Navigating the future of digital banking: A conversation with Deloitte’s Nick Cowell

Banking is undergoing deep changes. We’ve been tracking that. And as consumers become increasingly open to new digital options, incumbent banks are feeling the pressure. It’s hard to innovate when you spend upwards of 70% of your budget maintaining legacy systems.

But neobanks are also dealing with their own reckoning – we’ve moved beyond the days where we get excited about overall headline customer acquisition numbers. As they mature, unit economics matter for these institutions if they want to compete for the long term. Frankly, it’s not easy and it’s expensive to build a lasting banking franchise.

Deloitte’s Nick Cowell, Digital Banking Leader, joins me on this podcast to go deep into talking about the challenges banks face. As he explores some of the causes of customer attrition, for example, Nick defines the characteristics of the eventual winners in the digital banking market. For him, the banks that will lead in the future will become multi-tenant or multi-product providers for their customer base.

This is part of a four-part series we’re doing with Deloitte’s financial services leadership on the trends shaping our industry today and out into the future.

Here’s my conversation with Nick.

The big ideas and questions

• What are the key forces driving the evolution of digital banking?
• How digital banking is changing the landscape.
• Consumers’ openness and intentionality around digital tools.
• Challenges faced by the incumbents.
• Characteristics of the winners in the digital banking market.
• Buy vs. build.
• What is the definition of success?
• Future trends that will influence digital banking propositions.
• How will digital banks evolve from just a bank to a multi-product provider?

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The following excerpts were edited for clarity.

Nick Cowell, Deloitte: I’m Nick Cowell, partner with Deloitte Consulting based out of New York City. And I’m part of the digital bank leadership team. For coverage across North America and the United States, a lot of what we do is help incumbent banking institutions, non-banks, and startups really design, build, and launch digital value propositions, whether that’s new digital channels, new digital products, or more increasingly, helping founders actually launch new digital neobanks.

Adoption driving change

Digital banking penetration in the EU, in particular, has been pretty mature for a number of years now. We’re starting to see more and more interest in the adoption of digital banking and new digital banks coming to market. I think the time is right now in the US, particularly in retail and small business banking. Shifting consumers, more business owners, and business owners’ banking behavior has been influenced by COVID-19. But COVID-19 really exposed the fragility of digital channel maturity, and consumers just demanded better. I also think some of the generational shifts are really driving more and more focus on end-to-end digital maturity across customer journeys, and the ability to self-serve across those journeys, as well.

Deloitte does pretty extensive market research. And, interestingly, some of the research that we did earlier this year indicated that about 60% of US adults would now be likely to switch to a digital-only bank. And when you double-click into some of the segments within that, 20% of millennials already have a relationship with a neobank. So adoption is increasing.

New sources of competition

And I also think the marketplace and the competitive landscape are fundamentally changing — it’s no longer just banks competing with banks. We’re starting to see the fintechs decompartmentalize in different parts of the banking value chains. We’re seeing the rise of more digital neobanks, or digital challenger banks, similar to what we saw in Europe five to seven years ago. And over the last 12 months, we’ve seen the entrance and new seismic disruption that non-banks can have — in particular, big tech companies or new companies where their brand equity and their customer engagement are incredibly strong. They’re now launching either full-service banking offerings or very tailored products, which is having a big impact. I think we’ll continue to see this unmet demand on the consumer and small business owner side being fulfilled by different players in the markets. I think the time is now for incumbents to recognize that and invest in ensuring they survive and thrive in the increasingly digital world.

Consumers expect more

I also think consumers’ buying and spending patterns are fundamentally shifting as well. No longer is it about who will give me the best deal or who has the best sale. There’s an ethos element, as well — which brand really represents my beliefs, my values? And how does that not only show up in our corporate agenda but in the actual interaction I have with that institution? What rewards and incentives are tied to the products that I’m purchasing? How is marketing tailored and the experience tailored to that as well? It’s not just about setting an industry standard mobile and web experiences — that’s the table stakes.

It’s about how you really innovate around your brand, and your product, how you look at your customers, and how you engage with them differently. That will be where the real Digital Champions emerge, and others really struggle.

Incumbent banks challenges with digital

That’s a very broad question. There are many things unique about the US banking and financial services landscape. But I think when you look at the traditional archetypes of banks, there’s a very broad range. The concentration and the kind of services are fundamentally different. You have the large multinationals and large regionals, right down to very small community players. I think when we look at some of the larger players, speed to innovation is a real barrier for them just because of the organizational constructs and silos and decisioning bodies that can take time.

There’s a lot of the baggage they come with from a tech and an operational depth perspective. I read a stat the other day: on average, CTOs and CIOs of big banks spend about 70% of their budget maintaining legacy tech, which when you think about the innovation required to lead the pack or hang on their coattails, 30% may not cut it year over year.

And then you look at some of the smaller regional players. There is a huge investment required to really rethink and double down on high performance, digital products, digital experiences, and also on the underlying platform and infrastructure. From a servicing perspective, these are costly, and these become almost generational investments for some of these small banks. They’re hedging their bets on these platforms, and the experiences and innovation that will give them for the next 10 to 20 years. That obviously comes with a huge degree of risk and a huge degree of caution that has to be applied.

I think the underlying common pattern we’re seeing is that there’s more and more customer attrition or customer exploration outside of their primary or secondary banking relationships, which incumbent banking institutions need to be really aware of and be addressing, either by differentiated experience or just increase the value that they can provide, whether that’s financial or otherwise, to their customer bases.

Winning characteristics in digital banking

Look at the real innovators and there are kinds of foundational things that are just built into their DNA around really understanding the segments that they’re targeting and building value propositions that go deeper than just transactional banking relationships. Toggle on building an emotional relationship, whether that’s the brand identity, the brand positioning in terms of marketing, and how it engages with certain segments, but more and more in the actual product and experience design.

How are you hyper-customizing the features, the incentives, built around traditional deposit or lending products to really speak to and incentivize adoption? That goes beyond just offering really compelling interest rates on high-yield saving products. It’s how the rewards are tailored to the beliefs or the needs of certain segments.

The second thing is really having this mantra of it’s not buy versus build, it’s kind of a hybrid using the best in class fintech providers, the next-gen technology stacks to build your technical infrastructure that really drives that innovation and performance, but also acknowledging that the last 20% or so really has to be unique to be credible, and to differentiate from the competition in terms of what you’re putting in the marketplace.

There is a lot of optionality for diversification in revenue streams, whether that’s taking traditional banking products and pricing them differently with subscription fees or product bundling. We’re actually looking beyond banking. And I think particularly in the small business space, there’s a lot of opportunity through APIs and partnerships. How can you provide your end customers with a one-stop shop bank to help them manage their business, insurance, tax services, accounting, and workforce management services, all provided by a bank, but with third parties on the back end?

Some of these institutions are already doing it. I think Starling Bank is the leading example in the UK, actually, increasing the ROI on your platform investments by white labelling them and licensing them in the Banking-as-a-Service model. It’s just another way that some of these digital innovators are being successful.

Defining success in digital banking

When you look at a lot of the large digital challenger banks, even the large ones in the US, success has really been communicated in the market by customer acquisition numbers. I think more and more investors are putting pressure on digital-only banks, neobanks, and challenger banks, around their path to profitability. And I think having a clear product strategy around moving into interest income products, moving into lending — how you drive year over year profitability is something which a lot of these banks are going to have to demonstrate to really be successful.

There has been success in disrupting the status quo from a brand perspective, from a customer acquisition perspective, from an experience perspective — but now investors and analysts are saying, okay, show me how you drive profitability. I think there have been some really interesting models: Starling, as I mentioned before, really doubled down on the share of wallet and product mix to a smaller customer base in the UK. Others like Revolut, it’s all about scale, both geographic and product mix. So there are different models, but I think the common theme is success has moved on from just digital experience and customer acquisition — it’s now, show me the profitability.

Future banking trends

The data shows that there’s market appetite by customers in the US for differentiated experiences and there’s an openness to actually moving to brand new digital bank brands, as we’ve seen from the customer acquisition numbers. The real winners will be the ones who can offer a broader set of products and services, and in doing so, ensure that they’re driving profitability through the economics of the products that they’re offering.

I also think we’re going to see more and more demand for banks to really put their ethics where their wallet is, so to speak. How do you actually build that into the value proposition so that customers’ beliefs and the ESG agenda show up in a very tangible way, rather than just on corporate agendas? Coupled with that, how can you use everyday banking interactions to actually improve the access and opportunity for your customer base, whether that’s through better spending habits and your use of data, and how you pay that back to the customer in terms of financial health?

Around 18% of the adult population can be considered unbanked or underbanked in the US. So how can you build in tools, which really provide better access and opportunity for those communities? I think there’s a social need to do that.

More broadly, we will see digital banks and digital bank brands evolve from just being a bank to being more of a multi-tenant or multi-product provider for their customer base. It’s very slow right now, but I expect we’ll see more and more M&A and JV activity, as incumbent banks realize they may not have the brand equity to reach certain segments, or they may not have the innovation to drive certain kinds of product launches overnight. So how do they partner with the provider who can?

They can figure out a revenue share model. We’ve been talking a lot to some of our clients about this: you have a digital bank brand really own the customer on the front end, and the positioning and the customer acquisition. But some of the products, particularly the complex lending products are actually underwritten by a larger incumbent. And there’s some kind of revenue share mix, which benefits both parties. I think we’ll start to see a lot of that.

In Europe, we’re hearing a little about digital bank on digital bank acquisition. As the path to profitability becomes more and more of a burning issue, I think we’ll start to see more of that, as well.

I think we’ll see more and more demand from consumers and from small business owners for better digital experiences, more transparent products and pricing, and banks to show up differently in terms of ESG. And from a values perspective, which could actually be more of a decisive driver in terms of who and where people choose to bank with, we’re excited about where that goes. It levels the playing field and it brings new entrants in. Lastly, there’s obviously the question around how the regulation and the regulatory environment in the US will will adapt and evolve to enable and safeguard the system at large as we see this disruption.