“If you don’t like change, you will like irrelevance even less.” -General Eric Shinseki, Former US Secretary of Veterans Affairs
This blog has spent time documenting the ongoing digital disruption across the industry especially financial services. Is there proof that creative destruction is taking a hold in Banking? The answer is a clear & unequivocal “Yes”. Clearly, Retail Banking is undergoing a massive makeover. This is being driven by many factors – changing consumer preferences, the advent of technology, automation of business processes & finally competition from not just the traditional players but also the Fintechs. The first casualty of this change is the good old Bank Branch. This post looks at the business background of Retail Banking across the world & will try to explain my view on what is causing this shift in how Banks and consumers perceive financial services.
This blog post will be one of a series of five standalone posts on Retail Bank transformation. The intention for the first post is to discuss industry dynamics, the current state of competition and will briefly introduce the forces causing a change in the status quo. The second post will categorize FinTechs across the banking landscape with key examples of how they disinter-mediate established players. The remaining posts will examine each of the other forces (Customer in more detail along with specific and granular advice to retail banks on how to incorporate innovation into their existing technology, processes and organizational culture.
Retail Banking is perhaps one of the most familiar and regular services that everyday citizens use in the course of their lives. Money is a commodity we touch every day in our lives when we bank, shop, pay bills, borrow etc. Retail lines of banking typically include personal accounts, credit cards, mortgages and auto loans.
For large financial conglomerates that have operations spanning Commercial Banking, Capital Markets, Wealth & Asset Management etc, retail operations have always represented an invaluable source of both stability as well as balance sheet strength. The sheer size & economic exposure of retail operations ensures that it is not only staid yet stable but also somewhat insulated from economic shocks. This is borne out by the policies of respective national central banks & treasury departments. Indeed one of main the reasons regulators have bailed out banks in the past is due to the perception that Main Street & the common citizen’s banking assets becoming a casualty of increased risk taking by traders in the capital markets divisions. This scenario famously played out during the Great Depression in the late 1920s and was a major factor in causing widespread economic contagion. A stock market crash quickly cascaded into a nation-wide economic depression.
Thus, retail banking is crucial to not just to the owning corporation but also to diverse stakeholders in the world economy – deposit holders, the regulators led by the US Federal Reserve (in the US) & a host of other actors.
The State of Global Retail Banking –
In the financial crisis of 2008, retail banks not only held their own but also assumed a bigger share of revenues as the recovery got underway in the following years. According to a survey by Boston Consulting Group (BCG), retail banking activities accounted for 55 percent of the revenues generated across a global cohort of 140 banks, up from 45 percent in 2006.
However, the report also contends that retail revenues since 2008 have been slowly falling as investors have begin shifting their savings to deposits as a reaction to high profile financial scandals thus putting pressure on margins. Higher savings rates have helped offset this somewhat & retail banks ended up maintaining better cost to income (CIR) ratios than did other areas of banking.Retail banks also performed better on a key metric return on assets (ROA). The below graphic from the BCG captures this metric. In the Americas region, the average ROA was 162 percent higher than the average group ROA in 2008. From 2001 through 2006, it was 51 percent higher. Global banking revenues stood at $ 1.59 trillion in 2015 – a figure that is expected to hold relatively steady across the globe 
It is also important to note that global performance of retail banks across the five major regions: the Americas, Europe, the Middle East, Asia, and Australia has generally varied based on a multitude of factors. And even within regions, banking performance has varied widely.
Illustration 1 – Retail Banking is profitable and stable
As stable as this sector seems, it is also be roiled by four main forces that are causing every major player to rethink their business strategy. Left unaddressed, these changes will cause huge and negative impacts on competitive viability, profitability & also impact all important growth over the next five years.
What is the proof that retail banking is beginning to change? The below graphic from CNN  says it all –
Bank of America has 23% fewer branches and 37% fewer employees than in 2009. That downward trend across both metrics is expected to continue as online transactions from (deposits to checks to online loans) grown by a staggering 94%. The bank is expected to cut more positions in reflection of a shrinking headcount and branch footprint.
Pressure from the FinTechs:
The Financial Services and the Insurance industry are facing an unprecedented amount of change driven by factors like changing client preferences and the emergence of new technology—the Internet, mobility, social media, etc. These changes are immensely profound, especially with the arrival of “FinTech”—technology-driven applications that are upending long-standing business models across all sectors from retail banking to wealth management & capital markets. Further, members of a major new segment, Millennials, increasingly use mobile devices, demand more contextual services and expect a seamless unified banking experience—something akin to what they experience on web properties like Facebook, Amazon, Uber, Google or Yahoo, etc. They do so by expanding their wallet share of client revenues by offering contextual products tailored to individual client profiles. Their savvy use of segmentation data and predictive analytics enables the delivery of bundles of tailored products across multiple delivery channels (web, mobile, call center banking, point of sale, ATM/kiosk etc.).
Retail Banking must trend Digital to respond –
The definition of Digital is somewhat nebulous, I would like to define the key areas where it’s impact and capabilities will need to be felt for this gradual transformation to occur.
A true Digital Bank needs to –
- Offer a seamless customer experience much like the one provided by the likes of Facebook & Amazon i.e highly interactive & intelligent applications that can detect a single customer’s journey across multiple channels
- offer data driven interactive services and products that can detect customer preferences on the fly, match them with existing history and provide value added services. Services that not only provide a better experience but also foster a longer term customer relationship
- to be able to help the business prototype, test, refine and rapidly develop new business capabilities
- Above all, treat Digital as a Constant Capability and not as an ‘off the shelf’ product or a one off way of doing things
The five areas that established banks need to change across are depicted below..
- Convert branches to be advisory & relationship focused instead of centers for transactions – As the number of millennials keeps growing, the actual traffic to branches will only continue to decline. Branches still have an area of strength in being intimate customer touch points. The branch of the future can be redesigned to have more self service features along with relationship focused advisory personnel instead of purely being staffed by tellers and managers. They need to be reimagined as Digital Centers, not unlike an Apple store, with highly interactive touch screens and personnel focused on building business through high margin products.
- Adopt a FinTech like mindset – FinTechs (or new Age financial industry startups) offer enhanced customer experiences built on product innovation and agile business models. They do so by expanding their wallet share of client revenues by offering contextual products tailored to individual client profiles. Their savvy use of segmentation data and predictive analytics enables the delivery of bundles of tailored products across multiple delivery channels (web, mobile, Point Of Sale, Internet, etc.). Like banks, these technologies support multiple modes of payments at scale, but they aren’t bound by the same regulatory and compliance regulations as are banks, who operate under a mandate that they must demonstrate that they understand their risk profiles. The best retail banks will not only seek to learn from, but sometimes partner with, emerging fintech players to integrate new digital solutions and deliver exceptional customer experience. To cooperate and take advantage of fintechs, banks will require new partnering capabilities. To heighten their understanding of customers’ needs and to deliver products and services that customers truly value, banks will need new capabilities in data management and analytics.
- Understand your customer – Banks need to move to a predominantly online model, providing consumers with highly interactive, engaging and contextual experiences that span multiple channels—branch banking, eBanking, POS, ATM, etc. Further goals are increased profitability per customer for both micro and macro customer populations with the ultimate goal of increasing customer lifetime value (CLV).
- Business Process improvement – Drive Automation across lines of business – Financial services are fertile ground for business process automation, since most banks across their various lines of business are simply a collection of core and differentiated processes. Examples of these processes are consumer banking (with processes including on boarding customers, collecting deposits, conducting business via multiple channels, and compliance with regulatory mandates such as KYC and AML); investment banking (including straight-through-processing, trading platforms, prime brokerage, and compliance with regulation); payment services; and wealth management (including modeling model portfolio positions and providing complete transparency across the end-to-end life cycle). The key takeaway is that driving automation can result not just in better business visibility and accountability on behalf of various actors. It can also drive revenue and contribute significantly to the bottom line. Automation enables enterprise business and IT users to document, simulate, manage, automate and monitor business processes and policies. It is designed to empower business and IT users to collaborate more effectively, so business applications can be changed more easily and quickly.
- Agile Culture – All of the above are only possible if the entire organization operates on an agile basis in order to collaborate across the value chain. Cross functional teams across new product development, customer acquisition & retention, IT Ops, legal & compliance must collaborate in short work cycles to close the traditional business & IT innovation gap. One of DevOps’s chief goals is to close the long-standing gap between the engineers who develop and test IT capability and the organizations that are responsible for deploying and maintaining IT operations. Using traditional app dev methodologies, it can take months to design, test and deploy software. No business today has that much time—especially in the age of IT consumerization and end users accustomed to smart phone apps that are updated daily. The focus now is on rapidly developing business applications to stay ahead of competitors that can better harness Big Data’s amazing business capabilities.
How can all of this be quantified? –
The results of BCG’s sixth annual Global Retail-Banking Excellence benchmarking illustrate the value drivers. Forward looking banks are working on some of the above aspects are able to reduce cycle times for core processes thus improving productivity. The leaders in the survey are also reallocating resources from the mid and office to customer facing roles.
Again, according to the BCG, digital reinvention comes with huge benefits to both the top and bottom-lines. Their annual survey across the global retail banking sector estimates an average reduction in operating expenses from 15% to 25%, increases in pretax profit by 20% to 30% and an average increase in margins before tax from 5% to 10%.  These numbers are highly impressive at the scale that large banks operate.
The question thus is, can the vast majority of Banks change before it’s too late? Can they find the right model of execution in the Digital Age before their roles are either diminished or dis-intermediated by competition?
We will dive deep into the FinTech’s in the next post in the series.
 CNN Money – Bank of America has 23% fewer branches than 2009
BCG Research- Winning Strategies Revisited for Retail Banking
 BCG Research- Global Capital Markets 2016: The Value Migration