27 May 2021
Imagine you get your physical account statement from your bank once a year. Apart from that, you can only conduct banking transactions by mail or direct contact. Does this scenario also sound to you like something that belongs to the distant past in the age of e-banking, mobile banking and neobanks? Fortunately, the digitization of banking business is already well advanced.
The situation is different, however, when we look at the area of retirement provision and, in particular, that of many pension funds. After all, shouldn't the same convenience be possible there? And couldn't pension funds themselves also benefit from a similar development to that experienced by banks?
History as a teacher
If this is the case, then it would be worth taking a look at the history of the digitization of banking business to learn valuable lessons for the digitization of the second pillar of our pension system.
1. A (secure) digital identity
One of the biggest challenges in enabling electronic access to accounts and banking transactions was making the bank customer digitally tangible in the first place. A digital identity and strong authentication methods were the solution. These had to be designed in such a way that a scaled attack could be ruled out. Hardware tokens (hardware component to authenticate users), raster cards and later mTAN were the most widely used solutions. These were soon replaced by strong software tokens on mobile devices due to ease of use and advancing smartphone penetration. At the same time, banks also had to learn how to integrate the bank customer into a holistic security solution, e.g., with appropriate communication and notifications. The next step would now be to replace these bank-specific tokens and identities with a universally usable e-ID and universal login procedures.
Insight #1: A strong and user-friendly digital identity for insured persons is already possible today with common technologies and processes. Here, pension funds can clearly benefit from the lessons learned over the past decades.
2. An Internet-capable architecture
Most banks maintain a more or less monolithic banking system in which core business such as account management and transactions are handled. Early e-banking systems were relatively directly connected to these systems. But this also meant that e-banking could put a partially unpredictable load on the banking system. And secondly, e-banking was only available when the banking system was also available. However, this was not always the case and thus ran counter to the promise of 24x7 banking available everywhere. Modern online architectures decouple much more strongly from backend systems. This loose coupling can be found in modern architectures today, e.g. by applying CQRS (Command Query Responsibility Segregation), near-real-time read caches, and generally with the use of asynchronous APIs or event-based approaches.
Insight #2: The establishment of a loosely coupled, modular online architecture as a foundation pays off - ensuring that insured persons actually have fast access 24/7.
As described above, purely technical online access can now be realized with common technologies. However, the key question remains: What are the needs of customers or insured persons in the digital domain? Here, too, banks have made an important learning curve. In particular, a purely digital facade was clearly not enough. Digital self-service had to be tightly integrated into existing processes. Especially when the online channel was not the only channel for interaction with bank customers. This was the only way to meet the needs of bank customers (such as immediate responses) on the one hand, and to achieve budget savings on the bank side on the other. For many banks, the elimination of physical statements and documents alone represented a significant cost reduction, which was exceeded by staff cuts in customer service. A typical win-win situation for customer and bank.
Insight #3: Embedding online processes in existing processes is key. Only in this way can both the insured person and the pension fund benefit optimally from digitization. In doing so, the entire customer journey of the insured person across all channels must always be kept in mind.
4. The right use cases
In addition, the real customer needs could also not be clearly predicted from the outset. For example, it was not obvious which bank customers would prefer online services or the traditional contact with a customer advisor in which area. Although a basic set of expected functionalities, such as account details or payment orders, could be crystallized relatively quickly, the situation was less obvious for more differentiating functionalities, such as budget planning. Banks addressed this with customer surveys and market research. Ultimately, however, they also quickly implemented and tested new functionalities directly with the bank's customers.
Insight #4: It is important to identify and offer a good set of basic functionalities. In addition, the organization and architecture should be optimized for rapid testing of new functionalities directly with the insured person in order to gain valuable information here in the form of current and actual data.
5. Openness and ecosystems
The appeal offered by the online channel was soon further driven in banking by a flourishing fintech industry. These, and more recently regulations, increasingly required opening up of electronic access, such as with PSD2 in the EU. So Banks are therefore currently moving out of the purely dual bank-customer relationship into a genuine ecosystem world. This move is by no means small and requires clear trade-offs. I like to compare banks to gas stations: today, these represent an ecosystem of different offerings (providers such as dry cleaners, restaurants, stores, etc.) around the shared experience of "stopping for gas."
Important building blocks of ecosystems are Open APIs (e.g. the OpenPK project in the pension fund environment) but also new authorization models such as the direct granting of a "consent," i.e., permission for third-party access to data by the bank customer himself.
Insight #5: The development of an ecosystem of different providers is also emerging in the area of pension provision. Pension funds, and not least their insured persons, can benefit directly from the latest developments in technology as well as in business models and insights from the banks. However, the situation is made more difficult by the fact that the insured, who are rewarded by this opening with greater transparency and self-determination, are not directly the customers of the pension funds. This circumstance means that the transition to the ecosystem will take longer, but will nevertheless continue.
As Acrea, we have supported numerous clients in the financial industry through the very developments mentioned above over more than a decade. For the past five years, we have been successfully applying the experience we have gained in this way to our customers in the area of pension funds as well. We have also gained another insight in the process: Banks also benefit just as much from the (digital) insights of pension funds. So the digitalization journey continues. True to our motto: making digital (pension) work.