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How Banks Can Scale Digital Distribution

  • Last Updated: December 14, 2023

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A guide to scaling your bank’s digital growth and proven scaling strategies to lead your bank into the future

Many banks recognize the importance of digital channels and typically include some level of digital within their marketing mix. Yet why have only a few succeeded at rapidly building large, sustainable digital businesses? The missing ingredient is scalability— a concept that sometimes gets confused with growth.

Linear growth is achievable in business by adding resources (in the form of capital or employees) that facilitate increases in revenue. But a business is only scalable when revenue is grown without proportional additions in resources.

Growth vs. Scaling - Difference in Revenue and Resources

Scaling is the key to the meteoric rise of the best fintech startups. Banks that hope to replicate their success must start with a well-designed, scalable strategy for digital growth. In this article, we discuss the importance of scale, the fundamental prerequisites for digital scalability, and several innovative scaling strategies employed by leading-edge banks.

What drives scale?

A scalable business model typically possesses two key elements:

  1. A product or service with increasing returns to scale
  2. The infrastructure to scale up distribution of that product or service

While not all business models are scalable, for banks, financial products inherently possess increasing returns to scale. As a bank’s brand recognition grows, its customer acquisition cost lowers. Furthermore, when it expands its balance sheet and diversifies into new product lines, a bank improves its financial stability and reduces its cost of capital. Essentially, a bank’s products become cheaper to both produce and market with each new customer won.

Correlation of Branch Scale and Deposit Growth has weakened US retail banks

Until recently, banks also had the best distribution infrastructure in financial services: a physical branch network. But over the past decade, the relationship between deposit growth and branch density has weakened considerably. According to McKinsey, deposits at the 25 largest US retail banks doubled from 2008-2018, while their combined branch footprint decreased by 15% over the same period.

Figure - Bank Branches per Millions People

The main reason: growing consumer preference for digital banking – a global trend that’s likely here to stay. In North America, 50-60% of consumers are interested in banking online or on mobile phones, which has led to a modest reduction in branch footprints.

A glimpse into the potential future can be seen in regions like Nordic Europe, where 80-90% of consumers have adopted digital banking. Banks in the Netherlands have responded by shuttering 71% of branches, while Denmark and Sweden have reported reductions of 56% and 45% respectively.

The data is unambiguous: the traditional branch-based distribution model is facing a global secular decline. To remain competitive, banks must transition to a digital distribution model, and achieve scale in their digital marketing channels rapidly and cost-efficiently.

Here’s how to do that.

Prerequisites for digital scalability

Before scaling your bank’s digital growth channels, it’s critical to establish a strong foundation. There are several reasons for this:

Firstly, scalable distribution can be double-edged sword. On the one hand, it makes it easy to reach many customers at relatively low cost. On the other hand, it also makes it easy for your competitors to do the same. This results in a highly competitive, transparent market where inferior products get rapidly discarded in favor of the very best options. Banks that invest in the necessary infrastructure for delivering a better quality, consistent customer experience can differentiate themselves from the competition.

Secondly, the digital marketing landscape evolves rapidly, and over-investing in one trendy marketing tactic or channel can be risky. Focus on fundamentals that are likely to stay relevant regardless of these shifting winds to position your bank for success in the long-term.

Finally, similarly to branch-based distribution, digital distribution infrastructure has the potential to host a wide range of innovative scaling strategies. In other words, look at digital as a cost emerging profit center – one where wise early investments can result in large payoffs over time.

When considering your investments into your foundation, three main areas are recommended.

Omnichannel integration

1. Omnichannel integration

While many banks are successfully operating a a wide range of customer contact channels, it’s common for channels to become siloed. On the marketing front, a customer might receive a piece of direct mail, see an ad on TV, or read a post on social media. When seeking customer support, options typically include visiting a branch, dialling in to a call center, or chatting online. At each of these touchpoints, important information is collected about the customer, but not always shared across channels. This is a significant missed opportunity in customer service and cost control. It leaves a negative impression on customers that are forced to repeat information they’ve already provided at each new touchpoint. It also duplicates time and cost of resources across customer contact channels, leading to diseconomies of scale as more channels are added. Omnichannel integration is the solution to these types of pain-points and a prerequisite to scalability. To maximize effectiveness, an ideal omnichannel architecture is built on the following principles:

Multiple points of entry, single source of truth

The customer enjoys a wide range of options for engagement, including phone, email, live chat, mobile apps, social media and physical branch visits. But information from all touchpoints is consolidated into one central system that’s accessible by customer-facing departments.

Smart automated contact routing

A data-driven routing system dispatches customer enquiries to the best channels, based on an evaluation of urgency, complexity, cost to serve and potential economic value. Since cost of distribution varies widely across channels, a sophisticated routing engine should be able to optimize the customer journey while also improving operational efficiency.

An end-to-end digital user experience

Customers can sign up and be approved for financial products online. They can also conduct most day-to-day banking tasks through self-serve tools like mobile cheque deposits, e-signatures, AI-enabled chatbots and automated user authentication. Contact with bank staff is a selective support option, not a routine necessity, for any of these transactions.

An integrated omnichannel platform with these features can catalyze significant growth with a modest increase in personnel.

Automated personalization infrastructure

2. Automated personalization

In the digital world, consumers expect brands to deliver personalized experiences that treat them as individuals, not as a generic member of a homogenized group. In fact, 73% of customers expect “hyper-relevance” in their digital banking experiences, and 33% of customers who switch banks do so because personalization was lacking (Accenture 2019).

Historically, banks have depended on relationship managers and other frontline staff to tailor personalized experiences for customers. This may have worked well in the traditional, branch-based distribution model, where customers had frequent face-to-face interactions with local bankers. But today, many customers prefer banking online over interacting with bank staff.

According to McKinsey research, the researching options subjourney has 8x the impact of other subjourneys. Improving it can bring 15-20% lift in customer satisfaction.

To cultivate genuine relationships with these digital-first consumers, banks must be equipped with modern IT infrastructure that can automate personalization at scale. Moreover, the level of personalization must go beyond including a customer’s name in communication, and include the delivery of targeted content and tailored customer journeys.

In particular, research from McKinsey shows that 10-15 customer subjourneys have a disproportionately large impact on overall customer satisfaction. For example, when opening a new deposit account, the researching options subjourney has eight times the impact of other subjourneys. As such, prioritizing these types of subjourneys for personalization efforts can make a significant impact. Systematically re-designing this subjourney from the ground up takes on average three to four months, and can bring 15-20% lift in customer satisfaction. Given the scalable nature of digital distribution, the payoff is sizeable for relatively little investment.

It’s important to note that automated personalization won’t entirely displace the human element. In many cases, it will augment the quality of live customer interactions. For instance, a bank’s wealth management division may employ AI algorithms to monitor customers’ self-directed investment behavior and generate recommendations for relationship managers in future client consultations. In replacing a purely human-driven process with a technological efficiency, human staff can then allocate their bandwidth to discussions that are more closely aligned with the client’s true investment style.

Similar dynamics can be found in a range of other financial products, as well. In that sense, banks can leverage automated personalization to offer superior products to more customers at a lower cost per customer –the very definition of scale.

Data analytics capabilities

3. Data analytics capabilities

The growth of digital channels has led to an explosion of customer data across all industries, and banking is no exception. To capture this data and translate it into insights about customer behavior, robust analytic capabilities are essential to capture and interpret.

The importance of data analytics hasn’t gone unnoticed by financial institutions. According to the Digital Banking Report’s 2019 Financial Marketing Trends study, over 90% of financial marketers consider data collection and analyzsis as their two largest digital challenges. These challenges become increasingly complex as digital channels are scaled up.

Barriers to making the most of financial institution data

To understand the root of these difficulties, consider the top four barriers to making the most of financial institution data:

  1. Tech gaps keeping data out of single customer view (56%)
  2. Inaccessible data that’s trapped (51%)
  3. Inadequate skills to fully unlock data & utilize (51%)
  4. Failure to standardize for smooth operation (41%)

With the exception of the third barrier, all of these difficulties stem from flaws in the institution’s fundamental analytics architecture, which limits its ability to form a unified, comprehensive understanding of customer behavior.

Correcting these mistakes after the fact is an expensive, time-consuming process. It often requires cross-departmental negotiations and imperfect technical compromises. This is why it’s critical to invest in scalable, integrated data analytics capabilities before ramping up digital growth.

Digital Scaling Strategies

Once banks have established a strong foundation for digital growth, scaling up is a matter of execution.

As an initial priority, banks may leverage digital channels to acquire new customers for their existing product portfolio. This straightforward approach can be effective thanks to the inherent scalability and low costs of digital acquisition.

For banks that are looking to further their business via digital, one of the most exciting opportunities in digital distribution is the potential for even more innovative scaling strategies.

Here are four especially compelling directions to consider of your bank.

Data analytics capabilities

Own the broader customer journey

For consumers, financial products are a means to achieve a large goal, such as building a business, buying a home or saving for retirement. However, some banks focus myopically on one isolated transaction in that larger journey — such as offering a business loan — when the customer’s end goal may be much more far reaching, such as growing their company.

Rather than leaving all of that value on the table, banks can offer products and services across the entire customer journey. To identify these opportunities, banks can rely on digital channels that provide transparency of customer data. In addition to providing insights, digital technologies lower the cost of development and delivery for many adjacent offerings.

For example, Commonwealth Bank of Australia (CBA) pursued a long-term strategy of expanding across the home buying journey. They began with a home buying app that allows customers to take a photo of a house and see its estimated market price, along with available viewing times and the sales history of other homes in the same neighborhood. The app also includes a mortgage calculator and the option to apply for a loan with CBA. Within six months of launch, the app had delivered an ROI of over 100%.

CBA then expanded into other similar fintech products, such as Home-In, a virtual concierge that connects users with the right service providers at every stage of the home-buying process. By leveraging CBA’s established brand, franchise network and balance sheet, Home-In has achieved rapid growth in a short time, and has attracted high-profile partnerships with Microsoft and KPMG High Growth Ventures.

Monetize data

Monetize data

Banks typically possess a wealth of exclusive customer information, such as demographic data, lifestyle preferences, and historical financial behavior. Companies in a variety of industries are more than willing to pay for access to this valuable data, as it can yield valuable insights. Fortunately, digital channels make it easier than ever for banks to monetize this data responsibly and legally.

For instance, Citibank offers its commercial customers transactional data aggregated from its global customer base, which can be used to identify trade patterns. One large Spanish clothing company was able to use this data to determine where to open a manufacturing facility and several new outlets.

Toronto-based cybersecurity company SecureKey also leveraged the opportunity: partnering with Canada’s largest banks, it created the Verified.Me digital identity network. The system turns bank credentials into a single sign-in for a wide range of government, medical and financial services. The technology enables highly secure identity authentication for regulated services, while simultaneously providing banks with access to new potential customers.

Build a digital supermarket

Build a digital financial supermarket

Established e-commerce giants like Amazon and Alibaba have long understood the power of digital aggregation. Taking advantage of their central positions in the digital ecosystem, these companies have prospered by offering customers a carefully selected mix of internal and third-party offerings.

The same opportunity exists in digital financial services. Currently, the space is dominated by emerging fintechs. Platforms like NerdWallet and India’s offer a wide range of consumer financial products such as loans, credit cards and bank accounts, and receive affiliate fees from banks for referring new business to them. Lending marketplaces like Lending Club and Lending Home do the same for personal and real estate loans respectively.

A lucrative opportunity is on the table for banks to develop their own financial supermarket. In fact, banks possess unique strengths in this space through their proprietary customer data and large frontline workforce. By creatively leveraging these assets, banks can differentiate themselves from existing providers through a better personalized, exclusive or higher-touch service.

And there’s certainly good reason to push forward: on average, annual return on equity (RoE) for bank loans is only 6%, while RoE for product origination and sales is almost four times larger at 22%.

Rent out back-end assets
Rent out back-end assets

Rent back-end assets

Alternatively, banks can take a different route and focus exclusively on core back-end assets.

Banks expanding into front-end markets face stiff competition from established fintechs. But many of those fintechs lack banking licenses, infrastructure and capital assets. with some lacking a viable method to obtaining them.

For example, virtual lenders like Lending Club and Prosper consistently provide a customer experience superior to that of most banks. This is reflected in their average net promoter scores of 80, compared to 20 for regional banks, and 5 for national banks.

Average promoter score by lender

Despite its outperformance, lending marketplaces have failed to take significant market share from the $13 trillion consumer loan market. One possible cause is funding structure: since they lack a large balance sheet of their own, marketplace lenders have a higher cost of capital and are at greater risk of liquidity shocks during recessions.

Thus, rather than going head-to-head with virtual lenders and other fintechs, banks might benefits more from partnering with them. Fintechs can provide infrastructure-as-a-service, “rent” out the bank’s balance sheets, or offer financial products for them to promote.

Fintel Connect, for example, serves this need in the space of financial services. By connecting banks with a wide range of financial publishers and front-end partners, our technology helps banks scale distribution of their financial products in a transparent, accountable way.

Next Steps

  1. Customer experience that’s integrated across all channels
  2. Personalization across all customer journeys
  3. Analytics that provides the most transparent views of customer activity

Banks that are considering scaling their digital efforts should verify that they possess:

Once verified, they can begin employing scaling strategies:

  1. Providing solutions for broader business and consumer customer journeys
  2. Monetizing data
  3. Leveraging their central positions to establish financial supermarkets
  4. Partnering with fintechs, including renting out assets

By developing a strong foundation to support the above scaling strategies, banks can rapidly grow their digital distribution channels. Contact us to learn how you can scale with Fintel’s performance marketing platform.

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