Danny Shader is the founder and CEO of PayNearMe.
Traditional banks used to think of their competition as the bank or credit union down the street. But now they have to contend with another competitor: all-mobile neobanks. These fintech startups are luring away not only a portion of traditional checking and savings business but also some more profitable customers, such as the borrowers who generate upwards of 65% of bank revenue through interest income on mortgage, auto and personal loans.
How are they doing it?
The answer is customer experience (CX).
Though traditional banks have a wealth of data at their disposal, most are not using that data to render a modern user experience that can adapt as customer needs and preferences change. Digital-first neobanks are built from the ground up to deliver the type of data-driven customer experience consumers have come to expect.
Consumers have become accustomed to the intuitive, personalized experiences that greet us at every digital turn. Whether it’s a curated playlist on our go-to music app or a timely alert about a price drop for a flight, we’ve come to expect a certain level of hyper-personalization. Naturally, we anticipate the same tailored, frictionless experience when paying our bills.
Neobanks’ strategy is to capitalize on this demand for personalized online banking experiences to build market share—and it’s working.
They understand they can create a personalized loan payment experience for each customer using artificial intelligence (AI) and machine learning (ML) models, which constantly learn and improve through data input to customize the loan repayment process to individual preferences.
As part of my ongoing Payments 3.0 series, I’ll cast a vision of how traditional banks can capitalize on their strengths—namely vast data reserves, stability, regulatory compliance and the ability to scale—while borrowing the best CX strategies from the neobanks’ playbook.
Turning Transactions Into Hyper-Personalized Interactions
Fending off neobank competitors requires traditional banks to shed their one-size-fits-all approach to payments and, instead, design personalized experiences. A recent study, however, revealed that financial institution executives believe they lack the personnel and budgetary resources to collect and analyze effectively the data they already have, let alone invest in expanded data capabilities to turn loan repayment transactions into hyper-personalized interactions.
Additionally, half of financial institutions (50%) don’t survey their customers to assess how satisfied they are with their bank’s payments platform. These banks may view payments merely as functional transactions rather than valuable opportunities to engage their customers. As one vice president of consumer lending candidly stated, “We generally judge our consumer payments’ effectiveness by the number of complaints we receive.”
This “no news is good news” mentality needs to shift for traditional banks to disrupt the status quo and make meaningful improvements.
Let’s look at some realities banks should consider to protect critical revenue streams.
Reality: Consumers increasingly prioritize CX when deciding whether to stick with a particular institution or explore other options, hence the leakage of borrowers to neobanks. As a result, advanced data collection and analysis are table stakes for financial institutions striving to improve borrower interactions.
In the study referenced above, 75% of bank executives believe expanding data capabilities across types, scale and accessibility would benefit their organizations. The problem is that even if banks can hire the necessary data experts to meet that objective, they may still be hampered by legacy payments systems that can’t be adjusted quickly to support evolving customer preferences or support AI/ML-driven insights.
Solution: Audit the bank’s payments technology stack. Traditional banks would benefit from auditing their existing payments technology stack to identify gaps or deficiencies that prevent a highly personalized, AI-infused customer experience. Audit findings can then be incorporated into a phased migration plan focused on building the technology foundation modern CX requires.
Reality: Traditional banks need a flexible and configurable payments system that allows them to modify and improve their customers’ experiences by supporting new payment types and hyper-personalization—not just once but on an ongoing basis.
More than 3 in 4 consumer lending executives (77%) acknowledge their institutions maintain disparate payments platforms, and two-thirds (67%) cite this siloed approach as a hindrance to effective data capture and utilization.
These limitations show up in many ways, but one obvious example is banks’ lack of support for popular payment methods such as PayPal, Venmo, Apple Pay, Google Pay and Cash App Pay. Currently, few traditional banks offer these popular alternatives, in part because their outdated platforms lack the centralized data consolidation necessary to easily add and support additional payment types and channels (e.g., web, mobile). As a result, every new integration requires a system modification, which discourages innovation.
Neobanks exploit this gap by rapidly rolling out the modern payment types and channels consumers demand.
The best weapons banks could leverage are a centralized data warehouse and a payments platform built to fully utilize the data it contains. As one financial institution executive shared, “It would be great to have a way to merge all of our data into one place; the opportunities to improve all of our functions would be significant.” A third (34%) of respondents agreed, saying a single, modern payments platform is necessary for delivering hyper-personalized customer experiences.
Solution: Modernize payment infrastructure for seamless modification and data enablement. Expanding payment options is just the first step toward borrowing the best strategies from neobanks. To deliver the CX customers expect, banks should also embrace hyper-personalization, which requires leveraging extensive data to pair payment options with each customer’s unique preferences for loan repayment and deliver value-added offers before and after transactions.
A modern payments platform makes that possible by consolidating all data into a single repository and applying AI and ML to the data to optimize every element of the transaction. The payments platform can even combine the bank’s data with third-party data to give customers contextually relevant information, offers and recommendations.
With a future-focused payments platform, traditional banks can leverage payments data as a strategic asset, offer the personalized payment experience today’s consumers demand and deliver exceptional Payments 3.0 experiences that are as good or better than their neobank rivals.
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