportunities for financial services leaders. Our 2021 Outlook research found 84 percent of consumers felt their primary financial services organizations are meeting their needs during the pandemic. More than half, 52 percent, of consumers increased digital usage during the pandemic and 87 percent of those who increased expect to maintain that level of usage after businesses and physical locations fully re-open.
This increased utilization, along with forced behavioral changes from the pandemic, has implications on the future of branches and investment in brick and mortar. Customers are discovering that they can perform a wider array of their banking without the branch. The pandemic has helped many discover the speed and benefits of using the digital channel.
Digital acceleration is leading to less friction. Moving from one provider to another has become easier for customers. Relative to 2019, in 2020 fewer customers expect to be with their primary financial services provider within one year. This is especially true with Gen Z and Millennials. 66 percent of Gen Z and 75 percent of Millennials surveyed said they would switch financial services organizations for a better mobile banking app or for better digital capabilities.
Direct Banks are Gaining Market Share
Direct banks have benefited the most from the pandemic-related accelerated digital adoption, accounting for seven out of ten online accounts opened this year. This is an increase from six out of ten last year, resulting in market share gains.
This reflects the changing habits of consumers within many industries. For example, consumers are opting to skip the shopping mall and big-box retailers for online purchases and delivery. Compared to last year, more customers prefer to work with a direct bank and say they do not need branches. In 2019, seven percent of Gen Z preferred to bank with a direct bank and said they did not need branches. This number now stands at 33 percent. Millennials went from 20 percent to 25 percent, Gen X from 16 percent to 27 percent, and Boomers from four percent to ten percent.
Gen Z has the most dramatic change in likelihood to stay with their primary financial services organization in the next year dropping from 87 percent to 61 percent. A year ago, 67 percent of Gen Z said they banked with the same financial services organization as their parents. That number has dropped to 61 percent in 2020. As members of this generation mature, they will start to chart their own course and make more independent decisions.
While the traditional providers look for ways to better compete with direct bank offers, direct banks are beginning to face additional growth challenges. Features such as no-fee accounts, debit cards, budget tracking and user-friendly apps are becoming pervasive.
Traditional financial services providers can build strategies that incorporate new digital tools with existing technology infrastructure. Many fintech providers now offer digital banking modules that can sit on top of existing core systems, enabling organizations, including smaller ones such as community banks and credit unions, to roll out new services without the cost and risk of a core system replacement.
Nontraditional Players are Emerging as Serious Competitors
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Ask any financial services leader at the end of 2019 about the upcoming year and no one would have predicted a worldwide pandemic that would shutter businesses, introduce social distancing and push consumers to embrace digital banking overnight.
However, these experiences are shaping the perceptions and priorities for financial services leaders heading into 2021. According t...