In 2015, retail banking will still be concerned with its core role of supplying customers with help in paying for their purchases but the mechanics could look radically different, writes Stephen Timewell.
The world of 2015 could mean many things. The centre of gravity of the global financial system could by then have moved significantly to the east, where China, India and the Gulf could play a much more powerful role than they do today. Iraq could be in a reconstruction phase after ending hostilities and Hilary Clinton could be coming to the end of her second term as US president. And retail banking could be very different or much the same depending on how you look at it.
Put simply, people in 2015, just as in 1915, will want to make purchases and could want financial services to help make them. Reduced to its crudest terms, how those purchases are made, and who provides the financial support structures and why, are the core issues surrounding this key topic called retail banking 2015. While the raw fundamentals and basic human needs might not change, the mechanisms and infrastructure surrounding what is called the retail banking industry are undergoing a massive revolution, which hopefully is good for retail customers but is not necessarily a winner for all involved.
Today, the industry is in flux. A recent retail banking report by Booz, Allen Hamilton gave some overall insights. “Globally, banks have made some progress – but are still far from meeting consumer requirements and performance is highly varied. Banks are making progress in adapting their distribution channels to better meet customer needs (for example, enhancement of branches, new channels, mobile sales force, enhanced security for online). Although branch banking experience has improved, there is more banks could do. Some banks are delivering a superior branch experience, however, most banks still need to enhance their branch performance,” it said.
If that is the current situation, what will 2015 look like from the two key perspectives, that of the customer and that of the provider?
Analysing the landscape
In recent months, The Banker has examined ‘Retail banking 2015’ in a series of articles analysing the winners and losers, changes in retail front and back offices, and the huge expansion of services and channels that confront both consumers and providers (usually but not necessarily banks).
What seems clear from the customer perspective is that in eight years’ time the new generation of financial services customers will have radically different attitudes, expectations, knowledge and preferences than a decade ago or even today. The current 10 year old then will not regard the internet, the mobile phone and the plethora of Web 2.0 technologies as new devices but as standard practice. Rather than being at the mercy of what banks might provide, tomorrow’s customers will be far more technology savvy, far more demanding of how they want financial services delivered and far less loyal than previous generations. The often blind deference paid to banks in the past will have disappeared.
Wider market knowledge and more sophisticated technology have produced better informed customers, who will not suffer poor products, bad service and unexplained fees gladly. Unlike in the past, when banks could dictate terms, the expectations of customers in 2015 are likely to run ahead of the capabilities of providers, whether banks or non-banks.
In short, the new technologies now available and those that will emerge in time will provide customers with a dramatically increased range of potential financial channels and mechanisms.
The customer is king, with an increasing spectrum of choice available from both banks and non-banks that are competing hard for a slice of the retail wallet. And mechanisms such as the internet, the mobile phone, new contactless cards and related near field communications (NFC) devices are only just beginning to be used. By 2015, the current explosion in payments mechanisms will have evolved considerably.
The long tail
As Nick Pilbeam, founder of Itsun, says in his response to The Banker/SAP online survey (see page 13): “By 2015, the mobile-to-banking-network tie-up will become extremely sophisticated in its application, though the physical implementation will be very simple. Mobile, contactless chipsets will be available on a widespread basis in cards and mobile phones that will by-pass cheques and credit cards for high volume, low value transactions, numbering into their trillions per year for both developing and developed economies.”
He adds: “What is dubbed by the internet generation as ‘the long tail’ has been in use by the telecom operators for the past century, and the amalgam of the vast volumes of customers and transactions that phone companies are used to processing on a daily basis, brought together with the financial reach and security of the banks, will surpass all recognisable transaction volumes seen today.”
Will the internet generation and new technologies transform the retail financial landscape, as Mr Pilbeam suggests? They certainly could. The current paradigm that 80% of all personal payments in Europe are still cash-based and 80% or more of retail product sales across Europe are undertaken through bank branch networks (see The Banker, July 2007, p120) will certainly look outmoded in 2015 with new cards, cash substitutes and new channels emerging.
New technologies and mechanisms are costly, though, and the critical issue is who will pay for them? From the provider perspective, the customer may be redefining the rules of the game but someone needs to pay if all these consumer expectations are to be met. Many a good idea or product has failed to materialise because retailers, banks or customers refused to pay for it; many card schemes have failed for these reasons.
Mobile channel
Earlier this year, consultants Deloitte gave a blunt assessment of the mobile in the UK. While the mobile channel is seen as huge elsewhere, especially in many developing countries, Louise Brett of Deloitte noted: “The mass roll-out of mobile as a point-of-sale payment device will not happen in the UK in the foreseeable future.” Deloitte was adamant that no-one was prepared to pay for it so it would not happen. It also asked why banks would want to back the mobile channel against, for example, contactless payment cards when the costs were not in its favour.
This Deloitte example highlights the major challenge that retail banks and other providers face in addressing the heightened customer expectations of 2015. Who pays? This question raises a key structural constraint ahead. If customers want a broader range of channels and products, and are increasingly reluctant to pay, then providers have to assess whether the scale of their business can viably absorb the cost.
Just like the issue of increasing regulatory costs worldwide, institutions need to increase scale to stay in the game. So approaching 2015, only the bigger institutions, with the ability to spread the cost of innovation and new technologies, and the niche specialists, look likely to be able to weather the competitive storm. The middle ground players will lose out.
Extending this analysis, people across the globe need banking but they do not necessarily need banks. And in the future the bank consolidation trend is likely to continue, weeding out smaller, inefficient players. Governments, however, need banks if they are to maintain an organised and regulated financial structure. The growth of non-bank financial institutions makes for healthy competition but history shows that sooner or later existing banks and regulators close out the non-banks’ initial advantages. Although banks look likely to continue to dominate retail, the quality and sophistication of their products could also significantly improve.
Looking to 2015, a cynic may say that little will change in retail banking. The branch will remain the mainstay of the retail network as the banks’ touchstone with the customer, as our research suggests. Key products are and probably will be still sold through the branch even if most transactions by-pass it.
New mechanics
However, although it can be argued that the core role of banking has not changed, by 2015, if not before, the mechanics of banking will have changed significantly. New technologies, from the internet to mobile to contactless will have breathed fresh air into payment mechanisms and allowed time-consuming chores to be done at the click of a button.
But this comes at a price. As our research shows, IT investment is critical, and 80% of our respondents agree. But not all banks will be able to meet the full range of customer demands of 2015. Size matters and smaller banks will be squeezed out. Better banking is what will be needed in the future and larger institutions with focused technology strategies will be the winners.
