Driven by customer expectations and the evolving regulatory landscape, change management has become a constant feature for banks. In the first of our Future of Retail Banking series, Paul Willis looks at how customer expectations and trends are changing – and how banks can stay ahead.
Keeping up with the pace of change
Every business needs to keep moving forward. That includes being responsive to customer needs and adapting to a digital world. As new technology emerges, customers expect digital access to goods and services around the clock. Post-crisis regulatory reforms are still ongoing, and there will undoubtedly be a new wave of post-COVID-19 reforms in the next few years. Similarly, the environmental and political landscape will reshape how businesses operate in the future. As the demand for change increases, UK retail banks are under increasing pressure to keep up.
Making room for innovation in retail banking
Resources are limited, and with so many prescribed change programmes, many banks do not have the bandwidth to initiate non-essential changes. But there have never been so many opportunities for beneficial change and now is the perfect time to embrace emerging technologies.
The technological innovation, commonly referred to as Industry 4.0, means that the transformation that started with cloud technology and big data is enabling advanced analytics, robotics, distributed ledgers and artificial intelligence (AI) on a scale not seen to date. Getting the right skills in place to exploit and access these new technologies will be critical for creating cost efficiencies and value creation in the sector.
Embracing these technologies will also give retail banking firms a competitive edge in the post-COVID-19 landscape. In addition to a change in working patterns, many organisations may emerge with a stronger digital presence, one which plays a more integral role in the firm’s business model. There may also be a degree of market consolidation, but amalgamating operations is always tricky post-merger, especially if relying on legacy architecture. Many mergers and acquisitions post-2008 are still not operationally consolidated, largely due to the pressures of post-crisis regulations, as well as siloed product structures.
Legacy architecture is a problem
As new technologies are applied, they are often layered on top of existing systems, creating increasingly complex and fragmented IT infrastructure. Over time these become unresponsive to change, and in turn, make the whole firm unresponsive – making them unable to adapt to market events, customer demand or the political and regulatory landscape. To stay agile, banks need to invest in the future and create the right architecture to support long-term growth. Digital transformation is a key element of that renewed architecture. In order to create genuine value, these processes must exploit new tech and streamline the environment rather than adding further complexity.
Recognising that the ecosystem is changing, firms need to make strategic decisions around which services and specialisms will be sustainable for the organisation in the long term. Working towards a specialised future state can help maintain relevance in the market, improve agility and reduce costs. This, in turn, supports a reduction in cost income ratios (CIR) and an increase in return on equity (ROE), as well as improving value and long-term sustainability.
Customer habits are changing
The growth of the fintech sector, combined with alternative finance options, has helped retail banking firms develop these new specialist services. Cloud technology and mobile devices have also made it possible to integrate these products seamlessly, so they can be available around the clock – the use of wallets, contactless payments, and interactive apps, for example. Similarly, many large or online retailers allow customers to store money outside the traditional retail banking environment, with PayPal and Starbucks now holding more cash on pre-paid cards than many banks. This reflects a significant shift in how customers want to store and access their money.
Over the next 10 years, these trends look set to continue and changes in lifestyle and environmental expectations will affect how customers use financial products. For UK retail banks, this presents new opportunities and it may lead to a change in service delivery, with many moving towards commoditisation. But customers will still use different providers for different stages in their life journey, for example going to a different bank for a mortgage than for a current account.
To stay relevant, firms must shift from a product-sale focus to a holistic understanding of what the customer needs at different stages of their life.
Using data to understand customers
It’s not just customer behaviour that’s changing, it’s also banks’ understanding of that behaviour. The amount of data available on an individual has expanded exponentially, giving firms better insight on individual customer needs.
In a crowded market, most online and mobile customer services become comparable in terms of quality, essentially making these services indistinguishable commodities. Banks that can use data well, and which have the infrastructure to act on the insights gained, can carve out a niche for themselves and avoid getting lost in the competition.
Future of retail banking
The next 10 years will see significant cultural and business shifts. To avoid getting left behind, retail banks should consider how to respond to these changes in a way that’s personal, timely and value-adding.
The best place to start is by simplifying legacy architecture, improving agility and supporting adoption of digital tools such as blockchain, cryptocurrency and AI. These tools can help you gather and assess the data needed to understand your customer and can help you implement the right changes at the right time.