Retail Banking 2020: Evolution or Revolution?

Powerful forces are reshaping the banking industry. Customer expectations, technological capabilities, regulatory requirements, demographics and economics are creating an imperative to change. Banks and credit unions need to get ahead of these challenges and retool if they are to find success in the upcoming decade.

By Jeffry Pilcher, Publisher of The Financial Brand

Growth remains elusive, costs are proving hard to contain and ROE remains stubbornly low. Regulation is impacting business models and economics. Technology is rapidly morphing from an expensive challenge into a potent enabler of both customer experience and effective operations. Non-traditional players are challenging the established order, leading with customer-centric innovation. New service providers are emerging. Customers are demanding ever higher levels of service and value. Trust in financial institutions hovers near historic lows.

Such is the backdrop with which PwC uses to frame its world-class report, “Retail Banking 2020: Evolution or Revolution?” addressing the financial industry’s future head on.

As dire as the current situation facing financial services firms may sound, PwC actually believes traditional institutions a bright future. And despite all the gesticulating, undulating and bloviating from pundits about the “imminent death” of banks and credit unions, PwC doesn’t see “outside disruptors” driving a dagger through the heart of the banking industry — the fundamental concept of a trusted institution acting as a facilitator of transactions and credit resource is not about to change. However, the landscape will change significantly, as customer expectations, regulatory requirements, technology, demographics, new competitors and the fundamental economics underpinning the banking industry all shift and evolve.

PwC says existing banking providers must accept that the status quo is not an option. But does all this change signal a revolution, or an evolution? PwC says it’s both. The industry has historically changed slowly — evolutionary, incremental change. While the changes PwC envisions are less about imagining?some unknown future, and more about implementing and integrating all the things we already know today, the pace of change is intensifying rapidly. Financial institutions that fail to shift gears risk being left in the dust.

To produce their report, PwC integrated insights from 560 client executives from leading financial institutions across 17 markets. They examined the challenges and opportunities of this evolving landscape and how they plan to respond. 70% of global banking executives said they believe it is very important to form a view of the banking market in 2020 — to understand how global trends are impacting the industry, and what they need to do to develop a winning strategy.

Respondents aren’t sure who will be the primary beneficiaries of these trends. Just over half (54%) believe that large banks will be the winners, while the other half (46%) see smaller banks capturing share through increased differentiation. Industry executives are also divided as to the threat posed by non-traditional new players: 55% believe they pose a threat to traditional banks, while 31% believe they present innovative partnership opportunities.

Executives also differ in their views by geography. For example, fewer US executives think it important to form a view of the industry in 2020 (61%) than executives in the emerging markets (79%). And many more US executives view non-traditional new market entrants as a threat (71%), than executives in Asia (42%), where more view them as an opportunity (44%) for partnering and prospering together. This divide between developed and emerging market thinking is a theme throughout PwC’s survey.

Seven Macro-Trends Impacting The Future of Retail Banking

1. Technology will change everything — becoming a potent enabler of increased service and reduced cost. Innovation is imperative. In the last few years technology has rapidly evolved — big data, cloud computing, smartphones and high bandwidth are all now commonplace. PwC says we’ve reached a tipping point that’s analogous with what has already occurred in other industries (e.g. music, video, and print media), where the digital channel will compress revenues, enable new attackers, redefining service and crippling the laggards. The pace of innovation will continue to increase, and financial institutions will need to enable or leverage this innovation if they want to keep up.

2. Every bank will be a direct bank, and branch banking will experience?a significant transformation. PwC says that as technology shifts more and more activities online and as cash?usage drops, traditional branches?will no longer be necessary. Given their high-fixed cost, branches will need to become dramatically more productive,?or significantly less costly (e.g., smaller). Banks and credit unions have already reduced staff levels, closed less viable locations, and are experimenting with new retail concepts. PwC predicts branches will remain relevant, but will adopt many different forms — from flagship “engagement hubs” to compact “smart kiosks.”

3. Competitive reach will no longer be determined by branch networks,?but rather by banking licenses, technology and marketing budgets. When every aspect of banking can be done digitally,?a bank’s target market and competitive arena is no longer defined by its physical footprint, but rather by its technology, its regulatory boundaries and the sheer limitations of its marketing budget. In the US, for example, top regional banks could become viable national players?and ambitious foreign entrants with resources but without any brick-and-mortar footprint could suddenly find themselves compete on a new, larger field. New entrants could sprout up rapidly, potentially spawning dozens of new competitors and refragmenting the landscape further than it already has. Indeed, PwC envisions there will be increased competition from non-bank players. As a result, branding and marketing will be more important than ever before.

4. Banks will organize themselves around customers instead of products or channels. PwC says the winners of tomorrow will offer a seamless customer experience, integrating sales and service across all channels. They will develop the ability to view customers as a “segment of one,” recognizing their uniqueness, and tailoring their offerings so that customers view banks as “meeting their needs” not “pushing products.”

5. Banks (in most countries) will evolve their customer experience to be more female-friendly. In one US survey, 73% of women said they were dissatisfied with the financial services industry. Complaints range from a lack of respect, to being given contradictory advice and worse terms than men. Smart institutions will address this through a combination of branding, products, and service solutions. Furthermore, PwC forecasts that significantly more bankers working in the industry will be women by 2020; many banks publicly state this as an ambition.

6. Social media will be the media. Today, most financial marketers view social media as co-existing alongside traditional channel. By 2020, PwC says social media will be the primary medium with which financial institutions connect, engage, inform and understand consumers — everything from the mass “collective social mindset,” to the minutiae of each and every individual. Information and opinions — both good and bad — will be amplified. Mastery of social media will be a core competency, according to PwC.

7. Cyber security is paramount to rebuilding trust. Winners will invest significantly in this area. Recent high-profile security breaches?and media commentary surrounding cyber attacks have sparked fear and uncertainty, further eroding consumer trust. There are now higher expectations about security of information and privacy among clients, employees, suppliers and regulators. A proactive response is vital.

Six Priorities for 2020

Through PwC’s proprietary research and insights from client worldwide, they were able to identified six critical priorities for success in 2020:

1. Developing a customer-centric business model
2. Optimizing retail delivery
3. Simplifying business and operating models
4. Obtaining an information advantage
5. Enabling innovation, and the capabilities required to foster it
6. Proactively managing regulations, risk and capital

There is broad agreement among banking industry executives that these six areas are all “very” or “somewhat” important, but fewer than 20% feel they are “very prepared” to address these priorities. A similar number report that they are making significant investments in these areas.

Financial institutions seem to universally agree that they are hindered from addressing these priorities by financial, talent, technology and organizational constraints. Banks and credit unions need?to take aggressive action to ease these constraints, and manage themselves in a more agile manner to enable innovation and transformation they so desperately need.

To read more about the priorities and to download the full report, continue to read the article on The Financial Brand here ...

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