For the Incumbent Banks Phygital must be the New Normal

Sergio Magalhaes, IT Director, Millennium bcp

A lot of Banks in Europe, and particularly in Portugal, are always undergoing severe cost cutting initiatives. The bank’s profitability remains under pressure from the economic environment. During the last years was the low interest rates, legacy systems and competition from other players in the market, like Digital Banks and Fintechs; in the first quarter of 2022, namely after the War in Ukraine, the only variable that changed with this crisis is the rising of the interest rates – all the other risks and threats are rising even more. Before the inflation start being out of control, and the central banks starts the journey to rising the rates, the revenues were diminishing namely because the interest rates were in historical minimums and costumer behaviors were rapidly changing and shifting to digital channels - where price competition and costumer attrition is higher. Today, while higher interest rates hold the promise of wider lending margins, the incumbent banks cannot rely exclusively on the good news of the normalization of the monetary policy to improve their profitability.

The Incumbent Banks must tackle their structural issues, namely the Governance, the future and the size of the “brick and mortars”, the investment in the Digital Competences across the organization, the IT modernization, the establishment of new business and partnerships or even the workforce needed to run the business efficiently. In a nutshell, all the areas must be revisited in a “Zero Based Mindset”, reinforcing the strengths and rebuilding the weaknesses until they begin to contribute for the future of the organization, with these new economics variables in mind. The bad news for the banks that still relying on the “old fashion” economic models – expecting the same loyal customer base stability – are even worse; as smart technology like Alexa or Siri, IoT Devices, etc… enters our homes, cars, work and leisure time, costumers from those “old fashion” Banks expect services that not only cover both their online and offline needs but also combine them in a way that the consumer experience improves in each interaction and touchpoint. Nowadays the banks are being judged by consumers based on their last, best customer experience. And if this is an opportunity for marketers to innovate and reach potential customers via ever-expanding touch points this also a challenge for the incumbent banks: How to be always on top of the preferences of customers delivering the same (or better) user experience they have in the day-by-day of their lives?

In one hand, we see the digital movement gaining momentum and we are investing in it, but, in the other hand, we still believe that branches are a key driver for customer relationship, retention and sales. On top of this, depending on the country, there are some of them with more heavy users of cash amongst the EU countries. For the banks in countries where the cash “still the King” the only way to survive is to adopt strategies was to merge the digital world with the physical one, and enhancement it with a sparkle customer experience.

In Portugal, Millennium Bcp branch network is also being optimized, with a reduction of over 450 branches in the last ten years, representing more than 55% of the network and almost 40% in the number of employees. We can find several examples of footprint reduction in many banks around the world, but this was an imperative for the bank to adapt to the new challenges in Portugal. Customers are looking for convenience with easy access to services and the possibility of using multiple platforms and multiple channels to keep in touch. Some of those customers are searching for ATM’s and other equipment’s or for a bank employee in a branch that can advise them for special services or life projects. That’s why, in 2014 at the same time that we were closing some locations, we created a new type of customer-oriented branch, that is a holistic approach to an array of innovation in service and platforms. As so, the branch is either a place for servicing, as a place for sales, as even a place for digital migration and retention.

We all know that a lot of Incumbent Banks have been in the transactional business for far too long and we still have a lot of this heritage completely emceed in servicing processes, but transactions are “boring” and “repetitive”. The banks have to change from the “financial transactional business” to the “financial services business”; because service is more than a transaction, is an experience and to survive the traditional banks have to shift from the world of the transaction to the world of the experience. Having a “Mobile First” strategy will help to reach this goal to shift from the “financial transactional business” to the “financial services business”, combining the best performance, speed and User Experience of The Digital World with the Human Touch of the Physical World, served by motivated and well trained employees to advice and really help customers to reach their financial goals instead of doing transactions.

“All these new technologies poses significant challenges for banks, while at the same time providing opportunities for efficiency gains and new business models”

From all the experience and observing several markets evolution (U.S. included) I believe that the future for the Incumbent Banks that still have branches to serve their loyal “branch lovers” customer base will be the Phygital; we already see this trend in other retail business approaches that the customer already have options to purchase and keep in touch with the Bank in both the physical and digital realms. Mobile is the common denominator between customer retail experiences no matter what type of business or industry we are talking about. One of those days I was reading a Deloitte report, about shopping retail in the US, where was reported that more than 90% of consumers now use their phones in the shopping process, and according to Think With Google people are also using their phones as an “in-store research adviser” with a massive 82% of smartphone users saying they consult their phones on purchases they’re going to make in a store. And what can banks learn from those figures? This behavior shows us that the portability and ease of use associated with smartphones should lead the Banks to widespread adoption of Phygital technologies in branches creating the possibility of highly personalized in-store experiences and allow businesses to strengthen their digital reach while promoting convenient, lower-cost channel options for customers. Considering that almost every customer, no matter the age or “segment”, has a smartphone the use of facial recognition and other biometric software should enable the banks to recognise costumers and create optimal experience signing and validating even when doing those “boring transactions” simplifying the always heavy compliance part of the processes.