In the uncertain economic times resulting from the corona crisis, the advice given by banks has become more important to consumers than it has in a long time, says Lan-Ling Fredell, fintech and innovation expert at PA Consulting.
Technology, competition and regulatory changes are changing the banking landscape. Traditional banks are struggling to find a new role while focusing on regulatory compliance and answering questions about the transition to new core banking systems. Instead, Fintech's focus is on using data and new technologies to provide new digital services primarily to younger users. While several fintechs, backed by venture capital, have shown strong customer growth and expansion into new geographical markets over the past year, traditional banks with technical constraints and conservative cultures are struggling to catch up. We are talking about banks which, despite strong balance sheets and profitable products, act less like leaders and more like followers in the pursuit of modern mobile apps and fintech partnerships. This is despite the fact that it is still unclear whether fintechs will be profitable and whether consumers will leave their banks for fintechs.
Customers expect banks to have reliable and predictable services and trust them to keep their savings secure. A new qualitative Swedish study from PA Consulting reveals that banking customers of any age are more likely to buy services from fintechs who also have a bank behind them. While customers like to try new services provided by fintechs, they are also choosing to keep their traditional banks. This is in line with what last year's customer satisfaction survey from SKI showed. That was that Swedes choose to have several suppliers, including their traditional bank, for different types of financial services.
The current market turmoil may adversely affect confidence in fintechs. One concrete example is Robinhood, a US-based service that is popular with millennials and who in 2013 introduced a free stock trading app on the market. In February 2020, the app saw several interruptions which resulted in customers missing significant profits after a sharp decline in the market due to concerns about the financial effects of COVID-19. Robinhood's problems then continued and a technical hitch the following week created further interruptions, after which some customers began to tweet about their dissatisfaction. Some threatened to close their accounts, while others questioned whether the business model was about selling user data rather than offering free stock trading. This is an example of how turbulent markets and the downturn can lead to consumers prioritising the stability of traditional players with more technically reliable platforms.
Customers want products that give them the greatest return on their savings. We are talking about low interest rates on loans and high returns on investments. PA's study shows that customers are positive about switching banks to get a lower mortgage interest rate or for a better savings rate. They are interested in new insights and service packages from fintech suppliers, but not at the expense of services that have a direct impact on the return on their capital or savings. When, three years ago, Marcus, Goldman Sachs retail bank, offered higher interest rates, millions of customers chose to invest their savings with them. It should be noted that the success of that initiative, that today has generated investments of the equivalent of $ 60 billion, can be directly attributed to the interest rate increase and not the mobile app that the bank chose to launch only recently.
In Sweden, interest in investing in low-index funds has increased substantially in the past year. Last year, index funds' net sales accounted for 99 percent of total equity fund sales. The index funds currently account for over 18 percent of total capital fund assets, compared with 8 percent in 2010. In a 2019 survey, 54 percent of respondents stated that fund fees are a significantly more important factor in choosing an investment than risk levels and historical returns.
While consumers place a high value on returns on their savings, they are also aware that they lack knowledge. In the PA study, a large proportion of respondents, regardless of age, responded that they now turn to their parents for financial advice. They felt that bank advisors were primarily trying to sell products instead of giving good advice. They questioned, among other things, whether young advisers, such as millennials, really have the knowledge and education required for the role of financial expert. On the other hand, there were also examples of customers who, regularly, were very satisfied with their bank advisors, which they rewarded with loyalty to the bank.
Today's bank customers are pragmatic and want reasonable loan terms and a good return on their savings. In the current uncertain market climate, it is more important than ever for customers to trust their banks and get good advice with innovative solutions that secure their financial future. The bank of the future will be the one who helps customers achieve that aim.
Lan-Ling Fredell is an innovation and fintech expert at PA Consulting