Competition, regulatory pressure and changing customer preferences are driving banks to refocus on their customers. For the shift to be effective, banks must think beyond distribution to reimagining their entire operating model, Backbase managing director for North America Rich Kiel said.

The pressure to digitally transform comes from several directions. There is attention from regulators. Fintechs and startups, unencumbered by legacy technology, are bringing new and responsive products and services to market.

The most significant factor for Kiel is changing demographics. Young people want to be served differently from their parents. They have lived their entire lives in a digital era, where Spotify suggests music to them and Amazon things to buy. They expect the same level of service from their banks. Advances in big data, analytics and artificial intelligence make it easier to affect change.

Brand loyalty is dying. Banks could get by with static offerings for decades because customers remained loyal. That is changing, and they must act fast.

“Traditionally, banks have the usual set of products and services that they look to take to market, and they spend their time thinking about how they apply these to their customer base to drive growth,” Kiel said. “The difference is, (with) engagement banking that puts the customer at the heart of everything and truly thinks about the customer first from their perspective. That’s a different approach that the banks are moving towards and at different paces.”

How engagement banking benefits both the customer and the bank

Kiel said engagement banking is a platform solution designed to create a seamless customer journey involving everyone from the service desk to the branch office. It sits on top of the tech stack, separating the customer experience from it. That mix allows a bank to maintain core legacy systems while embedding new products and services in a new layer.

Tech providers must work closely with banks to identify the most critical areas. Focus on a few key ones to start so you are not overextended. Start with areas where there is clear customer demand. Kiel refers to it as progressive modernization.

How the bank needs to change

Before the technology can be transformed, the business must also shift, he advised. It must fully support the change in how they relate to customers. Across what is often a siloed operation, this means ensuring each department buys in. Usually, it means some new staff who eschew this mindset, ones with different skills, are required.

“It’s not just an investment in tech; it’s an investment in people, and it’s changing the way banks tend to have historically done their business,” Kiel said. “This is a business transformation first, supported by technology.”

The process also needs buy-in at the highest levels. Without it, the bank is left with another in what could be a long list of point solutions.

Early on, Backbase outlines the steps involved and what the expectations are. They help clients prepare and outline each party’s roles and responsibilities. While Backbase sometimes leads the process, it is often collaborative. Should the client have preferred third-party vendors, they can be integrated in, too.

“We’re not just connecting to the core,” Kiel said. “We’re connecting to multiple internal systems and, in many cases, integrating with third-party fintechs for different services because all the banks now provide a best-of-breed offering to their customers. Whereas big banks used to think they needed to build that all in-house, they’re moving to… build and buy.”

The digital shift and AI, what’s coming next

There is a clear demand for more digital services such as wallets, payments and cards. Kiel also sees interest growth in data and analytics, along with something that wasn’t even on most radars a year ago.

“A year ago, generative AI would not even have been on the radar of any bank or credit union CEO out there,” Kiel said. “Today, you’d be hard-pressed to find many that aren’t talking about it. They’ve been talking about the power of the cloud and hollowing out the core. And I think that’s still a big focus. But I think what we’re going to see in terms of future enhancements will be driven by data and a systematic understanding of who’s doing what, how, and being able to create unique, tailored experiences based on that.”

Are banks ready for the new customer?

Society is on the precipice of a critical shift, and Kiel said financial institutions must be ready. The next generation will inherit the most significant amount of wealth in history. They’re also the first fully digital generation, so if an institution wants their share of that historic wealth, they better meet the customer where they are most comfortable, which is in the digital realm.

“They are accustomed to immediate gratification,” Kiel said. “Loyalty is important but means something very different to a younger person today than to their parents or grandparents. Banks must innovate fast and furious to keep this next generation of customers on board.

“Banks have gotten away with providing okay service to their customers for a long time because of a deep loyalty based on personal relationships. I think we will see a dramatic shift over the next five to 10 years. This is why we see the banks investing heavily into new tools and capabilities for that generation.”