How do banks design their financial products

How the digitalization of the distribution of financial products can succeed

The financial industry is facing a fundamental upheaval. Between digitization pressure, growing competition from FinTechs and disruptive platform providers such as Amazon or Google and changing customer needs, many financial institutions have to reorient themselves.

The digital distribution of financial products is gaining in importance.

The corona crisis, the long-term consequences of which are still open, has already shown one thing: COVID-19 has significantly accelerated digitization in the entire financial sector, especially in banks and insurance companies. The entire industry - regardless of whether it is an established provider or a new FinTech - seems to agree: In the long term, there is no avoiding rapid digitization.

One of the central and most exciting questions is certainly how financial institutions manage to digitize their sales. EY recently examined pioneering topics in the insurance market with InsurLab Germany as part of the joint study "Insurance bEYond 2020". It is assumed that some of the findings of the study can also be transferred to other classic areas of the financial industry such as banks or asset managers, because the differences between the industries are usually fluid when it comes to the degree of digitization. Banks and insurance companies in particular are facing similar challenges and trends - especially how they use their opportunities in a business with ever tighter margins.

Financial companies need to understand and coordinate digital distribution channels

A central finding of the study is that established financial companies have to understand their digital distribution channels in their entirety and coordinate them so that the digitization of distribution channels is a success. But what does that mean in concrete terms? The products that are offered via the new digital sales channels must also match. And even more important: The sales channels and the products offered through them must meet the dramatically changed customer needs.

The vast majority of financial products in Germany are still sold through traditional channels. But the proportion of products that are sold digitally is increasing in almost all industries - from everyday household items to financial products. The growth of digital sales channels has been significantly accelerated again in recent months due to the COVID-19 pandemic and the associated restrictions on public life. Branches of banks and insurance companies were sometimes closed for longer periods of time and even those customers who normally sought advice on site were now forced for the first time to find out about financial products digitally.

Continuing pressure on classic sales channels

The current time is characterized by reducing unnecessary contacts in the sense of infection protection and it can be assumed that many behaviors will be retained in the long term - an all too rapid reversal of this development is therefore not to be expected. In addition, numerous banks in Germany are forced to reduce their costs and to close additional branches in this context. The uncertainty of how the long-term consequences of the COVID-19 pandemic will affect the established financial world is likely to exacerbate this cost pressure. It is therefore to be expected that the connected sales will continue to decline, as in recent years and as in some other industries.

Advice or information?

In traditional sales, the customer is shown various products in the local bank or insurance branch. Often these products are so complex that they require advice and the necessary advice increases the cost of the product. Today, however, younger customers in particular expect easily understandable and transparently structured products and services and the opportunity to be able to find out about them independently. Easily understandable apps or financial blogs offer interested customers the opportunity to obtain comprehensive information about financial products online, and ultimately to understand these products and to be able to purchase them digitally themselves. It is also becoming apparent that customers expect greater flexibility: they no longer want to wait for their financial advisor to be available again. Digital sales can only succeed with products that meet these changed customer expectations.

Focus on customer needs

Financial service providers should therefore focus on the customer needs of tomorrow and offer customers a better 'customer experience'. But this is also accompanied by a fundamental change in mentality: New customers (segments) are no longer sought for a specific product that the financial product provider sells. Alternatively, products could be developed that are easy to understand and more flexible based on individual customer needs.

Many industries are certainly more advanced than the financial industry. “In the future, recommendations for financial products should correspond much more closely to the way we digitally search and buy other everyday products. A good example is Netflix, which suggests new films based on previous interests, ”says the experienced FinTech entrepreneur Dr. Carolin Gabor, who sketched it when she was a guest on the 'EY FinTech & bEYond' podcast.

Hybridization of the sales structure

So how do financial service providers manage to meet new customer needs? The study shows that providers from the banking and insurance world are increasingly thinking about innovative cooperation models. A good example are innovative FinTechs who launched digital solutions for established providers during the peak of the Corona crisis in spring 2020 in order to facilitate face-to-face advice. This leads to a hybridization of the classic sales structure, which offers advantages for salespeople and end customers.

Not only do banks and insurance companies appear to be intensifying their cooperation with one another in order to jointly develop innovative business models due to the similar challenges. As the aforementioned study notes, many insurers are responding to these challenges by partnering with innovative tech companies, investing in them, and in some cases even acquiring them.

Establishment of ecosystems

Another finding of the study is that the establishment of ecosystems is increasing. Regardless of their orientation, the focus of ecosystems is on the idea of ​​offering a central (thematic) platform for bringing together and providing the best solutions for customers. In doing so, they often offer the various providers as well as the end customers more transparency and offers that are more tailored to customer needs. Dr. Harald Brock, Managing Director of investify S.A. and member of the supervisory board of CoWork AG, confirmed in the 'EY FinTech & bEYond' podcast: “We are currently in a really strong process of change. While banks used to concentrate on doing everything themselves and, if possible, 'on premise', today we are finding that this is completely breaking up. Banks are ready to work with platforms. "

Selection of partners is critical to success

But it also depends on the correct presentation and integration of digital offers as well as the selection of the right partners. “I just cannot imagine that we as consumers will use a large number of digital platforms in the future to carry out our financial transactions. Either we use financial products embedded in other digital everyday platforms such as Amazon & Co. or we also use a platform to explicitly manage our finances, ”says FinTech entrepreneur Dr. Carolin Gabor in the podcast 'EY FinTech & beYond'. "That's why I recommend all established players in the industry to work on making their products easy to integrate into other platforms."

Increasingly, many tech companies and new financial service providers only use certain areas of product sales: Insurance manager Clark, for example, is concentrating in particular on sales. Such a niche focus also allows established financial service providers to specialize more in the future and to focus on (already existing) strengths. This is all the more relevant in markets that are suffering from increasing pressure on margins and may be confronted with increasing consolidation. It is precisely against this background that the expansion of ecosystems offers financial institutions the opportunity to reduce costs in the development of products. Through cooperation with FinTechs and intelligent participation in ecosystems, products that are easier to understand can be created and, at the same time, the distribution costs of established financial product providers can be drastically reduced.

Corona pushes digital sales

The findings of the “Insurance bEYond 2020” study are clear: COVID-19 and the associated restrictions on public life are proving to be momentum and a catalyst for the sale of digital financial products. This development can be observed in various branches of the financial sector: even insurance companies, which in some areas are still smaller steps behind banks in terms of digitization, are increasingly relying on digital sales channels.

In order for banks, insurance companies and asset managers to succeed in this change in the long term, however, they have to get over their legacy, say goodbye to outdated models and initiate a change in mentality. If this succeeds, established financial service providers will have the opportunity to design a better product environment for all market participants with more individual offers and to maintain a close customer relationship - even if it is digital.