In the third of The Banker’s regular series looking at retail banking in the future, Stephen Timewell examines the huge expansion of services and channels and how banks will cope.
Nearly 80% of all personal payments in Europe are still cash-based and research shows that 80% or more of retail product sales across Europe are undertaken through bank branch networks. However, while the traditional vehicles of cash and the branch still dominate the retail transactions and banking environment in Europe and many other parts of the globe, will this be the case in the more technology savvy world of 2015?
Unlike in the past, when customers were confined largely to cash and the branch, the future is opening up to a plethora of new payment mechanisms and alternative banking channels that provide not only dramatically increasing choice for customers, but also radically expanding complexity for financial institutions. Just as the consumer has become king and is unlikely to give up this role, for banks, an integrated multi-channel approach has become the new holy grail of retail banking.
These changes are not without their consequences, though. “Banks now find themselves in a position of having to manage, integrate and update disparate channels, all operating in their own silos of infrastructure and applications, while at the same time facing increasing pressure to lower costs, and improve agility to address new and unforeseen consumer expectations,” David Vander, global managing director, banking, at Microsoft, said recently.
The challenge for banks looking to 2015 is to achieve channel transformation in a flexible and cost-effective way. To meet growing consumer demands that will outstrip many institutions’ capabilities, new creative architectures need to be deployed. And as Financial Insights concluded in a recent white paper on channel transformation: “Banks must themselves be visionary. New multi-channel value propositions hinge on the banks’ abilities to be strategic about IT execution – a vision of flexible, adaptive, end-to-end process management. Those banks that spend strategically are more likely to be left standing as we enter the next decade.”
A threat to banks
Banks face huge challenges, and not just from other banks. By 2015, non-bank institutions could represent a significant threat to banks, eating into their traditional payments revenues and creating new payment mechanisms that bypass banks completely. PayPal, for example, enables individuals and businesses with an e-mail address to send and receive payments online. Although PayPal does require the use of bank accounts, it creates another move away from cash, cuts banks out of part of the payment process and has attracted 145 million accounts in 190 countries in less than 10 years.
Another critical innovation is the advent of pre-paid and contactless payment cards, which is in its infancy but is expanding rapidly. In the US, 14 million contactless Mastercard PayPass cards have already been issued, and the European launch is beginning this September in the UK. Building on the success of transit cards, such as Hong Kong’s Octopus and London’s Oyster, the PayPass,Visa’s payWave card and new outfits, such as the Squid low-value payment card, look set to revolutionise how payments are made, creating huge benefits in terms of consumer services and putting pressure on banks, squeezing their already tight margins in the payments space.
The mobile phone is also creating a possible revolution in retail, especially in developing economies where the ubiquitous mobile could be the ‘killer’ application that brings effective technology and millions of unbanked people into the banked environment. The mobile channel has the potential to provide comprehensive banking services in areas where other traditional channels, such as the branch and the automated teller machine (ATM), are not available. Also the mobile could change the structure of international remittances completely, bringing huge potential opportunities for those willing to make the strategic investment.
The future of mobile payments
According to Alan Goode of Juniper Research, mobile payments worldwide are expected to rise from $2bn today to reach $22bn and be adopted by 204 million mobile users by the end of 2011. Although this figure is relatively small, the possibilities for mobile and the greater availability of near-field communication (NFC) devices provide huge opportunities for the future.
The mobile is also expected to play an important role up to and beyond 2015 in terms of SMS messaging. Sybase 365’s recent mobile banking survey across five major European countries showed that 61% of respondents cited account balance inquiries as the service they would be most interested in if offered by their bank. Sybase’s Diarmuid Mallon believes SMS messaging on account balances and potential fraud alerts will be going strong in 2015 and will be the best way to deliver these types of services. But as of today: “Consumers are more likely to see a mobile phone as a means of protection, risk reduction and control than as a device that can be used for transactions,” he says.
The mobile channel may have captured imaginations in the developing world but two recent reports in the UK and the US take a more jaundiced view. In May, consultants Deloitte gave some blunt predictions. Louise Brett noted: “First, the mass roll-out of mobile as a point-of-sale payment device will not happen in the UK in the foreseeable future. Second, banks will look at mobile options for remote payments (eg, remittances) but contactless cards will be the weapon of choice for the ‘war on cash’.”
Deloitte was adamant that no-one – neither customers, merchants nor banks – would be willing to pay for the mass roll-out of mobile and so it would not happen. It also asserted that the main profits in payments come from managing balances on credit and debit cards with revenues from merchants just about covering the cost of processing. Why should banks (in the UK) back mobile against contactless when the costs are not in its favour, Deloitte argued.
Customer convenience
In the US, a report last month from Boston-based Aite Group said that greater convenience to customers was the driving force behind rolling out a mobile banking service for 90% of banks surveyed. But nearly half of those banks viewed the service as a defensive strategy, adding mobile just to avoid being left behind by the competition, a kind of ‘me-too’ service.
Also bothered by security and standardisation concerns, banks in developed markets appear to be taking a conservative view of mobile, and are more focused on avoiding the technology pitfalls of the past than on creating opportunities for the future. However, although Deloitte’s negative ‘who will pay’ analysis may satisfy the cautious ambitions of some banks at present, it seems unlikely to satisfy the increasing appetite of consumers for improved services through whatever variety of channels are available.
In Europe, the Middle East and Africa, NCR has deployed more than 5000 new NCR Intelligence Deposit ATMs, which accept cash and cheque without the need for the customer to fill out a paying-in slip or deposit envelope. Some financial institutions are reported to have driven more than 75% of deposits to these machines, and new self-service kiosks, such as the NCR EasyPoint 42, give banks more flexibility in migrating customers to use self-service for basic functions. This allows branch staff in particular to focus in the future on more specialised sales and services.
So what will retail banking look like in 2015 and how will banks be placed?
“Business intelligence is critical for the ever-more focused activities of banks,” says Julian Johnson, senior vice-president banking, SAP EMEA. SAP and its partner, EFMA, have just published their fourth annual study of the financial services industry, Five Pillars of Excellence in Retail Banking, he says, and one of the five pillars is business intelligence.
“For the fourth year, banks state that although they want to become more proficient in this area, they continue to lack the critical abilities for creating and using the business intelligence that their customers and staff expect,” he says.
Put bluntly, customer expectations and new technologies are running far ahead of bank capabilities to absorb the changes and this extends well beyond just business intelligence.
New landscape ahead
The retail banking landscape is changing dramatically. By 2015, with the dynamism wrought by new payment cards, mobile and the internet, retail will have evolved yet further. Will the current 80% levels for cash transactions and branch product sales still apply in 2015? New payment mechanisms will slowly but surely push cash into the past, well below the 80% mark. As for the branch, it will remain a key channel, but it will look different and its core function will shift from transactions to sales. The branch may even become a more important sales portal.
The critical issue, however, is whether banks will make the transformation to the new age. Without vision and strategic investment, many banks will not make it.
The Banker: Project 2015 column is a regular insight into the future of retail banking and possible scenarios for the sector in 2015. To comment on the issues raised here join the debate at www.thebanker.com/project2015. This forum is supported by SAP.
