Retail Bankers Unprepared For The Future

At a time when powerful forces are disrupting the retail banking industry, financial services executives agree that a transformation of the banking landscape is inevitable. Unfortunately, while they agree on the priorities that are integral to success in 2020, fewer than 20 percent feel prepared to address these priorities.

In a survey of 560 executives from leading financial institutions across 17 markets entitled, "Retail Banking 2020: Evolution or Revolution," PwC  found that 90 percent of financial services executives agree on the priorities that are the foundation for success in 2020, yet only a fifth (20 percent) feel well-prepared to address these priorities despite the fact that nearly all (96 percent) believe that a fundamental transformation of the banking industry is inevitable.

"Growth remains elusive, costs are proving hard to contain, returns remain stubbornly low and regulation is impacting business models and economics," said John Garvey, U.S. banking and capital markets leader at PwC. "Simultaneously, the evolution of technology and heightened customer expectations combined with the emergence of disruptive competitors creates new pressure to deliver higher levels of service at a time when value and trust in the sector is at an all-time low. Surviving and succeeding in this environment may require a fundamental rethink in approach."

Today's Challenges

The impact of growing and changing regulations is the primary challenge for retail banks in the U.S. (47 percent) and Europe (40 percent), where banks are trying to stop seeing regulations as a burden and hoping to weave compliance into the fabric of their operations.

In the U.S., attracting new customers (35 percent) and increasing profitability (33 percent) ranked second and third respectively, aligning with the hierarchy of investment priorities (56 percent regulatory compliance, 46 percent enhancing customer service and 30 percent implementing new technology).

Source: PwC Banking 2020 Survey

Nearly all respondents (97 percent) view innovation as a critical driver of growth – with companies who consider themselves innovative predicting 62 percent growth over the next five years, nearly double the market average of 35 percent and triple the 21 percent for the least innovative companies.

Despite understanding the importance, only 10% of CEOs view their organizations as innovation leaders. Further, 64% of CEOs agree that neither innovation nor operational effectiveness are dominant – and are looking to succeed at both.

PwC believes executives recognize they need to do things differently. According to the study, over 50% are planning to enhance their internal capabilities to foster innovation, and to create innovation management teams across business units. There is also a recognition that partnerships and third-party relationships may be the best way for banks to reap the benefits of innovation.

In the U.S., the primary areas mentioned for innovation were products (43 percent), customer interfaces/channels (60 percent), core platforms (50 percent) and customer need identifications (40 percent).

Finally, nearly three quarters (71 percent) of U.S. retail banking executives consider non-traditional competitors a threat, significantly higher than executives in Asia (42 percent), where more view them as an opportunity for partnering.

Traditional Banks At Risk Due to Digital Disruption

According to two recent reports from Accenture, 35 percent of banks' market share in North America could be in play by 2020 as traditional branch banking gives way to new digital players. The research also indicates that 15 to 25 percent of today's roughly 7,000 North American financial institutions could be gone as a result of consolidation before 2020.

To combat this shift, Accenture recommends that traditional providers take a radically new approach to distribution, combining a simpler yet more comprehensive branch offering with integrated digital services.

"Digital technology and rapid changes in customer preferences are threatening full-service banks that do business primarily through branches," said Wayne Busch, managing director of Accenture's North America banking practice and author of the report, A Critical Balancing Act: Retail Banking in the Digital Era. "Given the scale of these disruptions, traditional full-service banks, as a group, could lose significant market share by 2020 -- to banks that reorient around digital technologies and to new entrants from the retail and technology sectors."

Digital Disruption

New digital technologies, emerging digital competitors and the extremely rapid changes in customer preferences are threatening to dramatically impact those full-service banks that limit themselves to products and services that get distributed primarily through physical branch channels. The outside disruptors tend to be more agile and more innovative, while traditional banks are weighed down by unprofitable branches, legacy back offices and inefficient silos. 

Business as usual is no longer an option in an industry that could see up to 25 percent of U.S. banks disappear completely.

In conducting online interviews with more than 2,000 US retail banking customers of the 15 leading retail banks in the U.S., Accenture found that 71 percent said they were “satisfied” with their bank and 68 percent said they would be “extremely likely” to recommend their primary bank to a friend, family member or colleague. In addition, only 9 percent of those surveyed switched institutions over the past year.

This loyalty is fragile, however, since more than a quarter (26 percent) of bank customers who remain with their primary provider do so simply because they consider switching to be a hassle, while about half said they haven't seen a competing offer that was attractive enough to make them move. The survey also found that two-thirds of bank customers would consider a branch closure as inconvenient and nearly half would switch banks as a result.

Source: 2013 Accenture Retail Banking Survey

This not only exposes the tenuous relationship banks have with their customers. It also confirms that the right offering and approach can induce them to switch. "The core challenge for banks: how to build a seamless digital customer experience -- and optimize its power with a better and more cost-effective complimentary offering in the branches that customers find so attractive," concludes Accenture.

The Disruption Has Already Begun

According to Accenture, many banks have already begun losing their customers to digital disruptors. The survey showed that customers acquired 34 percent of traditional banking services such as CDs, money market accounts, personal and auto loans and even new checking and savings accounts from institutions other than their primary bank.

Source: 2013 Accenture Retail Banking Survey

While traditional players have the innate advantage of extensive branch networks that the customer still says they value (nearly 60 percent of new product sales are still closed in branches), these same players should be concerned about the the transition to an online sales environment.

The growth rates in online sales since 2012 are strong in several categories, with online auto loans growing from 11 percent to 21 percent in the past year, online sales of mortgages rising from 15 percent last year to 25 percent in 2013 and sales of personal loans through the online channels jumping from 8 percent to 24 percent in only one year.

Source: 2013 Accenture Retail Banking Survey

Today's Mobile Banking Apps: Table Stakes or Cutting Edge

There is no disputing that the U.S. mobile banking landscape is changing rapidly. Larger banks are setting the stage for broader market trends, while smaller banks (and even some regional players) play catch up in the development of new functionality.

What are some of the top U.S. banks doing that is innovative and what has quickly become table stakes in a game of mobile app one-upsmanship? And is mobile banking innovation becoming a value-added differentiator that can drive new revenues?

Over the past 18 months, mobile banking applications have evolved beyond the basics to include specialized functionalities, improved user experiences and an expansion of platforms supported. A year ago, mobile remote deposit capture (RDC) was live at only five of the top 13 banks. Today, it is a 'must have' banking application that has the potential to drive revenue. Similarly, P2P is now taking center stage at most banks despite some logistical hurdles, with five banks adding this functionality in the past 12 months.

How are banks keeping up with consumer demands? How are they keeping up with each other? What's next? In the third report in a series on the state of mobile banking released by the financial research and consulting firm Celent, a review of new application development is provided along with a glimpse into the future. 

In the 44-page report, The U.S. Mobile App Landscape: An Annual Evaluation of Mobile Banking at Top U.S. Banks, Celent found that larger banks tend to out-develop and out-adopt smaller institutions by a significant margin. “The channel is still relatively new, but leaders in the digital channel space are beginning to take offerings into the realm of value-added services that are context-sensitive, timely, and utilize big data", says Dan Latimore, senior vice president of Celent's Banking Group and coauthor of the report. "There’s a large disparity among digital offerings—industry leaders are light-years ahead of the laggards.”

Below is Celent's view of the mobile landscape as it continues to evolve. As can be seen, Emerging Capabilities include a more advanced stage of interaction with more knowledge-driven tools and analytics. While some of these may not be pursued by every organization, Celent believes most will be tomorrow's standard. Interestingly, some of the functionality in the Future Focus is already being implemented on a global basis (see previous post 'Banks Accelerate Mobile Banking Innovation', June 2013). 

While the future may be considered speculative, some components are beginning to appear at the more progressive institutions (U.S. Bank and BBVA Photo Bill Pay) and at some of the new players such as Moven, Simple, GoBank and BlueBird (see 'Challenger Brands & Disruptive Ideas: Learning From The NeoBanks', Financial Brand, August 2013).

Current Evolution of Mobile (Celent, June 2013)

Banking Leaders Discuss 2014 Strategic Planning Priorities

CROWDSOURCING SERIES

As we enter the planning season with a marginally better economy than last year, banks and credit unions are faced with margin compression, high operating expenses, new competitors and channel disruption that challenge even the most efficiently run organizations.

To assist with this year's strategic planning process, I asked some of the foremost global leaders in the banking and credit union industry to provide thoughts on what they believe are the 2014 strategic planning priorities. This blog post is a companion to the post done at the beginning of the year regarding trends expected in 2013.

Understanding that each financial institution and market is different, it was interesting the uniformity of priorities offered to bank and credit union management by the more than 30 industry leaders I interviewed for this post. And while the ability to execute against these strategic priorities may be impacted by size of organization and other dynamics, there was a consensus among those who I spoke with that 2014 may be one of the most important planning cycles ever.

Enhance the Customer Experience

Improving the customer experience was the foundation of almost all of the responses I received around 2014 strategic priorities. Whether we are talking about branch reconfiguration, mobile banking applications, back office operations, etc. banking industry leaders believe an improved customer experience is the key to growth. 

As was said by Mary Beth Sullivan and the team from Capital Performance Group in their May/June Newsletter, "Many banks have a long way to go to get the basics right, so banks and credit unions should focus first on the basics. Once the basics are humming, ask yourselves: What can we do to be sure that our customers are better off banking with us than with our competition? What will make our customers lives better? How can we help them solve specific problems they are dealing with? Answers to these questions will define the experience you seek to create."

Beyond 'the basics', other specific strategic initiatives were recommended by Steven J. Ramirez, CEO of Beyond the Arc. "Developing a proactive complain management process that goes beyond regulatory requirements can drive new customer experience projects", says Ramirez. He also believes financial institutions need to determine how they can be a finger swipe away from providing guidance and support through mobile devices.

Financial industry futurist and blogger Scott Bales believes bankers need to get out of the office and talk to real customers, developing empathy for their problems, behaviors and desires if they want to develop offerings that align with the needs of the market. According to Bales, "The goal is to build experiences, not products".

Sankar Krishnan from Sutherland Global sees customer experience as the 'X factor' across all channels and interactions the customer has with their financial institution. Comparing what banks need to strive for with customer experience leaders Apple, Amazon and Quicken Loans, Krishman believes banks need to excel at aligning people, process and technology. 

Sam Maule from Carlisle & Gallagher Consulting Group believes that recent start-upssuch as Moven and Simple (and perennial cx leader USAA) are the best at visual engagement and customer experience. He quoted one of his banking clients as saying, "I would pay $500K for ONE great user experience designer. FSI's are horrible at this. We have massive data systems, huge BI tools, and more, but none of that means jack for consumers if there isn't an amazing user experience."

Finally, best selling author and acclaimed management advisor Joe Pine believes banks and credit unions must go beyond providing just checking accounts and loans.

Are Bankers Ready For The Bank 3.0 Reality?

In an exclusive interview about his newest book, Bank 3.0, Brett King discusses how change occurring in the banking industry is inevitable, speeding up and disruptive. 

From the mobile wallet wars to the impact of social media, tablets and the 'de-banked' and digital consumer, Bank 3.0 shows why banking is no longer a place you go to, but something you do.

A great deal has happened since Brett King wrote Bank 2.0 in 2010. Two years ago, banks were under siege as the foundation of the banking system was close to collapse and the image of the industry as a safe and secure environment was being challenged. The impact of social media was just beginning to be understood by the financial services industry and mobile technology as we know it today was in its infancy. Heck, King even referenced his (now long gone) Blackberry in the first chapter of Bank 2.0.

With Bank 3.0, King discusses how consumers are less likely to view their retail banking provider in terms of capital adequacy, branch network, products and rates. Instead, customers are more likely to determine their banking partners by how easily they can access their accounts when they need to, and how much they trust their provider to execute business on their behalf. For those who read Bank 2.0, King's new book retains some of the foundation and case studies, but updates several areas based on what has occurred (and will be occurring) relative to digital delivery, payments, social media, and the power of 'big data'.

On the eve of the introduction of Bank 3.0 in the U.K. (introduction in the U.S. is scheduled for early November), I interviewed Brett King about his new book and about how he views the banking industry today.

Banks Transforming Branch Networks to Improve Efficiencies

A lot has been written lately around the desire for banks to transform their branch networks given the consumer acceptance of alternative channels and the need to reduce distribution costs. In the past week, there has been coverage in both the American Banker as well as in BAI's Banking Strategies publication (see links to recent articles and white papers below).

One such report, published by the financial market research firm Fitch Ratings entitled, U.S. Banks: Rationalizing the Branch Network, expects that both fewer numbers of branches and different types of branches will be serving customers in the future. According to the report, the continuously increasing cost structure of banking, accompanied by a challenging revenue environment and higher capital requirements is prompting banks to evaluate all expense categories — especially their branch distribution system, which is one of the most significant expenses.

Past Branch Growth

For the past 30 years, branch growth continued unabated while the number of financial institutions declined by more than 50%. The growth occurred largely through consolidation and de-novo expansion, with the objective being to expand a bank's footprint and customer base and therefore low cost deposits and loans.