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Why traditional banks must solve the online account opening dilemma

As bank leaders reflect on their strategic course for the second half of 2019, there are many issues they must keep top of mind in order to remain competitive. These include the developing fintech environment,  growth of deposits and loans, customer acquisition and improving customer experience. Another issue, that of digital account opening, poses its own special challenges.

Clearly, there is a disconnect between how banks address the issue and what customers want. BAI Banking Outlook findings show that when it comes to opening accounts online, intent does not match reality. More than half of customers (57 percent) would prefer to open a deposit account online, while 47 percent would prefer an online option with loans.

Yet in terms of those who actually opened accounts, roughly a third did so online, with 34 percent for deposit accounts and 29 percent for loans. What explains the gap between both sets of numbers? It turns out that nearly half of the financial institutions we surveyed do not allow the first account to be opened online. While digital account opening services carry a higher operational security risk, banks do not have the luxury of ignoring the clearly articulated customer preference for opening accounts online. It is no longer a nice to have; it’s a must have.

But from the point of view of financial service organizations, efforts to build online customer relationships are not making progress. Of those bankers we surveyed in the BAI Banking Outlook report, less than three in 10 agreed it was easier in 2017 and that number dropped to two in 10 in 2018.

Over the same period that banks expressed less optimism, millennials showed a marked increase in their preference to bank online if it meant getting better rates. Their preference jumped from 18 percent in 2017 to 28 percent in 2018. For all age demographics, in fact, attitudes are shifting quickly and this trend cannot be ignored by traditional financial service organizations.

The compliance question

The hesitancy banks have with expanding their online account opening potential boils down in large part to compliance. Unlike Amazon or Uber, companies that can offer their customers friction-free customer experience, banks must deal with compliance issues as part of their everyday operation. This gives a great deal of power to the compliance department and puts it in a position to dictate an agenda that places these issues first.

Thus banks with a risk-averse approach often look to their branches to handle customers who want to create a deposit account or apply for a loan. They will acknowledge branch use is on the decline, but at the same time may cite current customer preferences. Indeed, just about half of millennials surveyed (49 percent) told BAI that they prefer to bank with access to branches, even if they don’t use them very often.

But the majority (51 percent) indicated they would either consider keeping some of their money at online banks or go entirely that route if they could get better rates. So these same branch-centric banks must ask themselves whose preference they are listening to, their clients or the compliance team.

The bottom line is that banks must figure out how to get past their risk and compliance challenges, because consumers are clearly headed in the direction of online banking and account opening. They do not see the world through the lens of the branch, as their daily experience reflects their time spent shopping, ridesharing and searching for information on the internet, in many cases exclusively. Their expectation, simply, is that the banking world will come along for the ride. Financial service organizations that fail to address this will be left behind in the race for new customers.

Cautious online optimism

That noted, the leaders of traditional banks still have reasons for optimism. Their organizations are the incumbents and have the benefits of brand, infrastructure and client base, as well as branches for those who currently prefer them. Giving customers the capacity to open accounts online adds to these advantages. But what may look like just another option for banks to offer customers is in fact far more than that. Online account opening is a true disruptor and banks must leverage what they have across all channels to make it a reality.

The good news here is that millennials may respond especially well to a best-of-all-worlds a mix that puts online account opening front and center. They have nearly twice the monthly interactions with their banks (107) compared to baby boomers (55). What’s more, they never met a channel they didn’t like. They use the most digital and human channels, with branch/drive-up at 5.1 times per month and live phone agents at 5.4 per month. However, all generations are frustrated by the lack of connection between these channels that require them to start over when they move from channel to channel.

This gives traditional banks with multiple delivery channels a distinct advantage. And millennials, while they want to open accounts online, still want all these other capabilities as well. Online and mobile-only banks can’t replicate the branch and ATM structure millennials take advantage of today. These young adults are still heavy users of those channels. The key to success will be creating a friction-free experience where customers can seamlessly move throughout their interactions.

Yet who knows whether their taste for branches will still hold  true a generation from now? Five years ago, people would’ve assumed that consumers would only want to try on their clothes in a store or pick out their own groceries. But people are busier than ever today. Attitudes and habits have changed. Old preferences are giving way to new conveniences.

Meanwhile, millennials are poised to benefit from the greatest transfer of wealth in history as they take over an estimated $30 trillion in wealth from baby boomers. Incumbent banks are in a good position to get their share of the new accounts that result, so long as they don’t lose sight of the online channel. For what millennials and the upcoming GenZ view as just one option of many today could become their preferred choice or overwhelming favorite tomorrow. If so, do not blink. It will happen in the click of a mouse or the touch of a finger on a screen.

For more articles like this, check out our recent executive report: Banking’s digital transformation.

Karl Dahlgren is the managing director of BAI.

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