Loyalty is no longer the main driving force when choosing a bank, says Lan-Ling Fredell, innovation and fintech expert at PA Consulting.
Nordea, Swedbank, SEB and Handelsbanken currently enjoy a total market share of approximately 70 percent, a figure which has largely remained unchanged over the past five years. These major Swedish banks have continued to have a strong grip on the most common banking services linked to savings accounts and housing loans. The Swedish Quality Index customer survey for the banking sector also showed in 2020 that three out of four Swedes use services from more than one bank. Among these, one in four use more than three financial service providers.
But with reduced customer loyalty and an increasing focus on digital services, there is a high probability that fintech companies will gain a stronger foothold in the private customer market. Historically, Swedish fintech companies have found a niche in profitable areas such as payment solutions, consumer loans and stock trading. But the market is beginning to change as global competition in fintech intensifies. In the Swedish market alone, there are several new players such as Revolut, LunarWay and PFC (formerly Betalo). A majority of these companies have so far not sought to replace the traditional banks. Rather, they have opted for a combination of low fees for foreign exchange transactions combined with more personal management of capital in a way that appeals to the younger and more digital generation.
How should banks act to meet the competition from fintech companies and protect their profitability in the long term? To find out, PA Consulting conducted three studies, two qualitative and one quantitative. Based on the results, banks should prioritise three areas.
Focus on interest rates and prices
Although digital services are guaranteed to drive new behaviour and expectations among customers, it is dangerous to conclude that digitalisation in itself is enough to keep customers happy. Digital services are no longer unique selling points but rather a hygiene factor that 80 percent of today’s customers expect.
The top customer priorities in choosing a bank or financial services provider are interest rates on loans (72 percent) and prices for services (59 percent). Not surprisingly, cost is still one of the most important factors.
Trust and good service is important
Customers want traditional banking products to be easy to use and payments to be fast. They want low-interest loans and savings products that generate high returns. In addition, rewards in the form of low costs for currency transactions as well as bonus points for airlines or even cashback are highly valued among customers who travelled frequently before the pandemic.
The study also showed that customers want to feel appreciated and visible, as well as valuing good personal advice. For those who were lucky enough to develop a long-term relationship with a reliable adviser in their bank, loyalty was very high. Neither strong brands nor low fees can compete with trust and high levels of service.
Let customers choose products and services from different brands
With so many people using more than one bank for their financial services, an alternative may be to offer a platform where customers are free to choose which products and services they want to use, without worrying about the brand or supplier. For the major banks, this can be a successful strategy as Swedish consumers, according to our studies, trust traditional banks more than new players and are more likely to buy services from fintech companies if they are affiliated with a bank they already know.
Given the above, the major banks should offer services from the fintech companies to a greater extent in their banking apps. In this way, banks can create value for customers while offering features they appreciate without having to spend time and money developing them on their own.
The more services the bank integrates into an app, the more time consumers will spend on it.
In an increasingly fragmented banking ecosystem - with consumers often having more than one supplier - this becomes a competitive advantage. The bank that can offer its customers all the financial services they want, without having to leave the bank's ecosystem, is likely to enjoy greater loyalty by offering convenience.
Banks should stop chasing digital bells and whistles. They should establish mutually beneficial partnerships with fintech companies that appeal to customers. By establishing a platform that offers both their own and others' products and services, the offer will both retain and attract new customers. It is a model where everyone is a winner.
Lan-Ling Fredell, innovation and fintech expert at PA Consulting