Why mid-sized players should embrace the direct-to-consumer model

The direct-to-consumer (D2C) model has gained prominence in a big way over the past couple of years. With the advent of mobility, ecommerce, social media, and ‘everything-as-a-service’, the way in which consumers interact with service providers has shifted.

This led to widespread disintermediation and aggregation in the mid-sized financial services market across banking, payments, lending and insurance.

As we enter the ‘new normal’ brought about by the pandemic, for businesses to survive and continue to succeed it’s imperative for them to be able to help customers directly. This requires a heightened level of engagement and a more sophisticated D2C operating model, which is only possible through adopting next-generation technologies. For the typically squeezed mid-sized financial space, it will make the difference between thriving and declining.

As we enter the ‘new normal’, for businesses to survive and continue to succeed, it’s imperative for them to be able to help customers directly.

The driving forces behind D2C

The traditional financial services intermediary model is transitioning in line with demographic, behavioural and technology trends. Changes to the way we live, coupled with the unmatched speed and accessibility afforded by digitalisation, have also resulted in seismic shifts to expectations. Consumers are demanding a smoother experience, faster response times and real time information at their fingertips.

Tech giants, with the wherewithal to implement digital technology on a vaster scale than mid-sized firms, have been actively disrupting and disintermediating new verticals and use cases, including D2C financial services (think of Apple Pay).

Elsewhere, the likes of Amazon and Netflix are tapping into a huge consumer base, building digital experience platforms and launching new products directly to that audience. Through AI-backed predictive analytics and deep learning algorithms, they are able to analyse data sets and historical buying patterns to tailor services and recommendations to individual users.

The mid-sized market can achieve the same level of hyper-personalisation. By making use of public cloud architecture and the data analysis tools that go alongside it, they can retain customer share, drive traffic and adoption, maximise cross-selling opportunities and launch into new geographies. They cannot afford not to. The rate at which intelligent technologies are maturing will only accelerate from now on – given the current rush on cloud and digital platforms as a way to ensure business as usual and cater to customers through virtual means alone.

Why the middleman must innovate to accumulate

Currently, an ageing population of intermediaries is struggling to attract and retain the newer generation of consumers, namely Generation Z and millennials. Meanwhile, a new wave of disruptive competitors, who instilled a D2C strategy by design and default, are moving in to take ownership of customer relationships. Heritage providers must find ways to tap into these new consumer pools for growth.

Industry newcomers can outmanoeuvre the rest by offering a more nimble and convenient experience, allowing customers to interact seamlessly with both virtual and real agents. The advantages of digitally-native competitors have never been more obvious than at present, especially their ability to scale up their operations at a moment’s notice.

For instance, agile online lenders are now stepping in to service the customers of traditional lenders whose legacy systems leave them unable to quickly work through the huge influx and demand for emergency loan schemes. Intermediaries must take steps immediately to modernise, or lose customers and revenues.

When setting priorities for the past year, 70% of financial services firms wanted to increase efficiency and speed; they indicated that they would invest 65% more into updating their IT capabilities. With a design-led roadmap, a digital transformation programme doesn’t have to be difficult, bulky or expensive for mid-sized financial firms, and can be self-funded. It involves a step-based approach that measures thresholds around cost, productivity, stakeholder experience and innovation objectives. It’s possible to innovate iteratively so that the end user starts to see a deeper level of engagement quickly.

As a first step, mid-sized businesses can go for a plug-and-play software-as-aservice (SaaS) platform to address more urgent pain points in a cost-effective way. Cloud technology will allow them to deliver value from the first day of implementation through differentiated, targeted D2C services. Firms can move disjointed data and applications to the cloud to enable a deeper level of data-backed understanding into their customers.

Relationships are front and centre

Consumers want the best of both worlds – the human touch as well as the flexibility and speed of digital. Brokers still play a significant role, as they have the advantage of already holding a wealth of client information and existing relationships. Where they suffer is their lack of broader brand visibility, recognition and differentiation.

They need to position themselves through mobile and multichannel communication avenues, to cultivate ‘sticky’ relationships with the new generation of customers. Those who will survive and come out stronger from the pandemic are those who put the end user experience top of their priority list.

A strong example of customer-centricity is the mid-sized challenger reshaping banking, Metro Bank. Now at almost 100% year-on-year growth, it does not need much advertising spend, having already amassed a loyal fan base who are spreading the word. Its model is built around a ‘phygital’ service comprising real-world branches and a 24/7 app and online provision to cater to every customer requirement. Supple enough to evolve with fast-moving trends, Metro also launched an AI-powered Business Insights tool, empowering business customers to make better, data-driven decisions.

AI is becoming more mainstream, as is the growing role and availability of data and its applicability through cognitive technology. In a 2019 report, the Bank of England cites the major forces reshaping the UK economy, including the move to digital, big data and automation.

It encourages businesses to embrace innovation through modern financial infrastructure and estimates that machine learning can increase productivity – and thereby boost financial performance – by around 20%. The most important element that determines mid-sized companies’ success is the pace at which they adopt innovation, and this is crucial to mitigating the micro and macro financial implications of the pandemic.

Looking into the post-pandemic future

There are two opposing views on the progress we’re likely to see in the UK and Europe in the next two to five years. There could be mass consolidation by the sector leaders and FAANGs, swallowing up mid-sized players. Alternatively, mid-sized intermediaries could emerge victorious, with the arrival of many more. These will provide a very high level of customer experience and satisfaction in hyper-specialised areas. The outcome depends entirely on the actions taken now.

In the UK, 99.9% of private firms are SMEs, contributing just over half of the country’s total business turnover. They will be key to restoring the UK’s economic balance once the full repercussions of lockdowns become apparent. Right now, however, the mid-sized sector is in a more financially vulnerable position.

I believe that the D2C model brings a lifeline, and a compelling long-term value proposition. If businesses use the uncertain landscape as the catalyst to re-imagine their models through digital technologies, they can get closer to their customer base quickly, cultivate brand awareness and trust, and benefit from a faster route to market for new services and products.