The question of how to respond to tech-driven disruption and digital-first competitors is one being asked by many industries, and banking is no exception. Faced with changing consumer expectations and rapidly evolving technology, the last 10 years have seen banks lose market share, in particular to digital payment providers.

In losing customers to payment providers, banks also risk losing one of the 21st century’s most valuable commodities, data. Technology-facilitated payments generate rich customer data that can be analyzed and turned into powerful insights and business intelligence. With research suggesting that banks could be losing up to a fifth of customers to poor customer experience, it’s clear that banks need to adopt new strategies to match the offer presented by digital-first and UX-driven payment platforms.

The business I lead is focused on giving banks the tools they need to truly harness their data and transform their customer experience. To understand the state of play in the market currently, and get an insight into the kind of questions keeping America’s banking leaders up at night, we surveyed several hundred banking executives recently. The results reveal the huge opportunities there are for banks willing to respond to the digital challenge, but also a degree of uncertainty about what that response should look like.

With competition from payments providers growing, it’s unsurprising that our research reveals a degree of anxiety on the part of the banking sector. This is felt especially when it comes to competition for small and medium business (SMB) customers. SMBs account for around 54% of sales revenue in the U.S., a huge amount of revenue and data, making it a sector of the market that the banks cannot afford to ignore.

The good news for banks is that they recognize the challenge.

Those we surveyed report that just under half (46%) of their banking customers are SMBs, up from 42% in our last survey. Revealingly, when asked which organizations they fear losing SMB market share to, 62% of respondents stated tech giants, while 59% reported payment providers. Meanwhile, the percentage of those who fear losing market share to rival banks has declined from 60% in our 2022 survey to 55% today.

Meeting The Challenge

Although banks recognize the challenge and are willing to meet it, uncertainty surrounds the question of what approach should be taken. The explosion of digital-first payment providers is still a relatively new phenomenon, and incumbent banks are large, heavily regulated and often very complex organizations, so responding at the required speed isn’t easy (or cheap).

While banks see the value of providing SMBs with services leveraging their own business’s data, it’s also the case that banks are not tech companies, and so knowing how to do this isn’t intrinsic to them. Should banks be focused on providing data-led insights to SMB businesses, or should they focus on providing the data that will enable businesses to provide better customer experiences? As competition with digital-first businesses intensifies, and customer expectations change in response to that dynamic, questions like this will come ever more to the fore.

So, despite sitting on a wealth of valuable customer data, currently, banks are reacting to the digital challenge, rather than developing proactive strategies to get ahead of it. To a large extent, this is because banks are trying to compete on tech’s terms. Tech companies use data to offer intelligence. In the case of a small business, this might be insights into customer behavior at certain times of day or certain points in the week. When it comes to data, however, process integration has to come before intelligence, and this is where banks can find a way to compete on their own terms.

Oftentimes, SMB customers won’t have the time or the resources to process the volume of data that tech could unleash. This is why, even with market leaders such as Square, the customer insights offered remain fairly uncomplicated. What banks can offer on the other hand is integrated processes, which bring back-end providers together to create a seamless experience for SMBs and for end customers of those SMBs. While tech can offer insights, banks can offer the integration that makes business as a whole better, faster, cheaper and ultimately more competitive.

By recognizing that, for SMB customers, integration needs to come before intelligence, banks can begin to realize the unique position they have in the financial and business ecosystem, and how they could build solutions that capitalize on that position. While the dots haven’t yet been connected, banks are sensing that a core role for them in the digital economy might be to simplify the lives of their SMB customers, ultimately reducing their cognitive load while also acting as an interface between digital service providers and willing customers. This is a genuine value-add that banks can bring to SMBs, which goes beyond both tech and finance.

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