No matter where you travel in the world, you can always rely on at least one constant- wherever you visit a McDonalds restaurant, a Big Mac hamburger will taste the same. That’s because the Big Mac is one of the most famous examples of a standardized product. Standardization is key to the fast-food business model as it relies heavily on consistency.
Standardized products dominate the financial industry too. Most banks offer a similar range of ‘off the shelf’ products which suits the back office- if not necessarily customers- because they deliver economies of scale.
Significant resources may be required to design a standardized financial product, but once that process is complete, the bank can easily replicate it. Much of the process can be automated, and the provider isn’t under pressure to innovate or educate customers as they know what to expect.
This increased efficiency cuts costs. The investment required to create a new product is spread across millions of customers, which is important because margins are typically tight on a product like a loan account.
Customers also benefit from standardized products as familiarity makes it easier to shop around. Challenger banks have taken advantage of this tendency, offering higher interest rates on savings accounts in a largely successful effort to steal market share from the incumbents.
From standard to personal
However, lately the trend in financial services has been towards greater personalization. Customers have become accustomed to Netflix recommending their next box set or movie based on their viewing habits, and they expect an equally bespoke service from their bank.
Personalization presents banks with several advantages.
Firstly, it leads to greater engagement. A bank can deliver a much better experience by providing a product that closely meets an individual customer’s needs rather than the needs of the masses. For example, customers have different goals and risk profiles, a challenge Futora solves by allowing banks to offer personalized investment products previously only available to high net worth clients.
Personalization builds loyalty by showing that banks understand their customers. According to Deloitte, 68% of millennials think challengers understand them and adapt products accordingly compared with 43% who feel the same way about the incumbents.
Ultimately, personalization boosts profits by attracting new customers and increasing share of wallet from existing customers through upselling and cross-selling. As we reported in a recent blog post on the democratization of bespoke investment products, research by the Boston Consulting Group shows that personalization can grow revenue by $300 million for a bank with $100 billion in assets.
Personalization also helps banks to stand out from the crowd. Another way challengers are eroding the incumbents’ market share is by leveraging technology to improve the customer experience. Meanwhile, the incumbents, saddled with legacy IT systems, are seen as old fashioned, especially among millennials. Embracing personalization can reposition a bank as digital and innovative and provide a valuable source of differentiation. This effect is reflected in net promoter scores- UK challengers score an average of 62, while the incumbents lag some way behind on 19, according to Accenture.
In future, banking seems likely to become increasingly personalized. However, personalizing financial products brings its own set of challenges. Keep an eye out for our next blog post in this series in which we explore some of these challenges.