Retail banks are increasingly under pressure to meet the demands of a rapidly changing environment. New regulations have opened the door to competition from financial tech companies offering niche and customer-centric services that resonate with today’s tech-savvy customers. This means, consumers are now in the driver’s seat and demand more relevant, easily accessible digital services in return for their loyalty.
And the stakes couldn’t be higher. According to McKinsey & Company, those who fail to embrace digital banking within 3 to 5 years, risk seeing their net profit plummet by 35%. In such a climate, retail banks must build on their existing strengths, while they upgrade their legacy systems, to ultimately provide consumers with the seamless experience they crave.
Time for a much-needed facelift
Considering the events that have shaken the financial world in the last few years it’s no wonder retail banks are now facing many challenges. These changes, as well as the inevitable ones that are bound to occur as a result of Brexit, have had, and will continue to have, a significant impact on retail banks reducing their profits and making it more difficult for them to generate new revenues.
However, these challenges also have the potential to create new opportunities for those who dare to rethink their approach and innovate, especially if they choose to embrace the digital. This technological overhaul is due primarily to new consumer expectations, increased competition and a need to find new revenue and profit streams by leveraging new digital tools to create efficiencies.
Catering to tech-savvy consumers
Several factors have contributed over the last few years to a shift in the way consumers perceive financial institutions. Until the 2008 crisis, banks were seen as pillars of stability and trusted partners in wealth management. But the crisis shook those perceptions and now, banks seem more fallible. This is especially true for Millennials, who now represent the largest workforce demographic, according to a report by Guggenheim.
As a consequence, loyalty is at an all-time low. According to Affinion’s upcoming report on customer engagement, 26% of customers surveyed say they find their bank frustrating. This echoes Webloyalty’s The Unfaithful Consumer report, which shows that 56% of consumers say they are ready to defect from their main provider in the banking sector and more than 37% say it is “easy” or “very easy” to do just that.
But frustration is only one factor. Consumers have changed too. Their busy lifestyle means convenience is a constant preoccupation, says the Webloyalty report. As a result, many now use mobile devices to do their banking online and they can choose from a wide range of financial service providers and payment options. The rise of consumer choice means they expect nothing less than a seamless experience across all channels and they are prepared to punish those who don’t deliver.
This represents a significant adjustment for many banks. First, they must develop digital services in line with new expectations. Then, they must find ways to offset the cost of developing these new tools. But most of all, they must adopt a more consumer-centric approach if they hope to fight back against their new competition.
The new kids on the block
Historically, banks have been “the dominant players in payment systems in Europe and around the world,” according to Deloitte’s recent report Payments disrupted: The emerging challenge for European retail banks. As a result, “payments have traditionally been both a key revenue stream and a strategic source of competitive advantage for banks.”
But even before the 2008 economic downturn, the European Union started questioning the dominance of banks, particularly in the key area of payments. This led to the implementation of several regulations to reduce what it called “a tax on trade” including a cap on interchange fees, that is fees bank charge each other when their customers use debit and credit cards to make purchases.
In the UK, the Payments Services Regulator was given a wide range of regulatory powers in order “to open the payments market to competition from non-bank players in response to innovation and changing customer behaviour, especially with regard to the use of smartphones.”
The impact of these regulations on card issuing retail banks will be quite significant both in lost revenues up-front and potential loss due to payment schemes, reserved up until now to member banks, becoming open to non-members such as tech companies, retailers and fintechs.
These relative newcomers have already been disrupting the financial world by offering niche services and high quality customer experiences meant to take advantage of traditional banks’ weaknesses. They’re agile and can move products quickly from the design phase to delivery.
But retail banks still possess many things fintech companies don’t: a known brand, market penetration and a breadth of services they can string together to create the ultimate omnichannel journey. But first, banks will have to revamp their existing systems, which will be quite a challenge as the current IT operating models were not designed for change.
Taking the digital turn
Many retail banks are already aware of the urgent need to embrace digital technologies. However, their existing IT systems weren’t designed for flexibility but rather to be secure, stable, predictable and efficient. This puts them at an obvious disadvantage.
That said, rather than wait for a complete overhaul of their systems, which could take years, banks can start showing their customers they’re listening by creating and implementing improvements in high-impact areas such as buying a car or a house, which are considered two key omnichannel journeys that involve browsing, advising and transaction.
These improvements can take many forms. They can focus on connecting with customers, employees and suppliers, explain Henk Broeders and Somesh Khanna, both Directors at McKinsey & Company.
“This extends from online interactivity and payment solutions to mobile functionality and opportunities to boost bank brands in social media.”
Others can create added value to existing processes. For example, the Commonwealth Bank of Australia collaborated with online real estate aggregators like domain.com.au to develop an app that uses augmented reality to help those looking for a house. Customers “simply point their smartphone camera at a residence and the app brings up extensive property details, as well as monthly payment estimates on mortgages and insurance.” This app creates added value for consumers and seamlessly links into banking services.
These incremental improvements can also enable retail banks to start reaping the benefits of new digital tools. Data analytics for example, can provide banks with valuable information about customers that it can use, in turn, to create more consumer-centric products.
The overhaul of IT systems can also increase efficiency as “repetitive, low-value, and low-risk processes” can be automated, explain Broeders and Khanna. “Process apps, for example, boost productivity and facilitate regulatory compliance, while imaging and straight-through processing lead to paperless, more efficient work flows.”
To make the digital turn successfully, retail banks must rethink their approach and implement gradual changes aimed at creating an omnichannel customer-centric experience. Deloitte’s advice is for banks to be selective in their in-house investments suggesting they instead partner, or even acquire, fintech companies already offering the right kind of digital services.
By Enrique Garland, senior strategy manager at Affinion