In the first of our quarterly 2015 series, The Banker takes a look at what retail banking will look like in eight years’ time. Stephen Timewell explains who the winners and losers will be.

The year 2015 is less than eight years away. The Olympics of Beijing and London will have come and gone by then, but the competition for personal finances in the retail banking arena will certainly not have disappeared, it will just have taken a different form.

The only thing we can be sure of in 2015 is that there will be demand for retail banking services, who will provide them and how is less predictable. While there is a presumption that traditional banks will continue to dominate, the financial revolution presently taking place globally in terms of consumer awareness, digital capability and information flow means that those banks surviving to 2015 and beyond will need to perform differently and operate under new norms.

The rise of non-banks

A recent white paper from IBM called ‘The paradox of banking, 2015’ focused on the US but has a global resonance. The paper reads: “On the surface, the competitive landscape of the retail banking industry in 2015 will not look much different than it does today. Mergers and acquisitions will likely have reduced the number of banks, especially mid-tier regional banks, and industry specialists and non-bank banks will play a more prominent role. But most of today’s players, including universal banks, community banks, industry specialist banks and non-bank banks will still be vying to differentiate themselves in a crowded marketplace.

“However, traditional approaches to creating value through growth and efficiency will no longer be enough. Advantages gained through acquisition, new market entry and reconfigured product offerings will be fleeting at best, while partnering and outsourcing will make efficiency a basic requirement for all.”

In short, the winners in 2015 will have to do more than create value from growth and efficiency, and this applies not only in the US but elsewhere too. In The Banker’s Top 1000 World Banks listing in July last year, aggregate bank profitability reached an unprecedented 22.7%, largely on the back of retail growth. But after three very profitable years the listing is also showing that profit growth is slowing appreciably and that the world’s Top 25 banks account for an increasing share of aggregate profits at a huge 40.5%.

Future trends depict that while the big banks are expanding and will continue to take market share globally, medium-sized banks without the economies of scale will be squeezed out of the market, mainly through acquisitions and continued consolidation. So the big get bigger and the middle ground disappears, but research suggests that there is still lots of space and margins for specialist, niche operations and non-bank banks.

Local entities

Small and local banks have a future if they know their marketplace and customers well. Local expertise can command a considerable premium. But even here the high and growing cost of regulation and compliance places a heavy burden. Also, consultants fear that banks of all sizes have to face up to the alarming threat of the growing volume of identity fraud and here again scale is an issue.

Will banks continue to dominate banking or will other players eat into the market? Outfits such as GE Money, Volkswagen, Tesco and the new peer-to-peer forum Zopa.com (see page 100) can provide attractive financial alternatives but their expansion seems limited. In a post 9/11 world it is difficult to see how both governments and regulators will allow effective non-bank banks to expand significantly and escape the stranglehold of banking regulation. Alternatives may be wanted but for various, sometimes spurious, economic and security reasons they are unlikely to grow significantly.

The key to retail now and even more so in 2015 will be banks’ understanding of their customer needs. Banks used to rely on customer apathy and reluctance to change banks. Today, armed with better information, less loyalty and more cynicism, customers want a better banking experience and better service than in the past. But unlike other retailers, such as supermarkets or airlines, banks have been slow to move, and as The Banker’s February cover story explains: “Banks are abysmal at innovation”.

In 2015, customers will be even more demanding and banks, if they are to be successful, will need to make attractive offerings that are both innovative and more personalised. Curiously, banks collect or have huge amounts of data on their customers but have largely failed to utilise this resource, as other retailers have done, to provide more targeted services. Banks need to expand on the trust already placed in them to produce higher standards and more responsive services. And in 2015 they need to reflect both at a customer and staff level the radically changing demographic profiles of their markets.

In the US, for example, from 2000 to 2010, the number of workers in the 25-34 age group is projected to grow only 8%, while the 35-44 age group will actually decrease 10% and the number in the 55-64 group will expand by 52%, while the 65-plus group will grow by 30%.

Such demographics provide important indicators for products, pensions and staffing.

Technology advances

The prime dynamic of the 2015 debate, however, is the revolution in technology which is transforming processes and markets too. Key to this change which is already under way is the use of the internet, the convergence of clearing systems and the radical change in payment mechanisms that will no doubt develop further on the path to 2015.

Payments are moving into a new era where mobile phones and various proximity payment models are reshaping retail transactions. Banking, using a mobile phone, is not only adding another channel to the multiple channels already available, but in some emerging economies is providing an unprecedented entrance for millions of people into a financial world previously unavailable.

The big change in the use of proximity payments, pre-paid cards and gift cards is not over yet and many more payment innovations can be expected in the years to come. A killer application such as being able to transfer money directly using an SMS messaging code is not yet available but probably will be by 2015.

Cross-border remittances, once the domain of outfits such as Western Union, are undergoing massive transformation and with the use of mobile technology will change significantly over the next decade, creating opportunities for banks despite initial high investment costs.

Will more sophisticated payments processes, the mobile phone and the internet dispel the need for the traditional branch? Experts agree that the branch will remain an integral part of most banks’ multi-channel strategy in 2015 and beyond, but much more as a sales vehicle than a transactional device. A few years ago, branches were thought to be unnecessary for the future but the accepted wisdom has changed with the view now being that banks will always need a branch to provide a direct personalised contact point with customers.

Therefore, by 2015 a more discerning customer base will demand an improved range of financial services through a broader range of channels. Retail banking is yet to come up with a killer application or an iPod of its own, but despite a certain lack of innovation, financial infrastructure is developing and through the internet and mobile phone more lower cost products look certain to emerge.

As for the banks, the consolidation trend will continue worldwide. The bigger banks will need to use their core strengths and scale to provide more than just efficiencies but new businesses and new processes, white-labelling products for smaller banks being one example. But success in 2015, big or small, will only come with clear differentiation and customer focus, something banks have struggled to achieve.

The Banker: Project 2015 column is a quarterly 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.

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