The changing face of retail banking

It’s almost impossible to open a newspaper today, or read its online version, and not find an article which predicts the demise of the traditional retail bank. With some estimating that leading online banks might be half as efficient again as the traditional bricks-and-mortar banks, it’s no wonder that a combination of the internet, mobile phone and automated teller machine (ATM) is being proposed as a real alternative to a physical high street presence.

Yet, could rumours of the death of the branch-led bank be premature? We think so, for two key reasons. Firstly, we believe that many of the established financial institutions have the experience, insight and resources that make them more than capable of prospering in a changing world. With their long history of overcoming challenges posed by wars, recessions and market changes, there’s reason to be confident that such institutions are well-placed to respond today’s issues, such as digitised technologies, automation and robotics.

At a time when much market comment is focussed on new entrants, it is worth remembering that it is the established UK banks that have quietly rolled out more than 23m banking apps to their account bases. Almost half the UK population now use mobile banking apps, implemented with little fuss and few problems, at the same time that the industry was deploying other new initiatives such as contactless transactions and faster payments.

Secondly, in helping our clients build tomorrow’s retail bank we have gained particular insight and understanding into market challenges, how the industry is responding and the results that organisations are securing. This gives us confidence that a traditional, but updated, business model remains viable.

But why is retail banking changing? Because market conditions remain difficult. Revenue streams remain threatened by three key issues:
• In a continuing period of low interest rates, pressure on the net interest margin is unremitting.
• A history of conduct-related issues and regulatory change means that opportunities to boost fee-income based businesses are more limited than in the past.
• The authorities are, once again, encouraging new competition to enter the market – with many of these suppliers being new to the industry and technology-led – so as to challenge the incumbency of established players.

Such trends mean that, in recent years, strategies which enable the market’s profit expectations to be met have focused around driving efficiency improvements. After all, control of the cost-base lies – to some degree – in the gift of a bank’s management team. But many cost-centred strategies have delivered mixed results. Will doing “more of the same” be enough to secure the future of the retail bank?

We believe that it won’t be, although banks have to take a more fundamental look at where value is created, where costs are incurred and how each organisation can compete in a changing world. After all, key trends – including increased competition, more outsourcing and a rise in partnering – are here to stay. Such an exercise will lead many retail banks into a fundamental strategic and organisation review. In particular, many will elect to no longer own and control all of the end-to-end value chain, which is likely to break up.

The challenges ahead

So, which parts of the chain should the banks keep and which can they let go? To secure its future, the established retail bank must rise to two key challenges – securing its relationship with the customer, while improving the efficiency and effectiveness of core operations. This means enhancing existing business operations while investing in platforms which provide flexibility, resilience and enhanced cost control. It also means developing technology offerings which match, or better, those be deployed by new entrants to the market.

The greatest value is to be secured at the front-end of the traditional value chain. Retaining ownership of the customer, and the means to reach each individually – be it through distribution channels, marketing or the corporate brand – will be key. Without the customer relationship, banks will be neutered. Consequently, these are assets which banks must retain ownership of at all costs and, therefore, are areas that the industry is likely to invest in heavily.

We also believe in an integrated distribution strategy, in which branches, working alongside other distribution channels, continue to play an important role in supporting each other. After all, in many cases, the branch customer is also the digital customer and also the one on the ‘phone with a query. Therefore, banks can be expected to continue to route routine transactions, such as balance enquiries and money transfer, to mobile technologies, while branches focus on value-adding sales and service.

This will result in the closure of some branches and the relocation of others into shared premises and not-so-prime locations. It certainly means the redesign of branches to resemble more closely those deployed by the best retailers on the high street.

By investing in enabling technologies such as high-end communications networks and self-service equipment, banks can create branch environments which consumers would be delighted to visit and use. The widespread availability of PCs and laptops, coin counters and higher-specification ATMs will enable customers to complete many simpler transactions for themselves.

Floor-walking staff, equipped with tablets linked to enhanced customer databases which offer true client insight, will focus on building relationships and on offering a shortlist of solutions to pre-identified customers. Centralised and telephone-based services will be increasingly supplemented, or replaced, by video, making conversations with centrally located experts much more powerful. Added to this, free services – such as wi-fi, coffee and newspapers – will be used to encourage customers to stop by more frequently.

Back-end operations will, increasingly, become automated, commoditised and less differentiated. Enhanced efficiency in operations means that the ability to compete around processing will become more limited, particularly once artificial intelligence (AI) becomes deployed routinely. Over time, some banks will probably choose to outsource particular operations or enter into utility-style arrangements. Such arrangements have been common for some time in cash processing, cheque clearing and payments, so expect to see further examples emerge.

A promising future

Industry initiatives, such as ring-fencing, will result in the operations and IT functions of some banks looking to secure business from clients beyond their parent organisation. New co-operative, and international, groupings will also emerge, looking for opportunities provided by selected new technologies. For example, the R3 consortium is looking at ledger-inspired technologies, while Ripple, is evaluating a shared cloud infrastructure and protocols for ledger communication for the Japanese banking market.

Yet it’s also clear that, as the traditional value chain fragments, risks to the bank will arise. The parameters of the organisation will be stretched, exposing it to new challenges. Maintaining the health of the bank’s cardiovascular system – those apps, systems and infrastructure that enable interactions with prospective and current customers and those that facilitate and record transactions and activities undertaken – will be essential to continuing success. This network must be mapped, understood, updated and protected as the bank evolves and changes.

In the new world that is emerging, banks must also ensure much closer day-to-day cooperation between divisions of each bank. For example, an enquiry about a mortgage received from a tablet device – which previously would have been addressed in a branch – may require an out-bound call from a contact centre which previously prioritised in-bound calls, with the consequential impact that handling regulated products has on key areas, such as recruitment and staff training. This implies a fundamental restructuring of the organisation and will place the IT function and its staff at the centre of the organisational change agenda.

While we believe that the established banks have a promising future ahead of them, it’s with the caveat that there is no room for complacency. A powerful combination of economic, technical and social change means that the banking world will not stand still. Addressing such issues is no insignificant challenge, but – by navigating a careful course – retail banks can be steered towards a prosperous future.

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