Phygital and the Future of Banking
Banking is getting phygital as industry leaders transform their offerings to deliver exceptional customer experiences that cross the online/offline divide. In case you haven’t encountered this particularly buzzy phrase yet, phygital, a portmanteau of “physical” and “digital”, was coined more than a decade ago by advertising executive Chris Weil to describe what he called the “immense possibilities for brands” to engage consumers in both worlds.
Top companies in consumer goods and retail—industries where the wall between the online and offline customer experience was already crumbling well before the pandemic—have been tinkering with phygital experiences for years. Today, banking leaders are taking up those learnings and adapting the phygital philosophy to meet both the unique needs of their customers and the rapidly increasing array of banking and investment services they offer.
To learn more about the phygital future of banking and other trends to watch, we turned to business and financial services savant Angela Paulk for her take on the trends she’s seeing today and where the industry is heading next.
Meet The Expert
Angela Paulk
Angela is a seasoned manager and business intelligence analyst skilled at developing strategic business insights and managing large-scale change initiatives across global financial services sectors
What changes and trends are shaping the banking industry this year and beyond?
The common themes currently affecting the banking industry include an uncertain macro environment, pandemic re-positioning, and the increased focus on data capture, management, governance, and monetization—as well as ongoing automation and digitalization across the market. But, within the industry, the changes and trends affecting the competitors are a bit more nuanced given a company’s size, business mix, and regional footprint. We can think about the ‘banking industry’ in three buckets:
1. Diversified banks with a global footprint and large institutional client base
The largest and most established banks are thinking about the broader implications of de-coupled markets and protectionism, opportunities around climate regulation, end-to-end (E2E) efficiencies and opportunities to benefit from scale across their business lines. They’re also weighing continued investments into technology (and staff) and more strategically embedding a culture of principles, organizational frameworks, and management accountability. For banks which have grown from acquisitions, I expect heightened focus on how well the talent, tools (e.g., AI), and insights (e.g., ESG analytics) have been integrated—and how well they were valued.
2. Regional banks and Consumer banks with large retail and/or SME (Small/medium sized enterprises) corporates client base
This group is hyper focused on the macro, client sentiment, and consumer activity. Like what we saw post the Great Financial Crisis of 2007-09, there will continue to be more consolidation in the market to benefit from economies of scale and/or rightsizing—of operations, product mix and clients. Aside from a concentration on digital and customization capabilities, I think product and service differentiation at a target market level will continue to intensify.
3. Challenger ‘banks’
These banks—most of which are around a decade old and offer services via web/mobile—have embedded digital processes, were founded with a focus on client experience, and have benefitted from lower cost bases than more traditional banks, which have multiple legacy issues such as dated infrastructure. However, these challengers have not had the benefit of managing through multiple economic cycles nor of the regulatory enforced scenario planning and stress testing that other banks have now operationalized—both of which help inform client resiliency. So, there is hyper focus on client profitability and cost. Public or private, I also expect increased M&A activity for this group. Management teams should plan for enhanced levels of due diligence and regulatory scrutiny, particularly with regard to how they have operationalized governance and risk management.
How are banks transforming to accommodate changing consumer behavior and demand?
I think the past few years have been a consumer-driven market. Given the breadth of financial products, lower barriers to entry, and an evolving range of competitors (and pricing), banks have had to evolve and modernize to remain viable. Some banks have even broadened their consumer base to include the historically underserved/underbanked.
Bank strategies to address consumer demand and changing behaviors range from internal initiatives such as employee digital trainings to externally facing activities like enhanced marketing and increasing input from clients via Net Promotor Score (NPS) and sentiment surveys. Banks have also enhanced their product offerings (e.g., crypto), range of partnerships (e.g., Goldman and JUST Capital), valuation models (e.g., ESG data and insights), and expanded into new types of service (e.g., J.P. Morgan’s foray into travel) to accommodate—and in anticipation of—client-demand. Some of the most interesting strategies that we are likely to see evolve at banks—large and small—include more products and services that focus on transparency.
A couple examples that I think are indicative of what more is to come include:
- Visa’s Sustainable Solutions and Eco Benefits, which enables clients to understand the environmental impact of their spending
- Investment strategies focused on broader impact, such as former NFL player Derrick Morgan’s challenge for more transparency on what investments (e.g. mutual funds, REITs) he held that might have contributed to funding private prisons.
How can banks become more “phygital”? Are there steps that banking leaders can take?
My take on the meaning of ‘phygital’ is that it captures that sweet spot combination of the best of the physical client experience with digital—and that the combination is not static. Aside from routine client engagement and sentiment surveys which routinely capture client input on market direction and relative competitiveness, bank organizational models are shifting to be more client focused end-to-end so they can be more responsive to their clients and pivot accordingly. So, if a bank is not already routinely incorporating this type of client input, it should be considered. For banks with a more diversified service/product offering, if there hasn’t been a lot of focus on a broader client coverage model (i.e., ‘client’ at a broader macro level rather than solely at a short-term product/service level) there are multiple benefits to doing so as soon as possible.
Do you think digital channels and experiences can entirely replace physical banks?
The question is whether retail and consumer banking clients can go completely virtual, and while I agree that is the direction in which the industry is headed, I think there is a foreseeable need for physical branches—although the number, the services offered, and locations really depend on a bank’s target market clientele.
To elaborate, I offer a couple of vignettes: The first, I think of my dad down in rural Georgia, who still does not use an ATM card and genuinely enjoys the banter at his regional bank drive through when he cashes a check. And the second, I think of a meeting I had a few years ago with a tech savvy former colleague (and successful venture investor) who was in London for a couple of days. He was having issues accessing funds that were deposited at a challenger bank—one in which I think he had been an early investor—and needed fast action. He had no person to call or branch to visit and ending up having to contact the CEO on Twitter to get attention.
How can banks ensure the accessibility and availability of physical locations, even as a significant portion of their business transitions to the digital realm?
The gist of this question is about location strategy—which to my mind incorporates not only the historical background of a firm, its core/target customers, and the type of business services and products offered, but also components of broader legal entity and cross-border regulatory considerations. To better address this question, I think it’s worth sharing a perspective on location strategy from both an operational point of view and from a client strategy perspective:
From an operational location point of view, the pandemic sped up physical location right-sizing initiatives for all banks, and we should see execution of these strategies over the next few years. However, for banks with a global footprint and that are operating cross-border, regulation (and in particular MiFID II, Brexit, and the OECD/G20 agreement on a global corporate minimum tax rate) was a precursor to the pandemic, so these firms may be further along in executing location strategies and will be more focused on client service.
From a client service perspective, the logical focus is on what type of service a client warrants—and how much are they willing to pay. So, if we think of ‘high touch’ as meaning in-person, a high level of customization, and/or exclusive access to financial products, physical accessibility for clients will remain in exclusive areas where high net worth individuals frequent and/or in urban financial centers, which are already home to multiple corporate and institutional investors. For more retail- and consumer-focused banks, the challenges will be in addressing the cost part of physical locations without losing clients—and staying profitable in this ambiguous macro environment.
What are the security and risk management issues with digitizing in financial services?
Aside from cybersecurity issues, multi-jurisdictional issues around data protection and banking secrecy, and just general issues around servicing retail clients and/or manage collateral—all components of banking which are highly regulated and scrutinized—there are a few issues and risks worthy of management attention in executing digitization strategies:
- Weak internal stakeholder management and inconsistent communications
- The potential to over elevate the importance of tools (e.g., AI), project management disciplines (e.g., Agile) and data insights (without relevant context) at the expense of quality and purpose
- Competing initiatives and re-prioritization
- Implications of broader market harmonization and/or lack thereof – for clients and regulators
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