New technology, new players and the challenge of social networking occupied the minds of the participants in a round table discussion on retail opportunities over the next decade held by The Banker.

Click here to view an edited video of the discussion

Participants

Brian Caplen – editor, The Banker

Anthony Thomson – chairman, Metro Bank

Patrick Muir – chief marketing officer, UK consumer, Citigroup

Topi Manner – executive vice-president, head of segment household and group marketing, Nordea

Mark Gunning – business solutions director, Temenos

The issues:

  • Empowered customers
  • What customers want
  • Innovation in banking
  • Power of social networking
  • Challenge of regulation

It is an exciting time in retail banking. Not only has the financial crisis opened the market to new entrants and new thinking in banking, but profound technological changes have also ignited new consumer expectations. If non-financial institutions such as supermarkets or telecom companies are ever going to make inroads into retail banking, now is their chance.

Entrants in the UK marketplace such as Metro Bank, Tesco and Virgin have given the industry a chance to refresh its thinking on what customers really want. Meanwhile, Basel III's introduction of a net stable funding ratio is going increase competition for bank deposits.

But perhaps most importantly of all, rapid technological change has made traditional banking networks appear antiquated to a generation of customers that have grown up surrounded by technological innovation. Customers want to choose between multiple channels through which to interact with banks: from branch networks to smartphones and social media networks.

To discuss the challenges and opportunities thrown up in the technological upheaval of the post-crisis period, The Banker invited leading players in retail banking and technology to a round table discussion hosted at the Financial Times’ headquarters in London. The discussion was sponsored by banking software company, Temenos, chaired by Brian Caplen, editor of The Banker and independently edited by The Banker.

Despite lively discussion on what customers want most, the panellists all agreed that in the current environment, it is customers rather than banks that are driving changes in how banks deliver retail banking products and services.

Watch the video 

This is an edited version of the discussion from The Banker's Exclusive Leadership Series. Click below to view more:

Empowered customers

Anthony Thomson, co-founder and chairman of Metro Bank, the first new high street bank in the UK for 150 years, said: “Customers are becoming more empowered and more aware. In the future, they are going to choose the channel that they want to use and the way in which they want to interact with their bank. And if their bank doesn’t provide it, they’re going somewhere else.”

In the UK, a growing number of non-banking institutions, such as Tesco and Virgin, have already entered the retail banking market. In other countries, telecommunications companies are also becoming increasingly interested in providing financial services.

Mark Gunning, global banking director at Temenos, a leading supplier of banking technology, said that whereas his company has traditionally been involved in renovating and updating existing systems, “30% of the possible [clients] that we’re looking at now are new entrants to the banking market - such as Metro”.

Against this background, the panellists agreed that successful institutions will be those that put the needs of the customers first. Topi Manner, executive vice- president, head of segment household and group marketing at Scandinavian bank Nordea, said: “The core of our organic growth strategy boils down to delivering great customer experiences - which is one of our values - and thereby profit becomes a by-product of great experience and good service for customers.”

Increased competition for retail deposits and tighter regulations have created challenges, but also opportunities for banks able to adapt quickly to the new banking environment. Mr Manner said: “When this regulatory tsunami hits, there will be a lot of capital demands on banks and there will be a number of banks that do not have a sustainable return on equity. They will need to dramatically review their business models and that will create opportunities for strong banks.”

Supporting the view that it is customers driving the pace of change, Mr Gunning also said that while technology decisions have in the past been largely made by IT professionals, “it is now the marketeers who are now involved in the selection process”.

Mr Gunning added that the selection process for banking software has completely changed: “Now right up front, when we’re first talking to a bank that might want to use a new system, they are talking about their market, their business model, the way they want to address clients and much more about client facing [technologies] - how can they help clients, what information do they have about them, will they have a single customer view, how can they build a relationship.”

What customers want

While the panel agreed on the fact that technology and customer expectations are driving changes in retail banking, there was room for discussion on what customers want. Metro’s Thomson said: “When [customers] go to [UK supermarket] Sainsbury's to buy their groceries, they’re not unique in their purchase of kumquats. What they want from the retailers - and I think banks fall into that sector - is somebody who understands and meets their needs, be it through service, convenience, or the range of products”.

Describing the increasing commoditisation of banking services, Mr Thomson said: “The reality is even very, very rich people don’t have their cars built for them. What they do is personalise an existing Mercedes or a BMW, for example. Perhaps at the very very top end there will be an undue level of personalisation. But for the mass affluent, I think it is about personalisation, it’s about understanding, it’s about being human.”

Patrick Muir, chief marketing officer, UK consumer, at Citi, said that sometimes customers just want to recognised and that customer loyalty was not necessarily built through customer loyalty schemes: “Just a bit of recognition goes a long way. It’s about being treated sometimes as an individual.”

With fast-changing regulatory, technological and consumer markets, the ability to personalise and adapt standard banking products to suit individual customers comes high on banks’ lists of priorities. Mr Gunning said that Temenos clients are now looking for banking systems with the flexibility and responsiveness to allow banks to say to customers “this is our product – it is a simple product but we can change it a little bit to suit you, we can change the terms, we can change the rate, whatever it needs.”

Nordea's Mr Manner agreed with the consensus that customer empowerment “should be the guiding star for the banking industry” but disagreed that the future of banking lay only in convenience and commoditisation of products and services. “We see the market polarising. Definitely there is a mass-market part, but then again, especially in the upper segments where customer needs are more complex and sophisticated, we see room for a relationship approach."

Mr Thomson criticised institutions that had lost sight of customer service: “Ultimately profit is a by-product of serving the customer. There are a lot of institutions, not just banks, that have come to believe that profit is their ‘raison d’etre’… If you put the customer at the centre of everything that you do - and you need a very strong technology platform to underpin that - I believe that you can create value, it doesn’t just have to be about taking out costs.”

Mr Gunning said banks' technology priorities have shifted from solely increasing operational efficiency to giving banks the adaptablity and responsiveness needed to stay competitive in a fast-changing environment. “What banks want to know is how flexible and innovative a solution is, and whether it will enable them to be innovative over the next five to 10 years. It’s about capabilities, architecture and the flexibility and the reasons for this are quickly changing customer demands, new entrants into the market, and new regulations.”

Innovation in banking

The panel strongly agreed that while technological change is vital, banks must stay focused at all times on customer needs. Mr Thomson said: “I think the thing that makes us innovative is not our underpinning technology - which is very very good - it is our view of the customer. We put the customer at the centre of everything we do.”

He added: “Although we think of [Metro Bank] as a branch-based retailer, our view of life is you as a customer should be able to choose the channel to interact with us - how, when and where. So if it’s by a mobile device on your way to work, if you want to pop in to one of our stores on a Saturday or a Sunday or you want to log on to the internet at night… What we have to do is make it as great an experience for you as a customer as we possible can.”

The panel also mentioned the advantages start-up banks have in accessing the latest technology without the complexity of merging legacy systems. Citi’s Mr Muir, who was marketing director during the launch of internet bank Egg, said: “Prudential gets credit for allowing us to take a project of a dozen people thinking nutty things in a room in a Holborn bar to what became the internet bank Egg. Being in start-up mode we reacted quickly to the explosion of the internet. And that aggressive change is still going on apace with the explosion of smartphones and social media and soon we’re going to have contactless [payments] and near-field communication SIM cards and all the rest of it.”

Mr Muir agreed that smaller, nimbler organisations or start-ups have a huge advantage “because you can go right to the cutting edge of what is there to enable your relationship with your customers”, whereas large institutions have long development and implementation processes. “For example, when we launched Egg most of the systems we were using, particularly the customer front end, data warehouses and middleware on the internet, we invented from scratch because there was nothing available off the shelf. We were using bleeding-edge technology to make it come to life, because we couldn’t go and say: Can someone please build us a banking website? Whereas now we can probably go and grab one out of a box. So the game’s changing all the time.”

Mr Thomson agreed that technological developments in the past few years have made it much easier to launch a new bank: “There’s no question, we could not have launched a new bank in the UK without the technological innovations that have taken place over the past few years. And Egg was an incredibly innovative bank, a game changer of its time”.

He added: “There were two things we needed, one was a single customer view - you can’t give great customer service unless you have all of the information about that customer held in one place - and second was the ability to do that without having to invest tens of millions of pounds in building a propriety system.”

In the context of what customers want, the panel also discussed the drawbacks and merits of product- and sales-led versus advisory banking. Mr Muir said: “When bank branches stopped being bank branches and actually became shops where people sold things, that’s when the old banking model changed.”

Mr Manner said: “This is the dilemma between the relationship approach and traditional product approach to advisory and sales. The true advisory approach sets standards for the bank in terms of leadership, in terms of culture, in terms of values and putting advisory at the core of the value of proposition, including choices that would seemingly harm the bank’s profit and loss in the short run.”

Mr Thomson pointed out that Metro has incentivised customer satisfaction, rather than sales. “If you incentivise customer-facing staff through sales targets the outcome of that is mis-selling, the outcome in the UK is 11,000 complaints about banks every single day. We believe in incentivising our staff on customer satisfaction scores. So none of our customer-facing staff are remunerated for selling products, they’re remunerated for customer satisfaction scores, and guess what? We get 95% of our customers saying that they are extremely satisfied, and 80% would recommend us to a friend.”

Mr Thomson also gave his view that it is a fallacy that customers are only interested in headline rates: “Everyone assumes that customers only move for rate. According to research, only 7% of consumers choose their banks because of rate; 93% choose them because of reasons of service, convenience and recommendation. And I think the reason existing banks compete on rate is because they have nothing else to compete on. They’ve assumed that that’s the only thing that drives consumers, they’ve disinvested in their distribution networks, they’ve disinvested in their service delivery to their customers and the result is that the only thing they can try and compete on is rate.”

Temenos's Mr Gunning responded by saying from his point of view banks' current IT concerns were primarily to do with improving understanding and serving customers. “[Banks] are not competing so much on products and possibly not on rates, but they are competing on customer service - no question.”

Mr Thomson said: “I don’t think products are the differentiator between banks, they are so easy to copy, rates can be copied almost instantly depending on your balance sheet and funding positions, and you may well come to a more competitive rate. I think the point of differentiation comes through the way in which products and services are delivered.”

The power of social networking

One of the biggest challenges for banks is understanding and harnessing the power of social media. Mr Muir gave as examples of the Facebook revolution, US president Barack Obama’s use of social media to get more people out voting for him and the role networks played in the recent uprisings in Egypt. “These forces are very strong and in a retail consumer field, social media can make or break your product or your business almost instantly.”

Mr Thomson said that the growth of social networks is likely to have a huge effect on banking: “My prophecy which I may live to regret would be that social networking will change marketing in the fundamental way broadcast media did in the 1940s and the 1950s. We have this huge challenge of how to understand what it means to our businesses. It’s incumbent upon us to meet the needs of our customers in the way that they want. Customers will choose the channels, the channels will change. Those who will merge different technologies will come out as winners in the future. And I suspect we don’t know today what they will be.”

Mr Manner also sees profound implications for banks arising from social media, particularly for the role of traditional contact centres, explaining some of the challenges banks face in entering public networks such as Facebook and Twitter. “Where the dialogue between the customer and the agent is visible to anyone browsing the social media, we need to be careful as there are all kinds of operational risk management and compliance issues, including training people very carefully so they understand the responsibility invested in them in interacting in that kind of environment.”

Social media have created expectations that, until the regulatory environment catches up, will be hard for banks to realise. Mr Muir’s experience with Egg’s online forum was that customers wanted to talk to their bank about their accounts and particular incidents, but that existing regulatory procedures - for example, linear complaints handling - made it harder for banks to respond. Mr Muir said that there are also “issues around what is advice, what is not advice… If you create the expectation by setting up Twitter accounts and Facebook pages, customers will want to say ‘oh well this happened to me today’ and ‘why have you done that’ and they want you to react in the same way”.

“What social media has allowed is a new level of democracy to break out,” said Mr Muir, urging that with the advent of social media “we’ve got to get the regulations up to speed”, not just for customer satisfaction, but also in recognition of the growing importance of activist customers.

Challenge of regulation

The panel also voiced concerns about the impact of regulatory initiatives on retail banking. Nordea’s Mr Manner said that although much regulatory reform was welcomed, he was aware of  “profound implications” of moving towards a match-funded regime with the advent of Basel III's net stable funding ratio, both for banks and in terms of customers’ choice of products and the prices charged.

Citi’s Mr Muir also had concerns over the “unintended consequences” of consumer protection regulation. “You could argue that if the amount of capital that banks were required to hold against mortgages was sufficiently high, the rates that they would have to charge to get a return on those mortgages could be unattractive and this could alter house prices over the medium term. And if you put annual percentage rate caps on certain lending products, that could mean that some [segments] of the population would no longer be sufficiently rewarding. So you could actually end up taking products away from some UK consumers.”

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