Everyone has their own views on what retail banks will look like in the future. But some things seem certain. Retail banking is still the main force in banking, and will stay that way for the foreseeable future, despite the relentless growth of investment banking, corporate banking, asset management, hedge fund management and other forms of finance.
The Boston Consulting Group (BCG) produced a report a few weeks ago called Retail Banking: Facing the Future, which supports this view. “Retail banking will remain the dominant source of revenue for banks worldwide through 2015,” concludes the report. “In 2006, the retail banking business accounted for €1220bn in revenues, or about 57% of the global banking revenue pool of €2150bn. Even for most of the top 10 banking titans, retail business is still a critical revenue source – representing an average of 37% of total revenues.”
BCG estimates that between now and 2015, retail revenues will expand at an estimated compound annual growth rate of 3.2% in real terms. Building in an inflation rate of roughly 3.2% overall annual growth should be about 6% to 7%. Retail banking also continues to deliver a higher return on equity than other banking segments. Most major banks achieve a return of more than 25% (before taxes) from their retail banking activities.
Emerging markets will account for much of the growth. By 2015, the share of global retail banking revenues generated collectively by the top five European countries and the US – which are all mature markets – will have shrunk by an estimated 5%, with matching collective gains in strongly growing markets in the Asia-Pacific and the Middle East.”
Reality check
Not all banks will benefit. There will be losers. The BCG report states that retail banks are facing intensifying competition and declining margins around the globe, and must take steps to protect their customer bases at home and to explore high-growth markets abroad. “If they do not, they will face serious threats to their revenue shares and profitability,” it says.
These competitive pressures are coming from different directions: deregulation and the opening of international markets, the expansion of direct and online banking, non-bank entrants, and rising customer expectations. Banks that cannot cope will risk being taken over by those that can, particularly in mature markets with low growth rates. Rapidly developing technology will shape much of this change. The trend towards direct and online banking will “inevitably lead to a further decline in the importance of bank branches for some sales activities, although branches will remain critical for customer acquisition and advice-intensive products,” says the report. “The transparency of the online world and the ability of sophisticated consumers to compare offers and price positions will push the pendulum of power in the retail banking industry increasingly towards the customer.”
Yet new technology will empower banks in certain areas too, not least in processing efficiency, which will help them to deliver a superior customer experience at the same time as reducing costs. “On average, cost savings of 15% to 30% can be achieved through improved process efficiency, internally shared services and outsourcing and offshoring,” says the report.
Branches will thrive
Reports of the death of branches have been greatly exaggerated. The European Financial Management and Marketing Association (EFMA), in partnership with Microsoft, published a report towards the end of 2007 called The Future Role of the ‘Bank Store’ and its Interconnectivity with Other Channels. It mapped out the likely future direction of branch banking and the role technology might play in that.
“Some years ago, when the internet boom was gathering momentum, many financial services industry commentators, as well as senior executives in leading banks, predicted the demise of the branch and its effective replacement by other channels,” it says. “As we will see in this report, although customers are now using a variety of channels to carry out their financial services business, the physical branch has seen a revival and resurgence.”
“Most banks are investing heavily in their branch networks or what they increasingly refer to as their ‘stores’. They are adopting a more retail-oriented approach and making branches a more attractive destination. The branch of the future will certainly be very different from that of today.”
EFMA’s authors argue that although the branch will continue to be at the heart of customer relationships – and will continue to account for the great majority of product and service sales even in five years’ time – its connections to all other channels must be “vastly improved”. Although channel interconnectivity is relatively low on the project priority list for many banks, the situation will change in the next few years “as market pressure to provide a fully integrated customer experience across all channels intensifies”. So the branch of the future is likely to be a lot smaller, often with only three or four staff, more sales and advice oriented, automated and better connected to all other channels.
Nordic trends
Peter Schütze, head of Nordic Banking at Nordea, predicts a number of trends emerging in the retail sector across the countries that he covers – Denmark, Finland, Norway and Sweden. First, branches will continue to conduct fewer transactions. “The net banks have captured the hearts of customers,” he says. “They use the internet several times a week to check balances, transfer money and so on, and they like its 24-hour availability. As a result, branches will move towards a sales and advice model where people sit down with their personal banker to discuss their finances.”
Personal bankers are becoming more proactive, which yields better results. “When we contact customers and ask if they would like to meet a personal banker for a ‘360-degree’ view of their savings, mortgages, loans and other services, a substantial majority say ‘yes’,” says Mr Schütze. “The personal banker prepares for the meeting, conducts the meeting and spends some time on it afterwards. But we sell a lot more than if we had waited for the customer to contact us.”
“Proactiveness pays off. Therefore when I look ahead, I see branches with fewer or no cash services, with highly dedicated staff giving sales and advice. Branches will not disappear, but they will have fewer employees. Back-office staff and tellers will, as functions, more or less disappear in the branches and be replaced by more sales and advice-focused people.”
Technology will continue to play a major role in the retail bank of the future, says Mr Schütze, although he stresses that staff are a more important asset for a bank than technology. Within the technology category, the most important part is the internet bank, as it provides most customers with their daily interface with Nordea, followed by customer relationship management systems and advice tools.
Over the next few years, technology will be increasingly used to make Nordea’s processes – for mortgages, loans, international transfers, deposits and so on – more efficient. “We are systematically building up functionality that can be used cross-border, process by process, to create straight-through processing (STP),” he says.
“We will do as much STP as possible and avoid outsourcing manual tasks to low-cost countries. We think it’s better to make the process automatic, rather than use cheaper labour. Our aim is to have as low a unit price per product as possible. It will take some years – but not many, maybe only two or three. We will end up needing fewer administrative and back-office people. Those who leave us will not be replaced, and those who stay will be retrained to be personal banking specialists.”
Targeted advice
Gary Lumby, head of retail banking at Yorkshire Bank, regards branches as being central to the future development of the industry over the next five to 10 years. “Lots of banks, including ourselves, are still investing in their branch networks and the technology that goes into them,” he says. Yorkshire Bank has invested in customer relationship management systems that provide counter staff with on-screen pop-up messages to provide information on the customer in front of them. “It allows us to take a rifle-shot rather than a blunderbuss approach to customer marketing,” says Mr Lumby. “We are also looking at concept branches – branches of the future. In five to 10 years our current branch design will not meet the requirements of our customers.” There will be more customer space, which will be allocated for customers to use ATMs and internet terminals, but also to have meetings with sales advisers. “We are also investing in our internet capability. Our new website goes live next month. We are supplementing our traditional, face-to-face branch banking with the internet and telephony. Pre-paid cards are also a growth area,” adds Mr Lumby.
Camille Fohl, group executive committee member responsible for retail banking, global branding and communications at Belgian bank Fortis, believes that one of the most significant future trends in retail banking in the Benelux countries will be that customers will demand more of their banks. “Customers have high expectations,” says Mr Fohl. “Customers will want more value for money and convenience, which means they will be looking for good service, operational excellence and speed. They will also want ‘proximity’, by which I mean better access to us through branch, direct and internet channels.”
Changing demographics
The changing demographics of the Benelux countries will profoundly effect the market. The ageing population will create more opportunities for pension planning and wealth transfer, says Mr Fohl. The population is becoming increasingly international, so segmenting the customer base and organising delivery according to customer needs will be key. Another emerging trend that will only get stronger is the growing demand for ‘sustainable’ products, such as loans for environmentally friendly cars or energy saving measures in the home.
Competition will increase, putting pressure on margins. “Volumes will remain healthy, but the big banks and domestic champions will be challenged by niche players, monoliners and specialists using acquisition pricing for their products,” says Mr Fohl. “The market is not experiencing much growth in customer numbers so the big banks will fight to protect their market share or increase their share of wallet.” Recent regulations – such as MiFID, SEPA and Basel II – and new rules in the pipeline will add to competitive pressures and affect product development.
Such trends shed light on why Fortis joined the consortium to acquire ABN AMRO. Under the arrangement, Fortis will obtain certain ABN AMRO assets, including its Dutch retail banking business. “There is a constant striving in retail banking to leverage scale and create efficiencies that benefit the customer,” says Mr Fohl. “The ABN AMRO acquisition will give us a better focus in the Benelux countries on the different customer segments – small enterprises, professionals, affluent customers and mass retail.
“It will also help us capture cross-border growth opportunities. We will be strong in all the Benelux markets and will be able to replicate our products, services, solutions and processes for the benefit of ABN AMRO’s customers and for ourselves. This will lead to rapid commercial development and efficiency increases. The retail banking markets in Benelux are still mainly locally driven, so if we can leverage what we have in each market and replicate it, cross-border will be a differentiating key success factor.”
Technological evolution
Technology will continue to be a big enabler for the retail bank of the future. “Technological evolution will drive customers’ behaviour and how they use banking services,” adds Michael Anseeuw, who is responsible for strategy and business development at Fortis’ global retail banking operation. As an example of the direction in which retail banking is travelling, he cites a new service called ‘direct personal banking’, which was fully launched by Fortis in Belgium last month. It is aimed at people with more than €250,000 of investable assets.
This personal relationship model, with access to specialists via telephone and internet banking, meets customers’ need for convenience, as it offers them the possibility of raising queries or conducting business out of normal hours, and saves them the journey to the branch.
“With direct personal banking we’ve taken retail banking another step forward,” says Mr Anseeuw. “In this model, direct channels occupy the primary role in focusing on value-adding advising services. Hundreds of customers registered for the service within the first few weeks.”
Emerging markets
Branches will continue to have a role in the next five to 10 years. “But that role will have to be completely redefined,” he adds. Banks in emerging markets are, to some extent, already showing the way for the future development of branch banking in mature markets, says Mr Anseeuw.
“Banks in these newer markets are not held back by long-established branch networks or legacy systems and so have come up with more innovative solutions.”
