A visit to last week’s Future of Financial Services 2023 conference not only showed that generative AI is still a hot topic on everyone's lips but more interestingly showed that transforming customer experience in the financial service sector, especially the mutual banks, is key to the next wave of growth for the industry.

Since their inception over 150 years ago, mutual banks have put customers and their surrounding communities first. The first mutual banks encouraged growing families to save money and accepted deposits from all classes of consumers, unlike many of the established banking institutions of the time. Today, the three underlying pillars of mutual banks—member-owned, community-focused, and local—not only remain intact but are flourishing. James Cudmore, Chief Customer and Digital Innovation Officer of NGM, the newly formed company from the merger between Newcastle Permanent and Greater Bank, spoke about community focus and how customer “trust and connection” is paramount and that “great Digital Customer Experience (DCX) starts with great human experiences, something both NP and Greater banks have been focused on for many years.”

Traditional big banks have embraced the digital latest technology, although many still cling to the one-stop shopping model that has been so successful for so long. The price for staying with an antiquated business model is now being paid, with margins down 25% over the past 15 years. Are mutual banks, rooted in their old-fashioned, brick-and-mortar community philosophy, destined for the same fate? Embracing modernisation via digital transformation without sacrificing core principles may be the best alternative.

The new banking ecosystem

Tech companies like Google, Amazon, and Netflix have changed the way consumers react to brands of all types in the digital age, as continuous innovation, multi-platform operation, and exemplary customer service are now the expected norms. For digital and retail banking services, these traits can be manifested in a fast and convenient banking experience that remains consistent across platforms.

Customer lifetime value and the customer journey are perhaps more critical in the banking industry than any other. Investing, borrowing, and major purchases transcend the business/customer relationship as they become major life events. The personalised nature of mutual banks has always fostered long-term relationships and trust—how can digital technology help?

Choosing the right strategy

Many digital tools and practices are already being deployed successfully by mutual banks and mutual financial services in general. Anna Lowe, Chief Strategy Officer of CBHS Health Fund believes that great customer experience, driven through technology, and done well is the key - with CBHS implementing a ‘health concierge’ function and looking into genomics as a way of providing customers with healthy meal suggestions based on their genes. User-friendly digital platforms and apps are nearly essential as busy customers expect this cross-platform convenience at their fingertips.

New technologies for data analytics, artificial intelligence (AI), and advanced cybersecurity tools are among the many digital options available. Modernization of legacy architecture and transitioning data to the cloud can also improve agility for banking institutions, although it often comes at a high short-term cost.

With the distinction of being owned by depositors while maintaining a for-profit model (unlike credit unions), mutual banks must choose from the available options to ensure core values are maintained while the customer experience and bottom line improve.

“Some of the most successful transformations have happened when the organisation is restructured around customer need”, says Andy Weir, Group CIO of Heritage People's Choice Bank, "with multidisciplinary teams being structured across Lending, Investing, Business, and Regulatory". This is not his first successful transformation having done similar shifts at Bankwest (CBA) previously.

Data-based decision making

Mutual banks rooted in their communities are known for their personalised products and services. Can this decidedly human-centric characteristic be preserved when artificial intelligence and data-based decision making are embraced? Although they may seem at odds, AI-based decisions are proving to be valuable for creating a superior experience throughout the customer journey.

Advanced data analytics can also support credit approval and investment decisions and detect fraudulent activities with the help of machine learning algorithms. The key to a successful transition for mutual banks is avoiding over-reliance on AI and automation, instead keeping the final say for important customer decisions in human hands.

Embracing artificial intelligence

Beyond the data analysis and automation offered by AI, there are additional applications that can improve operations and efficiency for mutual banks. Breakthroughs in generative AI have made customer support chatbots a more effective option. AI can also be used to create personalised marketing campaigns based on each customer’s needs and history. With AI supporting these essential processes, the personalised service mutual banks are valued for becomes more scalable.

Fintech partnerships

The large number of financial technology (fintech) startups entering the sector is often viewed as a threat to mutual banks, since they offer many innovative products and services to prospective customers. Mutual banks can turn this threat into a positive is by establishing partnerships with fintech companies. While fintechs provide more advanced online and mobile banking services, mutual banks complement these strengths through their established clientele and compliance know-how. Greg McKenna, CEO of Police Bank appears to have done this successfully augmenting his relatively small team of 200 with fit-for-purpose partners providing key services to the business for transformation.

Data security best practices

With the average cost of a banking-related data breach exceeding $9 million worldwide in 2022 and mutual banks striving to uphold their reputation as a safe place for customers to deposit their funds, cybersecurity measures and data privacy concerns are front and center.

Deciding on the best combination of cybersecurity tools and practices including data encryption, multi-factor authentication, and security audits can become a balancing act between cost and consumer confidence. A cybersecurity risk assessment simplifies these decisions by balancing the perceived value of each tool vs. the inherent risk. In keeping with the human-centric focus, employee cybersecurity awareness training to thwart social engineering tactics like phishing and impersonation can be an equally effective security tool.

Regulatory compliance

The web of complex regulatory requirements all banks (including mutuals) must contend with can become a time and resource drain. Can digital technology help?

Modern tools cannot shrink the volume of regulatory requirements, but they can help mutual banks navigate them more effectively. Digital compliance practices use smart tools to automate pre-activity checks and reports, while maintaining ever-changing regulatory standards more efficiently.

Developing employee skill sets

Even the most advanced digital tools bring little value without highly trained bank employees to implement and maintain them.

Reskilling and upskilling existing employees is a prudent investment that can also improve retention rates and employee satisfaction levels. With research indicating mutual bank customers are only willing to wait five minutes to speak to a human operator, ensuring customer-facing employees are well-versed in the bank’s latest digital services is also imperative.

Staying true to mutual bank roots

There is a reason mutual banks have endured as a mainstay of the financial industry for over a century. A community-based approach gives customers a sense of belonging and membership that they don’t often get from big banks. Being member-owned also keeps the primary focus on satisfying depositors rather than outside investors.

As mutual banks inevitably embrace digital technology to remain competitive, each new product and service should be evaluated to ensure it aligns with these long-held customer expectations.

The digital future of mutual banks

Perhaps the biggest challenge mutual banks face today is scale, or a lack of same. While larger banks retain up to 50 cents from each dollar of revenue, disproportional operating costs shrink this margin to the 20 cent range for most mutual banks. This discrepancy can work against banks seeking to fund expensive modernization projects. Smaller banks are also more vulnerable to cyberattacks and bank runs, simply due to their limited resources.

This lack of scale is one reason more mutual bank mergers have been seen in the past decade. While mergers help to address financial constraints that can prevent mutuals from evolving, they can also threaten the small town character that makes each bank unique and valued by its members. In the future, digital solutions with a lower barrier for entry may be the key to leveling the playing field.

To read more on shaping digital products for the financial services sector