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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

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

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 

In recent years, the rise of nontraditional
players such as PayPal, Apple, Amazon, and Google in the financial industry has
drawn the attention of both financial services leaders and consumers. Nearly 66
percent of respondents to our 2021 Outlook research report they would consider
a nontraditional provider such as PayPal, Apple, Amazon, or Google for their
financial needs. This is an increase from 48 percent in 2019 to 63 percent in

While traditional providers continue to
innovate to attract and retain customers that are being courted by direct
banks, they also need to consider working with nontraditional providers. One
trend that will likely see traction in 2021 is the growth of embedded banking,
where a bank inserts its services into a broadly used tech service, such as
Amazon or Google. For example, Citi announced collaboration with Google on its
Citi Plex account by Google Pay and Apple launched its Apple
Card in partnership with Goldman Sachs.

will be especially critical as nontraditional players move further into small
and medium-sized business banking services, an important segment focus for
financial services organizations in 2021.  Stripe launched Stripe Treasury
this year as a banking-as-a-service API that enables platforms like Amazon to
embed banking services with a few lines of code. So far, Stripe has partnered with
Goldman Sachs, Evolve Bank and Trust, Citibank and Barclays to provide banking
services for this new product.

To compete with the growth of
nontraditional players, financial services leaders should consider ways to
easily integrate into their customers’ value chains. This might include adding accounting
and payments services for business customers that can be incorporated into
their existing back office platforms. Additionally, financial services leaders
could look at creating digital payments or rewards programs that sit inside a
Google Wallet or Amazon account.

Customer Experience is Central to It All

What does an improved customer
experience look like? Our research shows that consumers want tools and options
to customize their own solutions. They also cite improving the omni-channel
experience and better use of data for improved product and service
recommendations in their top three priorities.

However, financial services leaders
should also consider generational differences and their own target audiences. The
younger generations (Gen Z and Millennials) want their primary financial
services organization to help them manage their money with faster payments and
quicker transfers. Automated savings and investment tools are their number two

The later generations (Gen X and
Boomers) identified these features as well, but they place a higher priority on
better fraud and identity theft protection. The importance of fraud and
identity theft protection increases with every generation. Making relevant
product and service recommendations also becomes more important as customers move
through life stages.

Traditional financial services providers
have physical presences, established reputations, expansive product offerings,
and superior brand awareness. Nontraditional players and direct banks are not
encumbered with the cost structures of branches and legacy systems. Effectively
leveraging respective advantages along with understanding consumer sentiment
will be keys in the battle for customer attraction and retention in 2021.

Karl Dahlgren is managing director of BAI, a nonprofit independent organization that delivers the financial services industry’s most actionable insights.

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