Retail banks and the point of no return

Brett Thornton
By Brett Thornton under Insights 28 July 2016

Why banks must act now or miss the next decade...

2016 is an inflection point for UK banks. Shifts in the regulatory environment, challenging economic conditions, elevated customer expectations, new sources of competition - not to mention the relentless march of technology - are all combining to threaten the banking status quo.

This change presents a dramatic, once-in-a-generation opportunity for those willing to move fast to remake their businesses. However, before we dive into that opportunity, let’s first zoom out and take a look at the reasons for the banking industry’s limp diagnosis.

 Banks face fresh challenges in the economic and regulatory environments.

Low interest rates, coupled with uncertainty around post-crisis regulation on capital requirements and net-interest margins, threaten to permanently depress bank profitability. At the same time, regulators - led by those in the UK - are encouraging competition with the FCA and the Bank of England’s PRA, targeting 15 new banking licenses to be awarded between 2015 and 2020.

► Technology is accelerating this shift, and changing the axes of success.

High street branches and the exhaustive product ranges that banks once counted as differentiators are increasingly costly liabilities, with BBA data showing branch interactions falling by a third over the past five years.

Meanwhile, knowledge is being aggregated and democratised, resulting in fewer customers turning to their bank as a primary source of financial advice - significantly depressing the lucrative opportunity to cross-sell. The increasing prevalence of these aggregators, combined with the Current Account Switching Service, have laid the foundations for an acceleration in switching. This acceleration is increasingly evident as the experience delta widens, with new competitors building with the assumptions of the mobile and cloud era.

► Banks are falling behind customers’ digital expectations.

Customers’ digital expectations are set by their best digital experiences. This means they are comparing their banking experience to Uber, Starbucks and their favourite takeaway app - not the competitors most banks are focused on. The services they are using are personalisable, real-time, contextually aware, and proactive: they put the smartphone at the heart of an ecosystem of devices and interactions. However, today’s primary banking apps are none of these things.

► What customers really want to achieve remains consistent.

In the face of so much change, you would be forgiven for thinking customers needs had radically evolved. In fact, the money-related outcomes customers want to achieve are remarkably consistent and universal. However, what has changed is how customers achieve those outcomes - and they are no longer tied to banks alone. To quote Bill Gates, ‘Banking is necessary, banks are not.’ People will always want to know their financial status, reach the end of the month, save towards something big, and easily pay friends. However, as startups and innovative new models appear, it’s becoming increasingly clear that banks are not providing the best solution for many of these core outcomes.

► Banks haven’t changed how they help customers achieve their outcomes. 

We regularly audit and review banking apps and, despite recent positive data suggesting bank customers logged into their apps 11 million times a day, it’s clear the majority still fail to fully exploit the opportunity presented by the mobile-era, and are set to miss what comes next.

History suggests - and we still see it - that each time banks have started using a new technology to serve their customers, they simply transported the previous era’s assumptions and formats to the ‘new’ world. Internet banking, for example, became a web version of the statements and forms we used in the analogue world. Mobile banking, in turn, is simply a shrunken, limited version of the web experience. In neither case was there a fundamental, radical rethinking of the use cases, limitations and, crucially, the significant new opportunities provided by the technology to do things in a better way. And we don’t have to look far for examples in Asia and Africa for banks who didn’t start with these analogue assumptions, and are now building truly mobile-native banking experiences the West has so far failed to deliver.

► The traditional banking value chain is being ‘unbundled’ by focused players.

Another clear example and result of the slow pace of innovation in banking is that a space has opened up for new competitors who excel at delivering a great customer experience - faster and cheaper than banks.

The potential of these entrants is evidenced by massive inflows of capital investment in financial services startups - startups like Mondo, which crowdfunded £1m in just 96 seconds, crashed Crowdcube’s servers and made history to boot. Most start from one focused slice of functionality around one key customer outcome. This threatens to peel off a segment of customers for certain high-value categories - such as consumer credit - and which then eats into the bank’s comfortable model of cross-selling products once customers are ‘locked-in’. This scenario is accelerated by increased transparency in product comparison, and is likely to drive more M&A and partnerships as banks look to recapture lost value.

► PSD2 and the Open Banking Framework formalises tomorrow’s ‘modular’ bank.

The introduction of the European regulation known as PSD2 will increase standardisation and interoperability of card, internet and mobile payments. Initially, this means allowing third-parties to read customer, balance, and transaction data using APIs. By 2019, however, this will have extended to third-parties writing data and initiating payments directly from a bank. Once this happens, there is a clear risk for banks that the primary customer interface (and relationship) moves away from them to a third party, who provides services sitting on top of the bank account. A similar dynamic played out in the telecomms industry, where service providers deliver the infrastructure that third-party content providers, such as Amazon and Netflix, deliver on top of.

► As banks get disintermediated, others increasingly own the customer relationship.

One scenario sees value moving up the stack, away from the bank and towards the entity that ‘owns’ the new customer interface, or to third parties offering new value. For example, an aggregator who removes the friction of switching between banks and products, automatically maximising customer returns. This would reduce the bank or other product providers to the status of interchangeable commodity - and further breaks the direct relationship between banks and their customers.

► For banks who act fast, there is a new world to win.

Despite the potentially gloomy outlook, all is not lost. The tools available to the new entrants are all available to established players, too, and banks have numerous other structural advantages they can exploit. We have seen significant investment across the industry, but more importantly, every bank needs to develop a clear and coherent strategy for tackling these oncoming dynamics - ultimately deciding where in the value chain it wants to play.

Banks have many options when deciding where to play. These range from owning the customer relationship and moving up the stack toward aggregated services, to a specialist focus on key customer subsets. Other options include differentiation through the product offering, providing added value services or focusing on the cross-channel experience, including in-store. Others, meanwhile, may focus on being the best utility offering, slashing costs and providing the services that others build on top of.

Having identified where to play, and with a clear strategy in place, banks next need to identify the capabilities required to deliver on that strategy. Capabilities include:

1. Mobility-era product excellence


2. Seamless multi-channel experiences 


3. Empowered and engaged front-line staff


4. Quality, scalable and flexible technology platforms 


5. Streamlined operations empowered by technology


6. Responsive agility across the organisation

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In our next post, we will be introducing these capabilities in more detail - but in the meantime, if you have further questions or comments, get in contact with us.