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:
- Developing a customer-centric business model
- Optimizing retail delivery
- Simplifying business and operating models
- Obtaining an information advantage
- Enabling innovation, and the capabilities required to foster it
- 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.
1. Developing a Customer-Centric Business Model
Financial marketers today have a simplistic understanding of their customers and a vastly complex product set. They typically do not know their customers very well. Many still send customers multiple product offers in the hope that something will stick. They struggle to join the dots internally and prepare bank-wide views of a customer relationship, let alone integrate external sources of data. For instance, few can analyze a customer’s deposit account, recognize that their salary increased, and send a note congratulating the customer on their promotion together with an offer of a premium card and a higher credit limit.
PwC says the winners of 2020 will develop a much more complete understanding of their customers. They will need to acquire, integrate and analyze multiple sources of internal and external data. They should be able to understand people’s needs, and be present relevant solutions at the time of need. They will simplify their product sets, redesign their core processes from the customer’s point of view.
PwC’s survey indicates a growing awareness in this area, but a significant gap in preparedness. 61% of industry executives say that a customer-centric business model is “very important,” and 75% are making investments accordingly. But few — if any — have attempted the sort of wholesale transformation PwC prescribes.
2. Optimizing Retail Delivery
Historically, banks with the best and/or biggest branch footprint have dominated, gaining a disproportionate share in their markets. By 2020, much of today’s infrastructure will not be a competitive advantage. Leading institutions will offer an anytime/anywhere service, fully utilizing all banking channels in an integrated fashion.
The shakeup in branch-based banking and the need to optimize distribution networks is clearly top of mind for banking executives. 85% of respondents in PwC’s survey said they see optimizing retail channels as important. 59% of respondents expect the importance of branch banking to diminish significantly as people migrate to digital channels. Yet, only 16% of respondents viewed themselves as “very prepared” for this shift. Respondents globally view the largest banks as benefitting most from these changes, and smaller regional and community banks being the most threatened.
3. Simplifying the Business and Operating Model
Banks have developed staggeringly complex and costly business models. Now they must simplify. Rising customer expectations, increasingly active regulators and stagnant shareholder returns demand it. Efforts thus far have not been enough. Many financial institutions have been built over decades of acquisitions, and new product and channel development, typically with each development adding additional systems, layers, processes and costs. Few have tackled the difficult and expensive work of integrating, optimizing and simplifying their platforms.
A majority of banking executives (53%) believe that simplification is very important, and 70% are making some level of investment in simplification. Yet, only 17% feel well-prepared. Taking a customer perspective, a majority of executives believe their banks must simplify products, channels and prices/rates. Taking an internal perspective, a majority of executives believe they must simplify their technology, their processes and their back offices. Bankers believe that simplification will lead to better service, lower costs and increased profitability.
PwC says you should start with the customer and work backwards. Simplifying the experience requires that products, channels, organization and operations all must change. The most successful banks will learn from other industries. Many consumer products companies (Adidas, Apple) do not own the entire value chain. They focus on what makes them distinctive — product design, marketing, distribution — and contract out much of the rest to third-party specialists.
Granted, all this sounds like a major undertaking, but PwC says the rewards for those who get it right will be huge.
4. Gaining an Information Advantage
Getting this right will be a game-changer. Fast movers will create competitive advantage in every area of the bank — from customer experience and brand management to underwriting and pricing.
The banking industry and the consumers they serve now generate exponentially more information than ever before. Few banks are positioned to integrate, analyze and act on the insights from the massive data streams available today; imagine how the volume of data will have ballooned even further by 2020.
In the future, PwC say leading players will exploit both structured and unstructured information — from traditional sources (such as credit scores and customer surveys) and from non-traditional sources (such as social media, and cross-channel bank customer interaction data). They will collect and purchase other behavioral data (such as mobile location and purchase data) — particularly as customers grow accustomed to surrendering privacy in a voluntary value exchange.
Leading players will develop advanced analytics capabilities to integrate this vast library of data, analyze it and create actionable insights. 57% of bank executives consider these capabilities to be “very important,” while 92% considering them at least “very” or “somewhat” important. Three-quarters of institutions are making investments in their data analytics capabilities, yet only 17% believe they are fully prepared.
5. Enabling Innovation
Innovation is the single most important factor driving sustainable top- and bottom-line growth in banking. But PwC points out that financial institutions today are not known as places where innovation thrives, nor are they the first choice for top software engineers. Banks and credit unions need to organize and manage themselves differently, PwC says — protecting and enabling talent, becoming agile in their development processes and being open to partnerships with outside institutions. Successful executives in the future will need to be fluid and savvy — mentally nimble, with an innovative mindset.
Innovation within the banking industry is considered to be somewhat or very important by 87% of respondents, yet in stark contrast, only 11% believe they are very prepared. And there are significant regional differences — over 60% of executives in Asia-Pacific and the emerging markets view open innovation as very important; however, only 40% of European executives and 28% of US executives agree. We believe developed world executives need to take more of an emerging markets view of the importance of innovation, particularly once the new regulatory framework stabilizes.
Executives believe that the large global and national banks will benefit most and that smaller community banks and credit unions will be the most threatened. Respondents report that their main focus areas for innovation are customer interfaces and channels (57%), followed by customer need identification (53%), products (52%) and core platforms (52%).
6. Proactively Managing Regulations, Risk and Capital
The post-crisis flood of regulations signals a major mindset change for regulators. In the past, regulation was just one of many considerations. Capital was plentiful and not a significant business constraint. Conduct issues were thought to be few and far between. Today, not only are the rules much more complex, but regulators are more suspicious, and less flexible with their demands to improve compliance, reporting, and the underlying business processes and data. Leading banks are taking a different and more comprehensive approach to managing their regulatory obligations. This approach is pragmatic, proactive and increasingly integrated into “business as usual.”
Executives in all regions — unsurprisingly given what’s transpired in this area over the last few years — consider this the biggest priority they need to address, with 64% citing this as very important. Again, however, very few (only 22%) consider themselves very prepared. Respondents say the biggest obstacles to addressing these issues are the level of financial investments required and technology constraints.