Today’s retail banking market is undergoing a hugely exciting – if challenging – transformation. Traditional financial services firms are under more pressure than ever from a variety of new competitors such as tech companies, while at the same time, consumer expectations are higher than ever.
In the UK alone, for example, there were 29 new banking licence applications in progress in 2015, and the likes of Apple Pay and Google Wallet are making great progress in developing innovative new services to entice customers with the promise of better value and convenience.
All of this means that firms in the retail banking sector will have to radically rethink their business model in order to meet these demands and provide the level of service their customers expect.
McKinsey notes in its 2015 Global Banking Annual Review: “The fight to hold on to customer relationships will be a high-stake struggle. We estimate that in five major retail banking businesses (consumer finance, mortgages, SME lending, retail payments and wealth management) from ten to 40 percent of revenues (depending on the business) will be at risk by 2025, and between 20 and 60 percent of profits, with consumer finance the most vulnerable.”
Here are five key trends that financial institutions will have to be aware of in the coming years if they are to achieve this.
More simplified operations
One of the major appeals of many fintech options is their ability to deliver a fast, convenient and easy-to-use service, and this is something banks must respond to. Streamlining the business is essential in order to provide value to customers, as well as ensuring banks are making the most of their existing resources.
Optimizing the distribution channel
Making the most of every available channel will also be a big focus for the sector in the coming years. For instance, most retail banking executives feel that the branch is still a big asset due to the value it can offer to customers, even where footfall is declining. Therefore, one of the top priorities for these executives is to have the right distribution mix in place – including both the branch and self-service channels to maximize their existing resources and to deliver an enhanced customer experience.
A more digital business
It should go without saying that digitization has been a key trend for any business over the last few years – yet despite this, many banks still haven’t taken full advantage of this. This will have to change. Currently, digitization efforts are more focused on automation and improvements in organizational sales and servicing capabilities. However, there is massive potential to transform the whole business through digital technology, making it more streamlined, agile and flexible to enable future growth and success.
BCG notes in its 2016 Retail Banking Excellence (REBEX) benchmarking study: “Banks leading in measures of operational and digital excellence reaped the lion’s share of financial rewards. They achieved 50 percent higher average pretax profit per customer than the median, while their operating expenses per customer were 30 percent less, a saving largely driven by lower personnel and IT costs.”
Going hand-in-hand with digitization will be a greater need to improve the personalization of products and services, which will be a key component of building a more customer-centric business model. This will help create greater value for customer and build future relationships that last for many years.
McKinsey notes: “Personalization can reduce acquisition costs by as much as 50 percent, lift revenues by five to 15 percent, and increase the efficiency of marketing spend by ten to 30 percent.”
Enhancing the customer experience
What all of the above trends essentially come down to is providing an enhanced experience for customers, by moving away from a focus on transaction management to a business model that prioritizes relationship management. This means understanding customer needs and partnering with them to achieve their short and long term goals in life. It is about creating a brand supported by the right sales and service capabilities to deliver enhanced customer value throughout their journey with the bank.