Virtually every U.S. bank is engaged in some form of digital initiative. The promises of digital technologies include lower operational costs, more product innovation and improved customer experience. Unfortunately, despite all the hope and potential, many banks struggle to translate their digital banking innovations into financial success.
Take mobile payments, for instance. Hundreds of millions of dollars have been invested in the technology and network. Yet despite high consumer awareness, the adoption rate for mobile payments remain disappointing with less than 20% of Americans using them on a regular basis. A similar outcome is happening with cash management and savings apps. Despite the success of Digit, Qapital and Acorns in helping people save, the majority of companies in this space are struggling with how to price their offerings in order to turn a profit.
In a joint RateWatch and Simon-Kucher & Partners study based on 215 unique survey responses from U.S.-based small businesses, we found that 34% have never used mobile banking even though their financial institution offers it, and up to 69% have a negative perception of mobile banking services offered by their institutions. Reporting on the study, an article on TheStreet.com noted that online banking users have declined: “In 2015, only 9% of survey respondents did not use online banking frequently or at all, but in 2016, the number has now grown to 20%.”
Consumers’ lackluster interest in and unwillingness to pay for digital banking features suggest that we are doing a poor job of communicating the value of our digital innovations to the bank customer. Consumers will only purchase a product or adopt it if they feel the value they will receive exceeds the price paid or effort required to use it.
The problem stems from the fact that most banks approach their digital initiatives as a process improvement or customer acquisition effort. In a survey of more than 500 financial institutions about their strategic priorities in 2017, the Digital Banking Report found the top five were: improve the digital experience, enhance data analytics capabilities, find ways to reduce costs, invest in innovation and meet regulatory compliance.
There was no mention of designing, pricing or selling digital banking innovations to return a profit when this should be a strategic imperative.
If we want our digital innovations to be profitable, we must follow a path that has a clear mandate for profitability and return on investment. We have to start pricing digital offerings to accurately reflect the value delivered to the customer, and stop giving away core digital banking services for free in the name of customer acquisition.
This practice is even more disturbing when there are customers willing to pay. For example, an article in Credit Union Times reports (registration required) that small business customers would be willing to pay on average $5.80 per month to receive transaction verification and advanced warnings by mobile phone. Additionally, according to research we have conducted on behalf of banks and financial services clients, we have found customers, in general, are willing to pay for certain money management and peace-of-mind features. These value-add features can be priced separately and monetized.
The success of our innovations is dependent on how well we can sell them through our digital storefronts. In today’s digital world, it is no longer enough to assemble an assortment of digital features such as mobile payments, money transfers or account monitoring and hope they will sell themselves. They won’t. We have to stop looking at websites as an efficient way to streamline banking services. Instead, we must incorporate new techniques like gamification, what-if analysis and interactivity to transform the digital purchasing journey into one that is more compelling and impactful.
Banks are also behind in tapping big data and analytics to acquire a deeper understanding of customers’ buying behaviors and financial preferences. We don’t have a clear idea of what customers value and what they are willing to pay. This first step in understanding customers’ willingness to pay and utilize is arguably the most important. Yet, all too often, this intensive pricing and marketing groundwork happens towards the end of a product development process or after a digital product has already launched. Then it is too late for corrections and adjustments.
Digital banking presents a huge opportunity for banks to rebuild pricing power and improve margins. However, success is reliant on a rigorous process to price, design and sell digital innovations. Thoughtful consideration must be paid to step into the customer’s shoes to understand value from their perspective, align prices to customer value rather than costs, and focus on communicating in a coherent fashion. Otherwise, we will see the launch of more suboptimal digital offerings that fall short of customers’ needs, their willingness to pay, and our profitability goals.