One of the most interesting aspects of the digital banking revolution is that in some ways it is actually taking banking back to its origins. The concept that links the original “bancos” in 13th-century Italian piazzas to the cutting-edge developments in (of) today’s Fintech hubs is hyper-personalisation. Using permissioned real-time data to generate customer-specific insights, banks can offer services highly tailored to customers’ needs.
The idea is not new. The original banks were a very good example of hyper-personalization in the absence of technology. They had deep customer understanding because many of them served a segment of one: for instance, the Medici family, or the Republic of Genoa. They offered unique, personalised financial arrangements and terms. Moreover, they focussed not on selling products but on helping a client achieve a certain unique outcome. This personalisation was gradually lost, from the Industrial Revolution onwards. As the Industrial Bank arose to meet increased demand, banking became standardized. That meant offering a limited range of standard products to a mass market. Only the wealthiest continued to receive tailored services.
In the late 20th century, what is known as the IT Bank, essentially offered the same products as the Industrial Bank, but introduced computers and IT to realise internal efficiencies and increase profit margins. Changes were driven from the inside, arguably with little real benefit to customers. In fact, some of the consequences of the IT Bank could be said to have made things worse for customers: centralisation and reduced local presence; in-branch staff with more skills in sales than banking; and the implementation of centralised and rigid ‘computer says no’ style rules. The IT Bank focussed on efficiencies in the bank and its tech stack; it seemed to forget the customer.
Excitingly, the digital revolution is today enabling hyper-personalisation again and indeed bringing it to the top of the banking agenda. Hyper-personalisation is a key way in which banks can differentiate themselves and thrive in testing financial conditions. As the impact of the 2020-21 pandemic continues to be felt, and with interest rates at record lows, banks can’t just rely on traditional interest-rate-bearing products. Hyper-personalization is defined as using real‑time data to generate insights, by using behavioural and data science to deliver services, products and pricing that are context-specific and relevant to customers’ manifest and latent needs. Using digital technologies, a single bank will be able to serve many thousands of individual customers, while still treating each as a segment of one. Banking is coming full circle, but this time far more customers will benefit. However, to successfully make use of consumer data for marketing, banks have to lawfully process and use customer data in an increasingly complex regulatory environment. Some of the regulatory issues that retail banks must navigate include the new prince of data protection – the Protection of Personal Information Act, 2013 (POPIA).
Besides personalising their own services, banks should also be considering partnerships with Fintechs. The bank then becomes the curator of a marketplace where - through a single-entry point - a customer can be offered highly personalised services from a rich array of fintech providers. They can then choose the one that best enables them to get the outcome they want. These Fintechs will have access to a customer’s financial landscape and can therefore offer products that suit the customer precisely in an area they specialise in. The bank in turn takes a slice of the profit earned by fintech providers.
Whether in lending, investing, savings or insurance, it is hard to think of a service banks could not offer this way. Of course, making the user experience as smooth and consistent as possible will be crucial, whether the bank is providing its own service or one from a partner third-party provider. But developing the front-end and the necessary APIs is significantly easier than attempting to offer all these services yourself. Moreover, banks are in a strong but benevolent bargaining position with Fintechs, many of whom still find scale and profitability elusive.
In this way, banks can create an offering that, as with the 13th-century Relationship Banks, is firmly about the customer and their outcomes again, rather than merely about pushing products that may not be a neat fit with what the customer actually needs. As we enter the new normal and the age of digitisation, it appears that the demand for hyper-personalised products and services will drive the future of banking. However, the banking sector will have to navigate a myriad of laws and regulations to ensure that in the process of creating hyper-personal solutions for their customers, they do not breach their privacy.