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From restoring the past to creating the future

Customer Engagement“Now that digital transformation is becoming mainstream it’s time to raise the bar”, Roger Peverelli and Reggy de Feniks argue. They just launched their new book ‘Reinventing Customer Engagement. The next level of digital transformation for banks and insurers’. In this blog, I interview Roger Peverelli, expert on customer engagement and innovation, on why customer engagement is a key factor for financial services to create a future. Peverelli: “The financial services industry is in a new phase. Banks and insurers should operate much closer to the market. Digital technologies and changing customer behavior are changing the fundamentals of the industry; too fundamental to be solved by cost focus alone.”

What are the main changes/challenges the financial services industry is faced with?

“When it comes to everything digital, we live in a world of exponential growth. Look at the growth rate of smart phones, tablets, sensors, connected devices, wearables, social networks, and the ever-increasing power of processors. All these developments are enhancing each other, creating a perfect digital storm. And there is so much still to come that we cannot yet anticipate or foresee. We are at the leading edge of a technology revolution in financial services.”

What is the effect of this technological revolution?

“For the first time in history, consumers have access to better technology at home than employees of banks and insurers have on the other side of the screen, the phone or the counter. The balance of power between customers and financial institutions has changed permanently: customers are in control. Smartphone and tablet customers hold the tools of change in their hands.

What customers expect and what they do has changed dramatically. They are becoming more demanding, but that’s the least of it. New technology redefines old behavior and new paradigms emerge. Technology changes customer behavior. It’s becoming more and more difficult to know what customers expect and want to have next, and when to have that ready.”

How should companies react to this change of paradigms?

“At practically every conference and in every boardroom session where we speak we are asked: when are we going to be ‘uber-ized’? Entry barriers have been eroded due to the advancements in technology. By making intelligent and innovative use of technology and data, new entrants are attacking the frictions – the complex processes and the product and pricing imperfections customers deal with when working with financial institutions. New entrants have the advantage of digital DNA to leverage technology, which enables better service at lower costs. They strive to be cheaper, faster, smarter, better and customer-centric to boot.

New entrants are not likely to replicate the well-known universal banking or insurance models. They introduce new value propositions and business models with less frictions and new service levels. This changes the framework of reference of customers, and inevitably their levels of expectations. Customers expect traditional players to offer comparable innovative services as well. In cities where Uber is active, we have seen this happen. Traditional taxi drivers have had to adjust. They are treating their customers more courteously, and the average waiting time for a taxi has shortened.

That is the real impact. Not all new entrants will survive, and only few will acquire significant market share, but they will set new standards. Incumbents need to step up to the plate to keep up.”

What is the role of the government in creating an ecosystem for traditional stakeholders and new entrants to stimulate innovation?

“Regulatory changes are an important catalyst for change. Regulation forces financial institutions to fundamentally re-evaluate their business model. It requires financial institutions to better understand their customers, to offer them products that meet their needs, to be transparent about their pricing and to stop practices that are not fair. However, we can see that far-reaching regulation and supervision also have some unintended consequences.

Financial institutions have become even more prudent and hardly dare to think ahead and move forward. “You can’t think further than the supervisor”, “You will be externally and internally punished”, and “It’s like walking through wet cement.” These are just some illustrative quotes we have recorded. Fear is the enemy of imagination. Many financial institutions give – out of necessity – more attention to the regulator than to the client. Large European banks and insurers spend hundreds of millions of euros every year to keep up with regulatory change.

This is at the expense of necessary investments in innovation and intrinsically improving services to clients. According to a British banker we spoke to: “We are wrapping ourselves up in more and more sticky tape.”

Roger Peverelli

How does this affect financial institutions?

“All these developments lead to the same consequence: margin pressure. And to make things worse, the systems of most financial institutions are often older than the customers they serve. Outdated systems result in high costs and make it difficult and costly to act quickly and effectively on customer wishes. A German insurer shared this telling formula with us: “Regulatory overhead + old technology = high prices + bad services.”

Is the financial services industry adequately responding to these huge changes?

“Operational excellence and cost efficiency will remain priorities for banks and insurers in the years to come. In view of all the challenges it is not surprising that digital transformation is at the top of the agenda in virtually every financial institution; as an all-encompassing solution leading to drastic cost reductions. In most cases, it revolves around moving traditional banking and insurance to the digital world; digitalizing processes and transactions, and optimizing operations.”

What is the first hurdle that financial institutions need to take with this digitalization?

“Cost reduction is absolutely necessary. That is why taking the complexity out of the organization and creating scale economies are definitely good themes. But many banks and insurers see the digitalization of the current processes as the result. In our view, all these efforts are just bringing the basics up to date; meaning it’s nothing more than a qualifier. What they do is restore the past, they are not creating the future.”

So, cost reduction is just one piece of the giant puzzle, what are the next steps?

“Financial institutions must address all disruptors. Not only the margin pressure, but also the changes in customer behavior because of new technologies. So far it seems difficult to turn operational excellence into a proposition that is distinctive from competitors. Banks and insurers not only have to work with operational excellence, but also must operate much closer to the market.

Financial institutions must seek out new added value and new revenue streams. How can we create substantial customer benefits that surpass solving basic frictions? And how can we create new revenue streams and a next level of business models? The financial services industry is in a new phase. Digital technologies are changing customer behavior, and combined, they are changing the fundamentals of the industry. In a way, comparable to shifting tectonic plates; too fundamental to be solved by cost focus alone.”

Why is it necessary to reinvent the way financial institutions engage with their customers?

“Because of digital technologies and changing customer behavior, a vast number of conventions on how financial institutions should serve customers have become obsolete. Yet many financial institutions are still working with these. The new principles are missed or underestimated, and the implications are not always understood. The gap between the old conventions financial institutions work with and the new expectations customers have is becoming wider at an increasing pace. This causes banks and insurers to lose relevance, and leads them to create less value for customers than they could have.”

What is the solution to close that gap?

“We believe that financial institutions need a vision on customer engagement to close the gap between ‘digital transformation to restore the past’ and ‘digital transformation to create a future’. That is why we chose customer engagement as the focus for this book.

Such a vision on customer engagement needs to be informed by changing customer behavior and fueled by digital technologies. Which requirements does new customer behavior set for the way we engage with our customers? What new forms of customer engagement are made possible by new technologies? How can we deploy technology to not only reduce costs, but simultaneously to lift customer engagement to a higher level? How can we use new engagement forms to open new revenue streams?”

Those are important questions to ask, but what are the right answers to strengthen the connection between customers and financial institutions?

“The next level of digital transformation is about reinventing customer engagement that leads to increased and new value for customers, as well as the financial institution. If you want to grow in a saturated market, you must make sure you are the most recommended company. More and more financial institutions realize that customer engagement is now the primary source of growth and profit. And they are right.

Furthermore, customer engagement offers new points of differentiation and has become a key driver of choice. Finally, as mentioned before, in almost every market and category we see innovative new entrants. And they will set new standards. Traditional players will have to keep up. How do I acquire customers when customers are behaving differently? How do I retain my customers over time?

In the past, it all worked out by itself, but these days, with easy switching and insight in everything, it’s a serious worry – and the newcomers are better at it than the incumbents.”

What business models will create the best revenue streams in the future? 

“In our view a next level of customer engagement is the winning business model of the future. In our book, we introduce three guiding principles for new customer engagement strategies: Always part of life, Contextual ecosystems and Simply human. Guiding principles that arise from what new customer behavior demands, and what new digital technologies make possible. These should be leading in the years to come: to use digital transformation not only for operational excellence, but to reach the next level of customer engagement at the same time.

Always part of life is about smartphones and connected devices giving financial institutions an unprecedented entry in the lives of customers, to become always part of life. Thanks to mobile, financial institutions can now accompany their customers wherever they go. For customers, mobile is already an obvious part of the experience for any type of service; including banking and insurance. It makes mobile not only suited for routine actions, but also to introduce new conversations to nurture the relationship. Other connected devices assist customers where they spent much of their time; at home, at work, in their car. All these devices give the opportunity to be close to customers and become part of their daily lives, right where it matters most; offering additional indispensable services that really support their everyday life. Banks and insurers should launch applications that engage with customers on-the-go, that wave self-tracking through daily life and that provide new ways to empower customers and to support in self-improvement; in financial, physical and mental well being, including protection, safety and security. Our book includes many best practices of banks and insurers that have introduced new services and new business models that tap into ‘always part of life’.

Virtually everyone agrees that financial services markets have shifted from push to pull. Although banks and insurers are aware of this transition, they have made hardly any adjustments to their customer engagement strategies and required capabilities. They still use predominantly push strategies – just like many other large corporations, by the way. Contextual ecosystems is about creating so-called pull platforms. We studied more than thirty such platforms – of Nike, Unilever, Ping An, Alipay, Westpac, Mashreq, FNB, eToro, Scottish Widows, and many more – and derived eight key characteristics financial institutions can put into practice.

The third engagement principle is Simply human. Banks and insurers should manage the feelings side of financial services much better than they do today. Banks have processes and products. Customers have dreams. Insurers see risks. Customers feel uncertainty. To relate to their customers, financial institutions need to build in emotion. In the physical world, you can do this by looking each other in the eye, putting yourself in a vulnerable spot. Humans inject emotion, empathy, passion, creativity, and can deviate from the procedure if needed. Banks and insurers need to create a similar connection digitally, but this is too often forgotten. With so many people working at financial institutions there is also an opportunity to create the best of both worlds.

Banks and insurers can deploy technology to empower human front-liners even more, to produce an even better experience and performance. For instance, by using advanced data analytics to support advisory conversations.

The guiding principles relate to one another like Simon Sinek’s “why”, “what” and “how”. ‘Always part of life’ signifies the domain in which financial institutions should supply their added value, and therefore can find their purpose. ‘Contextual ecosystems’ are the new concepts banks and insurers should apply in customer engagement. ‘Simply human’ describes how they should present themselves in day-to-day service and customer engagement strategies.”

What are the key factors that will drive future success?

“Applying technology for operational excellence is easy. Using technology to develop new forms of customer engagement is a lot harder. It requires imagination, and more guts to actually implement it. We have written this book to help with that.

A list of key factors may suggest that developing the next level in customer engagement is an orderly mechanical operation. The opposite is true: it is about making financial institutions fit the customer, making it a different perspective than the customary. It is like a change of lifestyle.”

So, what should financial institutions do now, just follow the three guidelines?

“The three guiding principles combined do not offer an instant recipe, but they do define the search space, where every bank or insurer has to find its own flavor. Distinguishing concepts can only be created in this way. However, in our book we did include practical guidelines as well, such as a different approach to digital transformation, different models to work with fintechs to accelerate innovation, and what we called ‘ten essential talents’: Customer obsession, Advanced data analytics skills, Building relations (with customers and the ecosystem), Open mind, Agility, Experimentation, Creativity, Orchestration, Gather the right people, Leadership. Too many to expand on here, my advice is to just read the book.”

For more information on the book, visit www.reinventingcustomerengagement.com or Amazon.

This article was posted in Banking.

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