FIs: Build For A Digital Future Or Lose Customers

The degree to which consumers’ lives have gone digital over the past two or three months can’t be overstated.

Vaduvur Bharghavan, president and CEO of card services platform OnDot, recently talked with Karen Webster about what financial services will look like in the post-pandemic world — and why things will be very different than what came before.

Bharghavan, who goes by “VB,” said financial firms have tuned their behaviors toward digital in some surprising ways. He said the financial institutions (FIs) that OnDot works with have been somewhat shocked by the dramatic changes they’ve seen in customers’ spending patterns.

Those he termed “digital laggards” — FIs that have been slow to connect their card offerings to their mobile apps — have noticed more than a 50 percent reduction in their transaction spend of late. By contrast, digitally savvy FIs that had already been boosting their mobile capabilities are seeing more than a 360 percent increase.

As VB stated, that’s because consumers are actively seeking out mobile services and apps. OnDot has seen the open rate on FIs’ downloaded mobile apps more than double, from about 35 percent in the pre-COVID-19 era to 79.06 percent as of last week.

That rapid uptick in interest has spilled out across every spending demographic and every part of customers’ lives, according to VB. For example, meal delivery services orders are up 33-fold, while digital grocery orders have risen 400 percent.

The expert added that these changes aren’t just reaching millennial and digital-native consumers, but also “my 80-year-old parents. It’s not just about digital self-service. It’s about digital payments really changing lives — and it’s across the board.”

“What we are seeing now is a seismic shift in digital’s magnitude,” VB continued. “Particularly when we think in terms of smaller institutions with fewer branch hours [and] fewer contact-center hours — I think for them, the only ways to come out of this is by driving better digital capabilities.”

Building those capabilities isn’t just about having the capacity. It’s also about finding ways to deliver good functionality to customers before big FinTechs — which have high-level concepts of what challenger banks might look like — sweep in and swipe users away, he said.

Webster noted that before COVID-19 hit, 25 percent to 30 percent of surveyed consumers told PYMNTS they were willing to leave their current financial services providers if something better came along. VB added that there’s mounting competition from non-bank players to use payments as a leverage point to start offering financial services.

What The Future Will Look Like

VB said he believes that the entire financial services ecosystem has experienced COVID-19’s lightning strike, albeit in phases.

The first phase involved just keeping day-to-day operations under control in a radically and quickly altered context. The second phase was dominated by the Paycheck Protection Program (PPP) and the effort to move funds to the small firms that needed them.

But now, the third phase is about how FIs can serve their key customers by leveraging digital. VB said FIs must use digital not to acquire new customers, but to hold onto the ones they already have — as consumers could bolt if they start seeing more compelling digital solutions emerge over the next three to six months.

“The same kind of panic that impacted the financial institutions also impacted consumers,” VB noted. “Once they figure out which way is up, they’ll start looking at which is the best competitive offer, where are the pain points today, and who can alleviate the pain tomorrow. In our own customer base, we haven’t seen so much of a flight in terms of the existing customer base, but we are clearly seeing with a lot of FIs the fear that will happen within the next year.”

That’s putting pressure on FIs at a time when they’ve already seen flash-fraud rates and chargeback disputes dramatically increase. As customers run into issues with, say, refunds on travel that they’re legally owed, many are sidestepping the whole refund process and just initiating a charge dispute with the bank, VB pointed out.

Apart from such challenges, FIs also face the need to find the appropriate digital delivery methods, particularly for smaller institutions whose customer bases were less likely to engage with mobile until about eight weeks ago. Fortunately, driving awareness of an FI’s updated capabilities to such a customer base is often much easier than promoting the bank to a mass market.

“One way we are helping our customers drive awareness is by sending weekly and monthly spending reports to check what a customer spent and to provide a quick look at their transaction history,” VB said. “That messaging also includes a pitch for apps as a way to better manage a card.”

Those pitches seem likely to attract a customer’s attention as FIs’ email-open rates have topped 70 percent since the pandemic began, and consumers are increasingly interested in tools to help manage their spending.

For smaller organizations, finding those very relevant transactional points for consumers is particularly important as the competitive field is getting increasingly crowded with impressive players, VB said.

Expect Big Tech To Step In Soon

Webster noted that challenger banks of the past haven’t offered much in the way of a genuine challenge to traditional banks. Instead, they mostly provide a pre-paid card attached to a much slicker digital user experience (UX).

VB agreed, but he and Webster both said they believe the next generation of challengers coming from massive tech enterprises like Apple and Google will offer more of a genuine threat. They’ll enter financial services through the world of digital transactions and will work to offer something very different than what traditional banks provide.

VB said Big Tech challengers “might not be incumbents in the banking space, but they are totally incumbent in terms of customer engagement. And it’s much easier to encroach into payments, as [the industry is] becoming more democratized. And as payments become more embedded, they become more about the consumer experience than about payment rates.”

As Big Tech firms turn their attention to becoming the payment method on file, they’ll pick up “a very powerful weapon” in the war for consumer engagement, VB said. That will be particularly true in the post-COVID-19 world, where retailers will turn to digital tools to offer in-store customers contactless payment options.

According to VB, the future will belong to the banks that not only build the right digital offerings, but also provide them in a context that keeps consumers engaged throughout their day-in/day-out financial transactions.