In the second of our regular series looking at banking in the future, The Banker ponders what retail front and back offices will look like in 2015. Stephen Timewell explains the changes.
By 2015, today’s 10 year old will be 18 and, if there are any certainties left, he or she will be in the market for financial services. But what services will be wanted and how they will be provided is likely to change significantly. And even the assumption that customer needs will be met by traditional banks is open to question. Over the next eight years, the retail financial landscape will shift and the role of the front and back offices will shift accordingly.
For both the customer-facing, sales- focused front office and the operational and administrative back office, the core parameters will change as new technologies reshape not only the way we do retail finance but how we think about financial transactions (see also data integration story on page 161). The explosion of high-speed broadband connections from the home and Web 2.0 technologies will create a much more interactive and collaborative environment. US consultancy and research firm Gartner says 75% of banks will use Web 2.0 technologies for retail delivery by 2012. Today’s 10 year olds will demand the latest technologies in 2015, and Web 2.0, the internet and competitive pressures will force retail institutions to transform their operating models.
Growing with the customer
Christian Goeckenjan, SAP’s vice-president for banking, is clear about the fundamental requirements driven by the majority of banks’ clear intentions to grow through new customer acquisition and cross-selling. “Back office and front office have to be considered holistically. Investments in either area will only pay off if the impact is assessed and appropriate changes made through the value chain. The result will be efficiency gains and clear opportunities for differentiation. An example would be back-office pricing optimisation ability which feeds to front-office offers of individual packages to customers.”
So what will the front office look like in 2015 in a multi-channel environment increasingly influenced by the internet? And what will be the role of the traditional branch? Prophesising the death of the branch has proved premature in recent years, with global banks now pushing hard to buy or create larger branch networks, especially in emerging economies. The current consensus is that the branch provides a much-needed direct link with the customer and is a critical sales and marketing channel.
The branch, however, is becoming much less of a vehicle for transactions and much more a vehicle for selling products and giving advice. By 2015, this trend will have evolved with most simple transactions transferred to the automated teller machine (ATM) network, leaving the branch staff to concentrate on sales, advice and more complex transactions. According to a recent Finalta report, the branch is still the major source of retail product sales across Europe. “For 49% of banks, 80% or more of products are sold through the retail network. Only 2% get the majority of sales from other channels. On average, 77% of retail products sold in Europe go through the branch network.”
Technology and tradition
In 2015, with increasing pressure on banks to improve cross-selling product rates and overall service levels, the branch will continue to play a vital role in direct sales. But the internet and alternative channels are also expected to play an increasing sales role as well. The branch’s dominant role in retail profitability looks unchallenged, but other channels are sure to play an increasing part and the structure of the branch itself will look different with greater space allocated for sales and more ATMs to deal with core transactions.
But while the branch may seem unassailable in the future, the payments revolution taking place in terms of mobile payments, contactless and pre-paid payments is only just beginning. These and online product developments such as the peer-to-peer banking innovation, Zopa.com (online lending exchange), are radically changing the way financial transactions, big and small, can be done. These technologies can disintermediate the traditional bank role, and by 2015 could completely transform retail finance in areas stretching from payments for a newspaper to mortgages.
The Zopa model, which cuts out the bank in the middle, can provide better lending rates and a clear opportunity to revamp lending attitudes and mechanisms. In many emerging economies the mobile phone has already transformed basic financial services and the full force of mobile technology is still to be felt in the huge cross-border remittances area.
A global market
For banks, survival and growth in the future will depend not only on reacting to the new competing technologies but also on transforming their operating models. Focusing on back-office changes, the 2007 World Retail Banking Report by Capgemini, ING and the European Financial Management and Marketing Association, examines what bank operating models will look like in the future. “Retail banks will increasingly globalise their operating models over the next five years, with two-thirds of them targeting either what we define as an intermediate or global operating model. Retail banks will transform their models across all dimensions; however, IT globalisation will remain their number-one priority.”
Emphasising the back-office changes in prospect, the Capgemini report notes: “IT globalisation appears to be the most important transformation trend for the next five years, with more than 90% of the (180) banks we interviewed willing to have a common architecture and modular application suite and a ready-to-go approach to IT implementation.” Globalisation and consolidation are key themes of back-office developments in the report and those trends are likely to continue well past 2015.
Looking at cross-country consolidation, the report notes: “We expect further back-office consolidation of core operational processes at the cross-country level; 67% of the retail banks we studied expect to consolidate these processes over the next five years, compared to only 41% that enjoy consolidated processes today. The same evolution is expected for the cross-country consolidation of support functions, with 66% of international retail banks surveyed expecting to do it in five years, while 39% do it today.”
Outsourcing and offshoring are also seen as key means to transform operating models and improve efficiency. The report notes that 77% of the banks surveyed outsource and 47% offshore at least one function of their operating model, from their back office, IT or support areas. Going forward, the report’s findings show that payments, mortgages and life insurance products are the most frequently outsourced today and will remain so over the next five years, with the outsourcing of mortgages growing fastest, rising from 33% to 48% among the banks surveyed over the period. Offshoring is also expected to be a strong growth area, with retail banks expecting to have a substantial portion (approximately one third) of their IT and support function offshored by 2012.
Adapt to survive
Moving to 2015, there is no ‘right’ or ideal operating model but successful banks are likely to have adopted more global operating models incorporating a higher level of consolidated processes and global marketing practices. More than 50% of banks are expected to have global marketing practices in five years compared to 28% today and that trend will continue.
So what will today’s 10 year old find in the financial services world of 2015? By then, if not significantly sooner, the internet will have transformed the way customers buy financial products, allowing them to access broad ranges of information and prices, thereby putting the customer in the driving seat rather than being at the mercy of the banks. Our 18 year old will be better informed, forcing banks to compete not only against non-banks and a variety of new payment systems, but also to provide more tailored products and distribution mechanisms.
By 2015, the front office is likely to become the genuine territory of the customer, a place where technology and choice make the customer king. The back office, for those institutions that survive until then, will also benefit from technology and choice in order to provide a more flexible architecture and product range. The core theme for institutional winners is consolidate and go global, the advice for consumers is take advantage of the new financial alternatives while they last.
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 on what the future holds for retail bankers at www.thebanker.com/project2015. This forum is supported by SAP.
