To keep up with the new competition from bigtechs and fintechs in a highly technological environment, traditional banks must reinvent themselves from the inside out and focus the entire company on the concept of “customer first.” The coronavirus crisis has further intensified the pressure to act.

We talked to our Principal and Head of Finance Practice Manuel Halbing. He provides some answers on how banks should now react:

Germany’s banks have been in a dead-end street for some time now. Neobanks and challenger banks – such as N26 or Tinkoff – are primarily targeting younger customers. Payment services, such as Klarna, are building their own customer ecosystem. And newcomers, such as CHECK24, are starting their own banks. In this market, do the traditional financial institutions still have a chance?

Manuel Halbing: There is no doubt that the competition between the classic banks has become much more diverse. Even bigtech players such as Alibaba and Amazon are increasingly expanding into the financial world with modern solutions and strategic investments. In these times of lockdown, the banks have also had to close their cost-intensive branches. Now many institutions are deciding not to reopen them at all. According to Handelsblatt, for example, 13 of 28 branches of Hamburg Volksbank are expected to remain permanently closed. A study by market researchers Toluna has shown that customers are increasingly turning to online channels: 76 percent intend to continue doing their banking business on the Internet even after the coronavirus crisis is over. This will make things more difficult for traditional institutions, because neobanks and challenger banks are usually ahead in terms of usability. So the air is getting much thinner – but banks still have a chance, of course.

So what would the traditional banks have to do?

In our current #NextLevelDigital study, we surveyed 230 managers: Three out of four top decision-makers from financial institutions confirm that they need to restructure their own companies in the direction of “customer first.”

What does a customer-first bank look like?

The central message for the coming years must be a return to the customer – alongside all automation and digitalization efforts. Banks must prepare themselves for modern customer journeys. To be more precise, customer usage behavior has changed, and a branch is no longer the linchpin of its financial world. Instead, the Internet is now the first point of contact. This starts with Google, continues with portals such as CHECK24 and often ends with reviews of individual branches. This is where banks should understand that every customer journey is different – it differs according to target group and financial product. For example, when it comes to special promotions for opening a current account for young people, TikTok can be a relevant touchpoint. When it comes to retirement planning for the 40-plus generation, it’s a different story, a different journey. 

Traditional banks must be able to quickly understand the lifestyles of their (new) customers and identify those areas where it is worthwhile to offer services and solutions. Two aspects are extremely important here: early involvement of the end customer in solution development, and the supportive use of technology and data.

Once the financial institutions have updated their customer journeys, what measures do they need to take?

In addition to changing their customer journeys, banks should strive for a customer-focused organization and use clear KPIs to drive innovation step by step – even in times of crisis. Customer-first banking stands for a radical but also fundamental change of perspective. The needs of the customer are the sole focus here. For traditional banks, this means that they must gradually dismantle their current organizational structures and establish interdisciplinary teams that are completely customer-oriented and that network with each other. In this way, human resources are used efficiently, and the best result for the customer is achieved.

How easy is such a change process to implement?

Changes are always easier in theory than in practice. Certainly the organizational structures of traditional banks have grown over the course of a number of years, which is why many employees and managers are simply not used to taking on new perspectives. But such a change process works with consistent employee empowerment by top management and through pioneering teams that demonstrate success in the new structure.

And why do you think banks should now focus on innovation?

In order to convince customers in the long term, banks have to react much faster to the increasing demands now than was the case in the past. In the best-case scenario, they should set new standards in banking solutions before fintechs and bigtechs do. However, this requires a completely new culture of innovation – and this is precisely where many banks in Germany are struggling. Not much money or attention is left for innovation, especially in times of the coronavirus and economic uncertainty. But to just blindly stop all thoughts of innovation – that would be fatal, and the wrong approach.

The important thing here is not to distribute the innovation budget in an undifferentiated way, but rather to support promising projects in a targeted manner. Because innovation often starts on a small scale, a structured approach with short, iterative sprints and clear KPIs is crucial – instead of long planning cycles with countless committee votes. And after just a few weeks, it becomes clear whether a bigger investment will pay off – or not. 

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