The Rise And Fall Of Customer Experience In Banking

OBSERVATIONS FROM THE FINTECH SNARK TANK

For the past 20 years, the financial services industry has been obsessed with the “customer experience.” Executives have been convinced—and convinced themselves—that financial products are commodities, and that the only way to differentiate in the market is through a superior customer experience.

Maybe that was true at some point, but it’s not true today. Financial institutions that cling to the belief that improving the customer experience (whatever that is) is the key to winning customers and differentiating themselves from their competitors are misreading the trends in the market.

What are those trends? Three in particular demonstrate the growing importance of product innovation and the falling importance of the customer experience: 1) consumers’ shadow financial lives; 2) the rise of community fintechs; and 3) embedded finance.

Consumers’ Shadow Financial Lives

The term “shadow financial life” might evoke thoughts of the shadow economy which implies underground or nefarious activities.

Consumers’ financial lives aren’t underground or illegal—but they include activities and relationships that traditional financial institutions don’t know their customers do and have. Examples of consumers’ financial lives include:

• Buy now, pay later purchases. What “financial account” do consumers use when they pay with a buy now, pay later service? There is no account.
• Automated savings tools. When consumers use Acorns or Qapital to automate their saving activity, the money may be stored in a traditional savings account, but the tools that move the money are “off the books.”
• Fantasy finance leagues. Young investors may have accounts with Robinhood or Wealthfront but they increasingly get their investment advice and experience from fantasy finance tools like Invstr and Wizest.

There are other examples, but here’s the common thread: Consumers are using these products or tools because of their product features. They’re not examples of improved customer experience with the underlying financial products.

The Rise of Community Fintechs

Fintech startups like Chime, Aspiration, and Daylight are emerging to take on traditional banks—that’s not new news. The common thread between many of these challenger banks is their focus on specific market segments.

Because we can’t really call these companies “banks,” I’ve proposed we call them “community fintechs” because they serve affinity communities (vs. geographic communities).

Conventional wisdom—and even some of the community fintechs’ own advertising—holds that they win customers because they provide a superior customer experience.

That’s not it.

They’re winning customers because their products address the unique needs of the communities they serve. Chime, for example, serves the needs of low- to middle-income consumers with product features like:

• Early access to money. Nearly a quarter of Chime customers said they chose the fintech because it offers 2-day early access to their direct-deposited paychecks, as well as to government stimulus and tax refund checks.
• Overdraft protection. The Spot Me product lets Chime customers overdraw on their accounts with no overdraft fees. According to Chime’s website, “limits start at $20 and can be increased up to $100 or more, based on factors such as account activity and history.”
• Credit-builder credit card. Chime’s predominantly low- to middle-income consumers aren’t in the crosshairs of the big credit card issuers’ marketing efforts. According to Cornerstone Advisors, 15% of Chime’s primary banking customers either have the card or are on its wait list.

An analysis from Cornerstone Advisors’ Alex Johnson shows that many of the leading fintechs have innovated by creating new product/feature combinations, not with customer experience.

Embedded Finance

There are different views of what embedded finance is—my definition is:

“The integration of financial services into non-financial websites, mobile apps, and business processes.”

One good example of this is the debit card Lyft offers its drivers. Product features like a strong rewards program and instant payments are coupled with customer experience improvements like seamless account opening and integration into Lyft’s driver app to provide a compelling offer for Lyft drivers.

You’re thinking: “Hold on here, I thought you said customer experience was in decline.”

Yes—from the perspective of financial institutions. The customer experience improvement in this example comes from Lyft—not the financial institution providing the underlying financial product.

The Decline of Customer Experience

For 20+ years now, financial institutions have pursued a quest to gain a competitive advantage based on providing a better customer experience.

I’ve never understood what that meant. Customers have many different experiences. Different customers want different kinds of experiences. So how can there be “the” customer experience?

I remember conferences from the late 1990s where consultants would present their firm’s approach to “customer experience management” as if it were some kind of science that their firm had invented or discovered.

Total nonsense.

There’s a natural ebb and flow to strategic imperatives in banking. The focus on customer experience in banking is giving way to a new focus on product innovation. Personalization is more about product personalization today than about messaging and offer (often disguised as “advice”) personalization.

Banks providing banking-as-a-service (BaaS) services understand this. They work with partners—fintech and non-financial brands—who control the customer experience (or experiences). The banks don’t control the experience—they provide the products.

Are there opportunities to improve the traditional banking customer experience? Absolutely. But there are two realities here:

1. For financial institutions with a strong customer experience, incremental improvements in that experience won’t produce the returns on investment that product innovation will; and
2. For financial institutions that lag others in providing a strong customer experience, making incremental improvements in the experience is simply playing catch up—and those investments aren’t likely to pay off.

Welcome to the new age of product innovation in banking. So long, customer experience—see you again in about 10 years.