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Digital journeysSeptember 1 2011

Why banks must protect the value of customer relationships

As 'physical' relationships between banks and customers dwindle in favour of more remote interactions via online, mobile or ATM channels, the banks that master their multichannel offering will be the ones to thrive.
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Why banks must protect the value of customer relationshipsRoberto Nicastro

This is a challenging period for banks, as they continue to face uncertainty in the capital markets, constant pressure on their margins, a tighter regulatory environment, increasing demands on capital and a decline in customer trust. And new challenges are becoming evident.

Universal banks are experiencing a dramatic change to their interactions with customers – a change that is undermining the good, old-fashioned distribution model, which was built on a strong network of neighbourhood branches and enduring customer relationships that revolved around branch personnel.

Remote interactions

The first clear trend is that walk-in branch visits by clients have declined steadily: 40% of customers have now become 'invisible' to the branch network in the German market. At the same time, total client interactions have increased by a factor of 10, thanks in particular to digital channels and the notable growth in internet and mobile banking, as well as the migration of transactions to ATM networks.

Furthermore, customers are demonstrating a growing preference for initiating and completing product purchases remotely. The consensus among EU banks is that 30% to 35% of sales will be executed via digital channels by 2015[1]. Simple product acquisitions, transfers and upgrades are expected to be carried out increasingly outside of branches.

Customers expect to be able to access all available channels to interact with their banks; initiating and completing product purchases while switching seamlessly from one method to another. For example, they want channels to be accessible for arranging a mortgage, requesting a credit card or posting and tracking a complaint.

In banks that have already reacted to these demands, face-to-face interactions are now almost completely focused on in-depth advisory services and complex sales transactions. Between 50% and 60% of in-person transactions can fit this profile, compared to 20% at less digitally progressive institutions.

Banking via mobile devices is also expanding rapidly. In many countries, mobile banking is growing faster than online banking, and is becoming a viable substitute for office-bound internet accessibility. There remains much untapped potential in this area, and room for innovations that go beyond transferring transactional services from online banking, but still no clear winners have emerged.

Relationship advice

While face-to-face banking remains irreplaceable, the key challenge today is how to maintain the value of relationship banking without completely commoditising automated banking services and, consequently, eroding margins.

The concept of banking as a relationship must be compellingly presented to the growing army of invisible customers who predominantly rely on digital channels, and have a preference for the lean and simple direct banks that are currently growing their customer base. This is the main challenge. There is no sustainable value in banking without relationship. So the goal for banks needs to be to translate the old physical relationship into a new multichannel relationship, which is considerably more far reaching than a multichannel service.

Thus far, the reaction of universal banks has been twofold. First, the technology has sufficiently matured to enable them to reduce their physical distribution costs. A panel of western European banks surveyed by EFMA and Finalta has presented a conservative scenario where branch personnel will decline by 3.4% in tandem with a branch closure rate of 2%. But the actual pressure on physical distribution will probably be higher[1]. Second, banks are attempting to leverage all new non-branch points of contact, using them to originate new sales and to offer end-to-end application processes.

Direct challenge

The challenge facing most banks is how to transfer the value of personal relationship banking to the direct channels. To date, they have just begun to scratch the surface of this dilemma.

Some banks have started making their personnel increasingly available by telephone, video conferencing, web and mobile channels, thereby making it possible to continue their dialogues with customers outside of the branches for critical transactions.

For customers with less extensive needs, relationships should be founded on a continuous and coordinated array of contacts made through all channels. They should be driven by CRM models that implement a holistic approach to embracing customers, channels and products, thus forming a true virtual relationship. Additionally, banks will benefit by investing in innovation and identifying ways to use new digital channels to provide customers with more value-added services, such as expanding their mobile service offerings. 

Brand value

All of the described practices have a strong impact on brand perception. And that, in combination with the kind of word of mouth that is so central to social media, has grown increasingly important in the world of multichannel banking.

At the same time, branch networks need to develop stronger advisory capabilities if they are to succeed in acquiring customers within the micro-markets to which they belong. Many banks are now planning or implementing light branches; a bricks-and-mortar format that is focused sharply on sales. These are often based on a two-tiered model, featuring an advice centre or hub, complemented by a fully automated and cashless sales point that enables the office to cover the full spectrum of the market. In a subsequent step, the industry needs to reassess the whole concept of proximity and its presumed competitive advantages.

In parallel to these developments, banks that have developed their businesses mostly through direct channels are addressing the need to forge stronger relationships with their customers, with the object of sustaining higher margins. To achieve this, they need to leverage their advisory role while making their services available through all channels. Thus, they too are converging towards the multichannel bank model described above.

EFMA is contributing to our industry’s strategic thinking by leading the debate on relationship banking among retail financial institutions. Originally focused on Europe, the location of 80% of the association’s largest retail banks, EFMA is extending its activities to the Middle East, Africa and Asia. Retail players in these regions are learning from the universal banking model of European financial institutions at a time when the monoline approach appears less successful.

For 40 years, EFMA has carefully observed the transformation of our sector and has held hundreds of online and in-person meetings annually, with the capacity to gather several thousand senior bankers and insurers. Presently, the most frequently discussed topic among them is relationship banking in a multichannel environment.

[1] Efma Multichannel Banking in Europe, January 2011, 6th edition.

Roberto Nicastro is chairman of EFMA and deputy CEO and head of retail strategic business area at UniCredit Group

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