Retail banks have no time to lose. The gap between the demands of their customers and what they can deliver is growing ever wider. It is time to make sweeping changes now or face extinction.

Sophie walks into an unmanned branch of her bank at 2300 hours and is greeted by a personal concierge. The bank identifies Sophie as she walks through the entrance. Her personal concierge is actually an avatar – a computer-generated image – and reflects her personality and characteristic preferences. The concierge directs Sophie to a panelled cubicle after determining her interest – today this is advice on derivatives-based investment portfolios.

Inside this comfortable cubicle, where the displays are personalised to suit Sophie’s needs and personal interests, she is greeted by a holographic image of an investment adviser, who is located across the country. Further biometric identification provides Sophie with access to all information the bank holds about her on the screen in front. Sophie and the adviser discuss and establish her requirements and another expert is called in during the meeting. Various suggestions are put forward and simulations of the impact of any investment decisions are conducted. Sophie gets a clear picture of her total net worth for the next five years in a variety of given simulations.

Sophie leaves the bank satisfied that she has received all the information she needs to make her decision – she trusts the bank and the advice given. The conversation with the two advisers will be waiting for review on the internet banking channel that she uses most of the time. She also has the option of contacting the advisers through the online channel as an online video-conference.

It all ends abruptly when Sophie wakes up in 2003 and realises it was all just a dream set in the futuristic bank branch of 2020. Today’s banks are still struggling to sort out their processes and product range.

While 2020 may seem far away, it is imperative that executives take this vision seriously and advance in the right direction. Even survival in the next few years depends on rapid change in the current form and function of retail banks.

Lost advantage

Let’s face it, banks have lost their information advantage over customers, and there is no emotional connection between them and their customers. Unless change is seriously embraced and accelerated, the future of some retail banks is in question.

Branding, the role of branches, products and services offered, organisational structure and legacy IT systems are some of the challenges that bank executives will have to face. However, the biggest challenge for banks in the near future will be to regain customer trust – a trust damaged by the pensions crisis, stock market performance and insurance failures. Banks will need to place greater emphasis on simplifying products, creating solutions, minimising financial risk and showing value for money. They also need to keep pace with the technical advances that customers have embraced, such as 3G and video-calling.

“Retail banking is running behind various developments that will undoubtedly have a core impact,” says Frank D Shaw, director general of The Centre for Future Studies UK. “With globalisation and the advent of the digital age, retail banks need to rethink their form, function and strategy because the current model will not remain relevant.”

Retail banking must evolve in a similar way to other retail sectors and adopt more of an ecosystem business model, linking with specialised players. Focus on core competence is a good place to start.

The key problem is that “retail banks today are not responding adequately to the challenges of the market”, according to Dr Holger Kern, vice-president of Monitor Group and co-author of European retail banks – an endangered species? Retail banking’s current focus appears to be on the wrong issues, he says. “Banks over-deliver. Customers are offered a variety of product differentiations for which they have little interest. Banking research and development has so far focused on process innovation (and still they struggle), new distribution channels or complex corporate banking products. Innovation in banking products and services has been limited.

“The standard product spectrum, which has remained largely unchanged over the years, will need to be updated as people are becoming wealthy enough – especially through inheritance – to become interested in affluent retail banking. And the average retail customer has also become increasingly sophisticated and expects to invest in more than just a savings account,” he says.

Greater convenience, a broader range of services offered and simpler products are necessary if banks hope to compete with non-bank entrants that are becoming highly attractive to customers, such as the supermarkets or car manufacturers.

This point is emphasised by Ian Darby, group commercial director at Bradford & Bingley, which is the largest provider of independent financial advice and the 10th largest bank in the UK. “How long would a supermarket last if it only sold own-label products?” he asks.

A different response

Banks need to be more dynamic and innovative in their response to changing market needs. As John Maltby, group chief executive of London-based Kensington Group – which is a successful lender to the non-conforming market – explains: “The problem is that retail banks typically go for standardisation of products across a mass market. Banks need to focus on mass customisation versus mass market. Mass customisation is where they compete on their ability to tailor products to meet different needs of groups within the mass market.”

The reality is that even in the mass market there are differing needs affected by customer lifestyle. Customer segmentation according to income, age and gender is no longer good enough, and analytical tools will need to differentiate the mass market. Banks are failing to use the vast amounts of data they hold to learn about their customers.

Better segmentation depends on clearer understanding of customer behaviour and motivations. One problem faced by banks is that customer information can only be captured through interaction on an electronic channel. Customer transition from branches to the online channels is important to enable banks to learn and understand customer behaviour.

Dr Kern advises: “Retail banks have to stop trying to be all things to all people. Specialisation is required, whether it be in specific parts of the retail banking value chain, on certain customer groups, on specific products or on a particular value proposition.” He suggests that the retail banking industry of the future will constitute a network of these specialised players, linked by mutual outsourcing/insourcing relationships.

“Retail banks have to make a choice. Either they see product development or transactions as a core competence. They should think about focusing on these activities and getting rid of the part of operations dealing with the customers or they accept the challenge from new entrants at the customer interface and focus their efforts there – most often leading to outsourcing of product development and transactions/ administration,” he says.

Business models that focus on core competence suggest that the retail bank of the future might:

 build core financial products that are highly specialised but sold to retail instructions;

 commission financial products from specialised ‘manufacturers’ to be re-branded/white-labelled and combined with own products;

 specialise in financial retail, only sourcing appropriate products and packaging as needed, either on demand or through long-term supplier contracts;

 do everything, build, package, brand and sell own financial products and services.

Partnership power

“Retail banks are likely to participate and manage more affinity partnerships with other lifestyle organisations,” says Chris Skinner, founder of information portal, ShapingTomorrow, and MD of Balatro Ltd.

Product and service sourcing alliances are already proving a successful business model for some banks. Bradford & Bingley, for example, has successfully embraced the model of specialist sourcing under its The MarketPlace brand in the UK. The bank offers advice on the wider market, encompassing mortgage broking, insurance, wealth and savings products, and distributes own-brand and third-party products across multiple channels for these areas.

Oliver Kirby-Johnson, managing director of Atos KPMG Consulting, agrees: “There is a trend of disaggregation. We are moving towards virtual banking, where key processes are outsourced to an organisation that can do them better and cheaper.”

As the business model of banks changes to enable future survival, so the role of branches will need to change. It must be remembered that retail banking is all about convenience, says Charlie Rohan, head of design, usability and accessibility at self-service technology providers NCR.

Predictions of the early death of the branch were overstated, however. Renewed branch popularity suggests that the branch will not disappear any time soon. A Henley Centre survey of UK banking customers finds that only 2% of online banking customers have stopped using the branch. Similar results were obtained by The Banker’s survey on Retail Bank of the Future.

A positive and convenient purchasing experience is key to achieving improved customer satisfaction. Whether business is transacted electronically or face-to-face, customers expect a personalised, efficient and open service. “Open” means an impartial/objective service when advice is being sought. In truth, although any financial product can be delivered electronically, for certain customers and certain transactions the reassurance of face-to-face dialogue is essential. Ordering a Gucci dress over the internet will always be possible but is unlikely to be desirable from the customer’s perspective.

The future branch will probably become more of a specialised retail outlet offering a bespoke range of financial products as well as advisory services.

A positive branch experience has proved to be an important element to which the success of ING Direct in the US has been attributed. In European retail banks – an endangered species? Arkadi Kuhlmann, president and CEO of ING Direct USA is cited as saying: “We are making banking easy, as easy – and as much fun – as having a cup of coffee.” At ING Direct cafes in the US, customers can enjoy a coffee in a relaxed atmosphere and do their banking at the same time. The cafes are designed to be bright and clean, and to give a fresh, crisp feel, and waiters act as bank salesmen, according to the book. “We don’t hire bankers for this job, we hire from retail businesses. It is much easier to train a retailer in banking products than make a banker a retailer,” Mr Kuhlmann says.

According to John Reeve of Deloitte Consulting: “Performance and sales culture have had little importance in the branch network before. This will have to change if banks are to compete with the service culture of non-bank competitors.”

Focus must shift

The focus in branches must shift to a much improved and personalised customer service, “providing customers with solutions, not products, addressing their needs”, says Dr Kern. Banks fail to deliver the consistent, independent, unbiased advice and personalised treatment that customers’ now expect. Multi-channel integration, to enable consistency, is the first step to improving customer satisfaction.

Mr Skinner says: “The introduction of high bandwidth IP [internet provider] networks to branches will offer customers greater access to specialists in a more personal and acceptable form, for example, through video-conferencing. Also, the advent of 3G mobile services as well as video-calling will change the way customers interact with the bank.”

For banks that find their niche in customer service and product delivery, the challenge will be to acquire sophisticated segmentation and learning skills to understand customer behaviour and motivation better, and thus be able to deliver personalised and customised service to changing consumer markets.

Systems overhaul needed

Delivering on the bank’s promises is paramount to customer satisfaction. That means that giant, lethargic legacy systems must go. Agility is key for the shorter product cycles and improved process efficiencies to be able to react much faster to market changes and customer demand. Also, as competition increases dramatically from international players in local markets and niche banks’ ability to reach a larger market through electronic distribution, there needs to be an acceleration of radical cost cutting and streamlining, leading to a complete overhaul of management style with much greater emphasis on the customer, marketing and cost of sale.

A good example of intelligent sourcing to reduce the cost of processing is presented by iPSL (Intelligent Processing Solutions Limited), the joint venture cheque-processing unit of Barclays’, HSBC and Lloyds TSB in association with Unisys. By combining their cheque volumes, the banks have achieved greater economies of scale than would have been possible individually.

Reinhold Leichtfuss of McKinsey Consulting says: “Performance will be driven by process efficiency as well as the ability to control cost.” According to Chris Gentle of Deloitte Consulting: “Banks will need to focus on process differentiation rather than just product differentiation.”

In Mr Reeve’s opinion: “Banks are overcomplex and often get too focused on internal dynamics. One of the critical factors determining success in responding better to market changes will be the radical simplification of organisational structure – technical and human.”

Ian Mullen, CEO of the British Bankers Association and chairman of the European Banking Federation Executive Committee, says: “The management strategy of a successful retail bank will be the management of change – a management more actively embracing and managing change.”

Branding power

Key to the future existence of retail banks is brand differentiation. “The difficulty is that trust in banks’ brand does not exist,” says Mr Skinner. And according to Dr Kern: “Banks don’t have a brand! Customers today do not differentiate between brands and have no emotional attachments to their retail bank.” He says that banks today, unlike other product manufacturers, generally differentiate on technical competence and reliability. “The only part of a bank’s brand that seems to instil the necessary trust is the word ‘bank’.”

To survive in the ultra-competitive environment of the future, retail banks will need to have a brand identity on a par with global brands such as Nike, McDonalds and IBM. And they will need to deliver on the promise of their goods just as these organisations do.

Only banks embracing change will succeed. They need to change their thinking and their business approach. Change is imperative if retail banks are to survive and be part of the highly competitive environment of the future.

Future banking

Parveen Bansal visits BT’s demonstration of the branch of the future.

UK communications giant BT has set up a fully functional branch of the future at its Ł300m-a-year research and development site in Ipswich, UK. The Agile Bank demonstration is based on the potential of a 2Mb/s broadband network connecting a branch.

“Banks must maintain their branches to meet customer demand but they need to change the way those branches are used to make the continuing investment worthwhile,” says BT’s Pete Richards. “We believe that, with some innovative combinations of technology and networking, banks can maximise traffic in their branches and lay the foundations for growth into new areas.”

The retail bank of the future will be a learning organisation. Using all the customer data to understand customer motivations and behaviour. All distribution channels will be seamlessly integrated – a task made simpler by the availability of cheaper broadband connection and more easily integrated core banking systems.

Customers will be identified using radio frequency readers to read identity information embedded in the chip on their smart card.

On entering the branch, the customer will immediately be faced with a self-service area. The machines will be clearly labelled and will offer a variety of services from simple cash withdrawal to cheque or cash deposit. Customers will be able to print out cinema tickets, air-travel tickets, vouchers and more. The ATM screen will be personalised to suit the customer’s interests – streaming business news and share prices, for example.

As the customer approaches the queue for the teller, a radio frequency smart card reader on a plasma screen will identify them and begin to play a marketing video advertising a product or service specifically yet discreetly targeted at them.

Dionne Barlow, head of marketing at TECO Information Systems, says: “The plasma screens will even take the place of window displays. With the use of broadband and networked systems linked to the plasma screens, a bank can instantly change window promotions across all physical outlets, as well as online sites, simultaneously, in order to maximise sales. This could save thousands of pounds and much time wasted on traditional poster and placard campaigns for window displays.”

At the teller desk, the customer will face a screen display similar to the one on an ATM, which will display largely the same for both customer and teller. To undertake a transaction the customer will begin by formally identifying themselves by inserting their smart card into a reader. For cash withdrawal, the screen will be used just as for a self-service machine. This facility will enable teller staff to educate and train reluctant customers in the use of self-service machines for such simple transactions. This will also help to capture data on customer behaviour in the branch.

Using a wireless web-pad, connected to the bank’s systems through a high speed secure wireless LAN, on-the-floor staff will be able to begin to service high net worth individuals while they queue. Once again, they will be able to identify such customers using remote radio frequency readers to read smart cards held in the wallet.

Using a flexible broadband network along with “eye2eye” video-conferencing in a specially designed room, customers will be able to connect with remotely located professionals who can offer advice on various banking products. The customer can be directed, either by the professional or interactively (on a web pad), to important areas of a pre-filled application form. A sale is simply completed by signing the application form on screen.

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