Digital transformation and changes in customer expectations
This blog post is a lightly edited extract from our book, Customer-centric Innovation in Finance: Leveraging Human Insights to Drive Product Innovation in the Digital Age, by Erin B. Taylor and Anette Broløs (2024, Kogan Page).
Digital transformation is a broad agenda optimizing processes, meeting increasingly digital customer expectations, embracing real-time data and taking advantage of new technologies like
artificial intelligence, machine learning, virtual reality, tokenization and more.
It also means coping with increased competition and changing business models, including the building of partnership in open banking structures.
Most importantly, digital transformation is also a cultural change. This is so for all involved: company management, employees, suppliers, customers and even regulators.
Within this cultural change, financial services are shaped by customers' expectations and decisions, just as customer choices in finance are shaped by the services available to them. So, how do customer expectations and financial services change in response to each other?
FSPs
FSPs definitely show an increased focus on providing customer-centric solutions, whether this is advanced customized solutions or broader use of financial services by new groups, or via financial inclusion. Customer-centricity is often an important goal of digital transformation. Indeed, according to a recent Harvard Business School survey it is the main goal.
While FSPs have come a long way with digital transformation, change is ongoing, with even more disruptive changes in financial intermediation due to take place, with Web 3.0 bringing us decentralized finance and the metaverse (an interoperable network of 3D virtual worlds).
This means that on top of digital transformation, FSPs (and particularly banks) could see major changes in their fundamental raison d’être. The existing financial intermediation is based on banks transforming short-term deposits into long-term loans and credits. In the future, we might see central banks lead part of the account management issuing remunerated retail CBDCs and taking over part of the deposits.
Indeed, in a decentralized model, customers themselves may play a stronger role in handling their own assets and transactions avoiding financial custody. If central banks change regulation to let new players participate in international payments this will also affect existing models.
So, while still contemplating how best to survive and retain valuable customers who trust their FSPs, it is also necessary to start a long-term discussion of the roles and business models that might be possible in a decentralized environment.
How would this affect banks’ revenue model, which was previously based on the interest margins between deposits and loans? We might see quite different models of customer identity develop. Some customers might have several identities in different environments (real world, games and more), and there could be a choice for customers between different types of identity (national, self sovereign or private providers). Changes in identity will change risk management in both banking and insurance. A particular issue is how regulation (protecting depositors, investors and insured) will develop, and how fast it will be able to adapt.
What kind of services could or should be offered in a decentralized money environment? Should they be offered by humans or by automated algorithms? And which competitors might offer to serve them? These are questions that fintech start-ups and traditional FSPs are considering in the long term.
Customers
Globally, consumers have changed their financial practices in response to changes in the availability of mobile devices and the availability of new financial services and shopping experiences more broadly.
Mobile phones are particularly useful because they give people access to a range of services on the one platform, including domestic and international transfers, merchant payments, savings accounts, insurance and credit. Particularly in the Global South, basic financial services are increasingly offered through microfinance agencies and mobile phone based systems. These services replace or complement a wide array of informal services, speeding up transactions and reducing costs.
Financial services are increasingly becoming available across borders, and in principle customers can pick and choose from financial solutions across the globe. In practice, however, the majority of people stick to local solutions–and, indeed, still very often to their traditional bank, or their usual cash payments. This is so in both the Global North and the Global South. There are a number of reasons for this.
First, habits and culture are important, as is a general resistance to change.
Second, regulation and consumer protection are different across countries, and there may be trust issues with non-national providers.
Third, it takes time and effort just to become aware of international solutions and to continually follow their development. Few people have sufficient interest in finance to follow the market closely enough that they can make informed choices to use these new services.
Generally, this development is faster and earlier among young people or younger groups. It is stronger among males than females and higher in urban areas than in rural areas. It also tends to be more pronounced among populations with higher incomes and levels of education (European Central Bank, 2022).
Younger people are much more likely to change their financial service providers, and indeed to use several providers (Caliber, 2023). This is particularly true for young people who travel or work internationally. They often feel less well served by traditional FSPs, as traditional cross-border solutions are expensive and cumbersome to use and it is difficult to save for retirement as regulations and tax regimes differ across countries.
As society changes, so does trust, as aptly described by McAuley and Weiner (2015). People used to trust authorities, institutions and face-to-face dialogue. But millennials and later generations who have grown up as digital natives trust technologies, networks and social causes. Young people may trust internet-based solutions more than anything offered face-to-face. Their networks are more likely to combine personal and social networks, and ratings on media used by these networks.
And, finally, it is well documented that these younger generations value brands and brand visions (like sustainability) rather than the institutions themselves. This change affects older generations as well, as habits change and digital solutions become commonly used across age groups. Meeting the needs of this group of customers is important as they require changes in communication, organization and company culture–changes that tend to develop slowly.
What we need to do
Digital transformation is creating major changes for both the finance industry and its customers, particularly since customers’ access to new solutions has widened and developed substantially. It is clear that, as customers’ needs and contexts are changing, they are adding further to the demand for changes in financial services, both for incumbents and new players. Increasing customer demands is likely to become the norm as we look to a future of further change. It is now more necessary than ever to spend time with customers–consumers and businesses–to understand changing needs.
In other industries like retail, automation, building and more, organizations have looked to future thinking to come to grips with questions like this. Less so in the financial industry. Future thinking and future studies are very different from traditional customer surveys or even AI-based data collection and analysis. Such longer-term studies are important to understand the potential effects of broader trends and to be prepared for making decisions when change happens fast. Some call this ‘future preparedness’. Only in recent years do we see FSPs engage in systematic work of this type. This too will be increasingly necessary.
