November 2, 2022

Why do banks not offer personalised products?

As we established in the first post in this series, embracing personalisation helps banks to better engage with customers and ultimately boosts the bottom line. Pursuing this strategy is especially important for incumbents that risk getting left behind by the next generation of tech-savvy rivals.

However, the financial sector is traditionally slow when it comes to digital transformation. According to the 2021 Financial Services Digital Transformation Survey, conducted by consultancy BDO, even though nearly 100% of financial institutions (FIs) have developed or are in the process of developing a digital strategy, only 30% have implemented one.

Worth reading! Explore how personalised financial products improve customer engagement

So if the business case is solid, what’s stopping banks from offering customers personalised financial products?

Legacy systems

As proved by the challengers, tech advances such as artificial intelligence, data analytics and application programming interfaces (APIs) have driven the personalisation of financial products. In the case of Futora, we help banks add bespoke investments to their range by automating the entire process of creating and distributing the products. But many incumbents are stuck with legacy systems designed for an era when standardized products dominated financial services. These systems usually consist of dozens of solutions which have been bolted onto the core. When an incumbent decides to invest in another third-party tool like Futora’s to improve personalisation, the IT team faces considerable operational challenges to integrate the tool into its existing infrastructure.

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Stretched resources

Banks need to secure a significant budget to launch a new digital transformation project. According to Couchbase, FIs invest an average of $42 million on digital transformation, nearly double the average cost of $24 million incurred by other industries. Couchbase’s research also shows that projects have failed or been delayed at 88% of FIs due to the constraints of legacy infrastructure.

Human resources add to project costs. A bank must set up a team to implement a new solution and educate customer-facing staff to make sure they understand the product they’re selling. This rise in demand for human resources comes as workforces are shrinking at many banks. To put this problem into context, in 2020 HSBC announced that it was planning to shed 35,000 jobs, reducing its global headcount to 200,000.

Regulatory burden

The increased regulatory burden which comes with offering personalised financial products poses another challenge. In terms of personalised investments, banks have to become familiar with the relevant rules set out in the Markets in Financial Instruments Directive (MiFID) and Packaged Retail and Insurance-based Investment Products (PRIIPs). Failure to meet regulatory requirements may lead to heavy fines, not to mention reputational damage.

This greater burden also drives up costs. Research by the EU shows compliance already accounts for up to 4% of an FI’s operational costs, so the prospect of taking on further regulations is likely to meet resistance. And if a bank doesn’t have the necessary expertise in house, it must bring in the services of an external consultant at a significant expense.

Keep an eye out for the third and final instalment of this series where we explore some of the technologies that help banks overcome these challenges so they can start distributing personalised investment products.