The current state of the financial landscape
Much like last year, we are living through a continuation of “tough times” brought about by geopolitical conflicts and slowly falling interest rates. Uncertainty and volatility are the ever-present buzzwords in financial contexts, and not without merit.
Responses to economic uncertainty
We are heading towards a period of increased economic uncertainty as banking customers face stubborn inflation rates that are falling more slowly than is ideal. In response, customers are looking for banks and credit unions that display a level of empathy – alongside innovative financial products and services (The Financial Brand).
These fears are not unfounded as high interest rates are affecting banks. There is a trend of tighter lending and deposit rate competition, which will squeeze bank margins (The Financial Brand).
These pressures – combined with regulatory changes – may result in a faster rate of industry consolidation. The reason for this is because mergers and acquisitions represent increased opportunities for revenue growth through efficiency, risk mitigation, and scale. Combined with increased fintech partnerships, these measures mean financial institutions may be able to weather any oncoming storm (The Financial Brand).
It’s not all doom and gloom, however. In the US, the Federal Reserve has indicated that it intends to shift to rate cuts in 2024 as inflation shows signs of easing (Bloomberg). In other words, there may yet be light at the end of the tunnel.
What remains to be seen is how these strategic pivots will affect the banking customers themselves and if their worries about economic uncertainty can be mitigated.
Digital transformation in banking
With 71% of global business now digital, the impetus at financial institutions is to continue expanding in that area. The primary objective – according to 77% of those surveyed – is to increase revenue. However, there is also substantial emphasis being placed on improving the customer experience, reducing costs, increasing operational resilience, and strengthening regulatory compliance.
Achieving this is at the heart of financial institutions’ digital transformation initiatives. In this regard, most banks have reached a certain level of maturity, given that few remain who need to begin from scratch. Instead, the focus is moving to continuous digital transformation. Over 53% of surveyed decision- makers at banks say their organization is working on improving their digital transformation efforts, up 20% since 2021.
That’s not to say that all banks are experiencing such success. Shockingly, 1% still claim to not be interested in digital transformation at all, while 8% have no plans to implement an initiative. Slightly better, we have the 10% that still only have planned implementation initiatives, meaning a total of 19% of global banking decision-makers are yet to harness the power of digital transformation.
For the 10% that are planning to implement digital transformation, there are clear signs as to what is holding them back. Of those surveyed, 33% claim that the company’s technology strategy represents one of the most challenging aspects of their role. This is accompanied by the related challenges of data and project management, with 29% and 27% reciting these respectively (Forrester).
Inter-generational customer preferences
The lingering effects of the 2008 financial crisis are still present today, most notably in the attitudes of millennials who came of age around that time. A recent report shows that this demographic tends to distrust big banks.
Younger generations – specifically the Gen Z demographic – also display low levels of brand loyalty to traditional financial institutions. However, this does not appear to be rooted in distrust in the same way as their millennial counterparts. Instead, the preference for fintech institutions over traditional incumbents speaks to service-driven decisions.
That is to say, Gen Z prefers the digital experience that fintech institutions offer, with robust mobile-centric experiences and digital products. Traditional financial institutions that want to attract younger demographics need to update their approaches. Beyond ensuring more seamless and data-driven digital experiences, this can also involve leveraging social media in the form of financial influencers or financial education on platforms such as YouTube (The Financial Brand).
Customer loyalty in banking
European banks are not performing well on emotion, according to Forrester. Although 62% of European banking customers claim to have had an “effective” experience and 63% had an “easy” experience, only 48% classified their experience as “emotionally positive.”
But what role does emotion play in loyalty? According to the report, emotion is the primary determinant of customer loyalty, beating out both ease and effectiveness. This means feeling understood, respected, confident, valued and appreciated.
If a customer feels just one of these five emotions, according to Forrester, 69% or more would remain with the brand, 65% would invest more in the brand and 62% would become brand advocates. The survey found that, across six European countries, no more than one in five respondents felt even one of those five emotions.
At the other end of the spectrum, disappointment, frustration, neglect, annoyance, and anger are the main drivers of disloyalty or loss of loyalty. While these feelings don’t automatically lead to churn (primarily due to customer inertia), these feelings if left unchecked can cost banks dearly. In total, 43% of banking customers who have experienced just one of these feelings would stay with the brand.
Key Takeaways
Continued Economic Turbulence:
The financial landscape remains challenging due to ongoing geopolitical conflicts and slowly declining interest rates, perpetuating uncertainty and volatility in financial markets.
Customer Response and Industry Trends:
Banking customers seek empathetic institutions offering innovative financial products amidst stubborn inflation rates. However, banks face challenges such as tighter lending, deposit rate competition, and regulatory changes, potentially leading to increased industry consolidation.
Federal Reserve’s Response:
Despite the challenges, the Federal Reserve in the US plans to implement rate cuts in 2024, signaling a potential shift in economic trajectory. This move suggests a glimmer of hope amid the prevailing uncertainty.