TDB: Following the banking dislocation in the US in early 2023, banks in the U.S. have been under pressure to strengthen their balance sheets and identify new growth opportunities. How can lenders, particularly regional banking institutions, stem potential deposit outflows and create new value for customers by rebuilding trust and charting a path for sustained profitability?
Yerbol Orynbayev: The US banking sector faces several critical challenges, such as the interest rate environment, a looming recession, and the ongoing uncertainty sparked by the collapse of SVB. Regional banks have been hit particularly hard, and their reliance on traditional lending has been exposed by high interest rates.
These banks must embrace the ecosystem business model by diversifying the range of services they offer and ‘bundling’ non-financial services and products. This will create additional value for customers and help attract the new wave of digital-first customers entering the banking market, at the same time as stopping outflows.
Specifically, banks must engage in strategic partnerships with non-financial and lifestyle service providers such as insurance, retail, lifestyle, travel, and telecommunications companies, as this will align with changing consumer preferences.
Modern customers expect more from their banks and want more services in one, convenient place. We can learn lessons from other sectors such as big tech. Amazon, for example, has built the infrastructure to offer entertainment and online retail on one platform, as well as a range of other goods and services. Banks should do the same by providing a multi-faceted offering and move beyond their role of only being depositors and lenders.
Some banks are reluctant to expand their consumer offering and instead want to hunker down to see out the challenging conditions. But investing in ecosystem development now is a robust strategy to establish future revenue streams and help ensure long-term profitability, especially amongst younger consumers.
Young Americans are no longer following in their parents’ footsteps when setting up a new bank account and they aren’t necessarily looking for a brick-and-mortar institution. Banks have an opportunity to get ahead of their competition by developing ecosystems to attract those entering the banking market for the first time.
TDB: Looking at retail side of the business what are some priority areas that U.S. regional banks should focus on to deepen customer engagement and capture greater share of wallet, while leveraging the use of effective digital platforms?
Yerbol Orynbayev: First and foremost, regional banks have many advantages over bigger institutions to develop their ecosystems. They’re closer to their customers and therefore have a deeper understanding of consumer behaviour and preferences. They’re also smaller and more agile, meaning they can adapt faster to new business models than their national counterparts.
Therefore, regional banks should prioritize integrating investment products, partnering with local retail providers, and investing in user-friendly mobile apps when building out integrated ecosystems.
Offering investment services and products, such as broker accounts and access to money market funds, should be the top priority as these services allow banks to directly increase their revenue streams and help de-mystify investing for customers.
Partnering with local businesses and integrating retail offerings and discounts into ecosystems are particularly important for regional banks as a significant portion of spending occurs locally. As of 2023, 55% of Americans shop at a local store at least once a month and locally-owned businesses contribute around 44% to the US economy. If regional banks partner with local retailers and provide incentives for the most popular services – entertainment and retail discounts, for example – they would have a competitive advantage over their national counterparts, especially for younger consumers.
Regional banks also need to commit more investment into their mobile apps. This is an area they have largely neglected in the past, often because they don’t see the point in competing with the larger players. Providing a functional, user-friendly interface increases the convenience and accessibility of banking, which has been proven to strengthen customer retention.
TDB: With the successful revamping of Jusan Bank in Kazakhstan we see how important the formation of digital ecosystems can be in connecting with customers and facilitating successful user journeys. In that respect, how can banks optimise their ecosystem strategy and does it necessitate looking beyond financial products & services?
Yerbol Orynbayev: Banks must expand their horizons beyond financial products and services to include non-financial offerings. The US is held back by its long-standing conservative and traditional approach to banking, which often reduces banks to intermediaries between deposits and loans. While there are pioneers in the sector driving disruption, like Chase and AmEx, the US is still in the experimental phase for building ecosystems – and is lagging behind other countries like China.
Banks have access to vast amounts of data and can process various transactions such as purchases, sales, loans, transfers, utility bill payments, and gift transactions. But they must commit more resources to analyzing this data and so they can prioritize offerings based on the scale of each transaction category. Emerging technology such as AI and ML has accelerated processes in a number of other industries and has transformed customer understanding, and banks should double down on investing in this technology as part of their ecosystem business model.
Finally, ecosystems can help banks create additional value to help retain customers. Implementing loyalty programs, optimizing fee structures, offering loan discounts, or even introducing buy-now-pay-later schemes are all effective strategies to deepen customer loyalty.
TDB: Likewise, what lessons can be learned from China especially in terms of its application of AI and how has this translated in to improved digital CX?
Yerbol Orynbayev: China has excelled in developing digital ecosystems and lifestyle platforms, with Alipay and WeChat standing out as prominent examples. These innovations significantly enhance convenience and reduce transaction costs in daily life.
Their ecosystems are underpinned by advanced technologies such as big data and AI, which Chinese companies pioneered and are still leading the rest of the world. For example, China has used AI in precision marketing – to accurately recommend different financial products to different customers; and for credit risk control – using models powered by big data to help customers minimize potential financial risks. These applications have enhanced digital CX in China’s banks.
The rest of the world can draw valuable lessons and insights from these models, potentially leading to their adaptation and implementation elsewhere.
We can also learn lessons from China’s payment economy. Our traditional payment providers of MasterCard and Visa don’t operate in China and retail banks have therefore been able to facilitate direct QR payments, enabling them to cut out the middleman and slash fees.
It might not be long before we see similar developments in Western markets. If Elon Musk succeeds in creating an “everything app” out of X, then QR payments – or a payment economy similar to China’s – could become the new norm in the US and elsewhere.
TDB: Technology will continue to play a central role in powering the next wave of innovation in the banking industry with various players still experimenting with Web 3.0 based initiatives and enhancements. Can decentralization of finance peacefully co-exist within traditional banking arrangements and frameworks? What parts of Web 3.0 will work for banks and do you envisage the metaverse becoming next big source of disruption?
Yerbol Orynbayev: I can’t envision a banking environment where the decentralization of finance can coexist with traditional banking frameworks. There will be a split and divide among regulators in different countries, with some supporting decentralization and others opposing it. I believe regulators in developed markets like North America and Europe will oppose decentralization, and lean towards traditional banking; conversely, developing markets in Central and South America might favor decentralization. This division could result in a fragmented global banking landscape, and could even lead to tensions and friction in some areas of the economy.
AI technologies have already started to be deployed extensively in the finance sector and will continue to shape it. They’re currently being utilized in investment models and customer services, but they could make a real difference in banking ecosystems. For example, AI could be deployed to gain a deep understanding of consumer spending habits, which would allow for tailored non-financial services.
On the other hand, blockchain technology, aside from its use in digital currencies and payment systems, has not yet seen widespread adoption. However, as computational capacities continue to increase and costs of implementing them drop, banks may increasingly shift toward blockchain-based digital platforms. It’s possible that blockchain technology could transform ecosystem development, strengthening underlying technology and creating a more fluid customer experience.
Looking ahead, the metaverse appears to be the next major source of disruption, however its potential in the near future is limited by limited technological and computational capacities. Quantum computing, which is essential for many aspects of the metaverse’s development, remains in the experimental stage, with practical applications still a considerable distance away.
