Sector By Sector – Retail Banking Part 3 – Banking Apps, AI & Recessions

In part 2 of our look at retail banking we looked at the in-branch experience. Banks are closing branches when they should be investing in customer experience, which branches are a key part of.

This week we go in a different direction. We will focus more on the digital experiences that retail banks can offer customers. We are going to look at retail banking apps.

There are a lot of issues (and opportunities) around security and risk in digital retail banking. So we will look at how AI and Machine Learning can help with those risks. As well as how they can tie into the experience of using a retail banking app.

It is also time to look in-depth at recessionary pressures on retail banking. These pressures have already started and may get worse.

But it’s important to note that although recessions come, and they may last a long time, they do end. So we will see if there are any green shoots that might start to grow. As well as opportunities for retail banks to make a positive impact on their customers’ lives.

It’s time to go back to the bank.

Retail Banking Apps & AI Executive Summary

  • Banks have to offer core banking functionality in their banking apps
  • Account opening and onboarding experiences are still not good enough
  • Retail banking needs to offer better digital purchasing experiences to customers
  • The majority of customers believe fintech challengers offer better purchasing experiences than banks
  • Banks have to offer consistent customer experiences (CX). App, website and branch have to be aligned
  • Apps can be used to speed up the boring parts of visiting a bank
  • Personal Financial Management (PFM) functionality is more possible with open banking APIs
  • PFM functions increase customer engagement with their banking app
  • Retail banking’s implementation of AI is too often technology-led when it should be customer-led
  • Customers do not always see the benefits of AI & Machine Learning systems
  • Typical fraud investigations still take weeks or months, even with AI & ML
  • Artificial Intelligence & Machine learning can speed up lending decisions, but you still HAVE to communicate with customers all through the process
  • AI & ML can power customer vulnerability indicators during a recession
  • Banks can use this to help their customers, thus increasing brand loyalty
  • Pre-approved financial products can be distributed to customers in a hyper targeted way via banking apps using AI and ML tech
  • Investing in better digital and in-branch experiences can help banks be profitable even in a recession

Retail banking app being used on a  smartphone.
Photo by Tech Daily on Unsplash

What Should A Banking App Look Like? 

People live their lives on their smartphones. So it is not controversial to suggest that mobile banking apps are very important to a lot of people.

But although every retail banking brand has an app at this point, there is still a lot of room for improvement. In fact, a lot of banking apps lack core features that users want. This causes customers to engage less with their bank. Or even take their business to fintech providers who can give them what they want. 

So what should retail banks focus on when designing or optimizing their apps?

Core Functions Of Banking Apps

A banking app has to offer users core banking functionality. Banking apps should mirror the service a customer would get if they visited a branch. With obvious exceptions, you can’t deposit physical cash into an app!

Here is a list of core banking functionality that should be present in any banking app.

Account Opening & Onboarding

There are still many banks that do not offer accounting opening and onboarding in their apps. In some markets, this may be due to AML (Anti Money Laundering) legislation. But younger customers, who banks need to onboard for the future, are demanding a better onboarding experience. This is evident in research from Deloitte. A Deloitte survey asked “could the account opening experience be improved”. Of the respondents who said yes, 75% of them were under the age of 50. That is a bank’s future customer base.

100% digital and online identification and verification processes are here right now. So it is time for banks to offer account opening via app, if local AML legislation allows it.

24/7 Transactions

People should be able to send and receive money via their banking app 24 hours a day, 7 days a week. This might sound obvious, but too often banks get in the way of their customers. International transactions, which should be pretty much instant, take too long for some banks. Account transfers from one bank to another are not always instant either. Some banks also schedule a lot of maintenance time that creates friction for customers.  

People want and need to access their money whenever they want. If they cannot do that, they will go elsewhere.

Payments & Confirmations (including peer-to-peer payments)

Whether it’s via QR code or services like Apple Pay, people want to be able to pay for things. Including household bills. Without payments and confirmations, a banking app is not really a banking app.

Purchases Of Financial Products

An account holder should be able to apply for a credit card or loan or savings product through an app. Again, local AML legislation does impact this but there is no technical barrier to making this a reality. The technology is already there for most banks, it’s just that the experiences are often not very good. Abandonment rate is a huge issue for retail banks. In Europe, abandonment rates have increased in line with increased digital take up during the pandemic. Two thirds of consumers (according to Signicat) believe that fintech and mobile first brands are better than banks. 32% of consumers will not even start a digital application if they have to take documents to a branch.

Retail banking needs to offer better digital purchasing experiences to customers.

These are the absolute core services a digital banking experience should offer. Without one of these, a banking app causes friction with customers. When customers experience friction, they will go elsewhere.

But how do retail banking apps move to the next level? How can they delight customers?

Retail Banking Apps - Someone using a smartphone and a computer
Photo by on Unsplash

How We Can Make Digital Banking Experiences Better

So we know what base expectations customers have of their digital banking experiences. But how do retail banks go beyond those base expectations? Let’s have a look at how banks can make better banking apps.

Consistent Customer Experience (CX)

There’s a reason why a banking app should offer the same services as a branch. People like a banking app and the bank’s website to look similar for the same reason. That reason is consistency. In omnichannel commerce, people really like consistency. They want a unified experience.

Customers need support throughout the whole purchase funnel. This applies double for retail banking. Purchasing a financial product can be a huge life decision. So, it’s up to banks to provide the right support to their customers. A consistent CX and functionality can help with this. Banks can also use their apps to distribute helpful content to their customers. Financial products can be hard to understand. In branches, someone is there to help you. Retail banks can replicate this experience in apps with informative video content and online support.

Connect Your App To Your Branches

Consistent CX also means connected digital and physical retail banking. But most banking apps are not connected to in-branch experiences in any meaningful way. When they are, it can be negative. For example, if a customer has to bring I.D. documents to a branch for checking even though they tried to apply for a loan online.

But connecting digital and physical can provide enormous benefits. We touched on this in part 1 of our retail banking series. Banks can use apps to improve the in-branch experience (and vice versa). Customers could use their banking app to book appointments in-branch and use digital customer support. Branches could send customers personalized offers and notifications when they are in-branch. Banks could use their apps in branches in a similar way to how Apple uses their store app in a physical Apple location. Imagine a banking app where you could perform all your core banking functions. But also make an appointment to go to a branch to learn more about financial products.

Apps can be used to speed up the boring parts of visiting a bank. Need to sign some documents for a mortgage? Use your banking app to make an appointment, turn up on time, sign the documents and receive a digital copy instantly through the app. 

Too often banking apps are separate from physical branches. It’s time for retail banking to move on from this and see everything as a connected experience.

Personal Financial Management

Personal Financial Management (PFM) apps are all the rage. With the advent of open banking APIs there is plenty of scope for retail banks to help customers manage their finances. All within their banking app.
This will help to keep customers engaged with their bank. Which in turn helps banking profitability as more engaged customers means more financial product take up.

AI & ML In Retail Banking – A Game Changer For Banking Apps

Most banks are very aware of the potential benefits of AI (Artificial Intelligence) and ML (Machine Learning). According to OpenText, 80% of banks are aware of the opportunities AI and ML can bring.

But are banks approaching AI and ML in the right way? And how can AI and ML bring the most benefits to customers?

AI In Fraud Detection & Notification

It’s estimated that global losses from online payment fraud will exceed $343 BILLION over the next five years. That is a serious amount of money. It is a lot to lose for banks but the story is even worse for customers.  KPMG ran a Global Banking Fraud Survey and found that over half of respondents recovered less than 25% of fraud losses.

So fraud is bad for banks and terrible for customers. It is also increasing. 

One of the first areas banks applied AI and ML systems to is fraud detection. Retail banks (or at least a lot of them) have AI or ML systems in place focused on fraud. 72% of large banks with over $100 billion in assets have leveraged AI for fraud detection. However, only 5.5% of all financial institutions have an AI fraud detection system in place.

So the biggest brands are covered in this area, but this coverage is not everywhere. Retail banks in big, but developing markets, may not have the same robust systems in place. Also, are the big banks really using AI in fraud detection to help customer experience? Often their approach is technology-led, not customer-based. 

Put simply, the customer does not always feel the benefit of these cutting-edge fraud detection systems.

Many Banks Use AI & ML In Fraud, With No CX Benefit

Any AI or ML project should be of benefit to the customer. It should result in changes to customer journey and experience. Those changes should also always be positive. With fraud specifically, AI and ML should cut down investigation times. Customers should be able to get refunds or compensation fast. Which drastically improves their perception of their bank.

This is the core benefit of AI and ML in fraud detection. It is the benefit that customers will feel. But this benefit is still not clear to customers. Typical fraud investigations still take weeks or months. This is very distressing for customers. On top of this, customers are not well supported when reporting fraud. Average call wait times are over ten minutes.

How Can This Change?

This is terrible for customer experience and, for banks, terrible for long term profits. Customers remember when banks do not support them. 

AI and ML systems have to be better integrated into fraud investigation. Plus AI & ML will also help to keep customers instantly appraised of their investigation. Personalized notifications can be sent via their banking app about their case at every step. This is not complicated to do. The technology exists, but banks have not put the customer first when implementing AI in fraud detection. That has to change right now.

Banks should adopt a customer-centric approach when applying AI and ML. Otherwise they will lose business to challenger banks. It is that simple.

Customer Benefits Of AI In Risk Management

As mentioned above, customers should feel the benefit of AI implementation. Risk management is another area where AI impacts customers, but they do not always see the benefit.

One obvious area where customers could feel an impact is lending decisions. AI and ML can manage risk management in lending, resulting in quicker decisions. Challenger fintech companies operating in niches like B2B, use algorithms to deliver loan decisions in minutes. With all the data at their disposal, there is no reason banks cannot do this. 

But, as with fraud, it is important to keep the customer apprised of what is going on via in-app notifications. If the decision is taking longer than expected. It is important to note that AI and ML systems can also display bias. So for customer experience reasons, communication is vital. You cannot turn down customers and not tell them why. Automated notifications, as well as calls from support professionals, should explain to customers why certain lending decisions result in a fail.

Another area of risk that impacts retail banking customers is investments. Better AI and ML investment software for retail banks can help recommend new plans for customers. Using data held about customers, banks can determine if they are risk averse, or risk positive. With a purchase journey a bank could even see if they want to invest in ethical funds. The app could then suggest different potential funds to invest in with the option to talk to someone if the customer needs it.

Use Of AI In The Coming Recession

The coming recession will be difficult for everyone. It may also bring about very quick changes in lending policy. AI and ML can pivot to new market conditions in an instant. Making far better risk management decisions at scale.

But the duty of a retail bank is to help its customers. It’s here that AI and ML could help banks identify potentially vulnerable customers. 

As part of the personal financial management features of a banking app, a bank could see when people are having a tough time. Spending habits may rapidly change. An AI dedicated to customer safety could spot these changes and things like changes in credit reference data.

This becomes even more important when a customer asks for help. This data could highlight life events, health needs and other needs that are not obvious from data that is already held. This is all data that the bank can use, combined with natural language processing, to drive automatic (and predictive) vulnerability indicators. This can then help customer support teams to help this customer in need. 

Many people in a recession will have a tough time. If a bank helps them through it, they will remember that.

Pre-approved Personalized Financial Products

AI and ML could serve pre-approved, personalized financial products. If the customer shows no sign of financial distress. New options for things like personalized credit and life insurance policies are shown in-app to customers. These customers could then buy them in seconds, with a strong AI and ML pre-approval process. 

This could be especially effective if a customer is using their banking app in-branch. The offers could be tailor made for specific branches and customers. If that branch is in an area that, for example, has a large concentration of high-net worth customers. This could include areas like central business district branches. Which may have more senior corporate type customers than suburban branches may have.

Photo by D koi on Unsplash

Recession Pressures On Retail Banking

If you have switched on the news at any time in the last six months you will know there is a recession looming. With pandemic-ravaged supply chains and inflation at the highest it has been for years, things are going to be tough in 2023.

Interest rates are very volatile at the moment which presents a problem for retail banks. If the recession bites hard, customers will suffer. Which will see greater defaults on products such as auto-loans and mortgages. Take up of those profitable products will also shrink by a large margin.

Business costs for banks will also rise along with inflation. Talent acquisition costs will be high as will investment into new technology, no matter how essential that might be.

But businesses that invest in customer experience weather recessions better than businesses that do not. Retail banks are no exception.

Investing in better digital and in-branch experiences can help banks remain profitable. They can increase customer engagement and increase brand loyalty. Banks are actually in a strong position right now. With the right strategic moves, and a holistic customer experience strategy, a retail bank could see opportunities even in a recession.

Capital reserves for most banks are high at this moment. Due in no small part to some banking industry conduct in the last recession. But opportunities are there for banks who can put customer experience first. Products like income protection insurance may even become more popular. Leading to new lending opportunities.

Banks can seize opportunities to not only survive the recession, but also help their customers while they do it.

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Do you want to improve your retail banking experience? MAQE can help. We are experienced in creating AI & ML systems that mitigate loan risk and experts in creating great customer experiences. Get in touch via [email protected].