The financial services industry is going through dramatic changes as a consequence of changing customer behavior, channel proliferation and the digitization of business and society in general. Cost reductions and increased sales do remain the key drivers, among others in retail banking.

The digital transformations taking place in finance are driven by many common challenges and opportunities across the industry, whether it concerns insurance, (retail) banking or other financial services.

Retail banking - image Shutterstock
Image: Shutterstock

At the same time, in each of those financial industry segments there are several specific challenges, depending on the digital transformation maturity level, the region, the overall ecosystem, the customer context (including the use of digital channels), the business scope and the degree in which digitization has taken place and processes have been connected. In this article we take a look at the challenges and evolutions in consumer or retail banking.

Although in some regions and countries, retail banks are leading in several digital areas, including marketing and customer-facing operations (with great examples of omnichannel banking and mobile banking, for instance), in general retail banking still has a lot of catching up to do with many ongoing digital customer shifts, market evolutions and process change requirements. The speed at which it happens has to do with priorities (cost reduction, sales) and siloed structures.

Banks in general have additional challenges which we see in other segments of the financial industry as well:

  • The need to integrate/connect distribution channels to optimize efficiencies, reduce costs and serve customers and prospects in a consistent way, the so-called omnichannel imperative, which we have seen in retail and is typical for a channel-agnostic consumer.
  • Some other key goals: better identify opportunities by looking at the overall customer life cycle (and important changes in it), improve experiences and (thus) enable better customer service and experiences.
  • Reducing churn and increasing loyalty. The loyalty of retail banking customers fluctuates. This has to do with several other challenges mentioned below and overall changes in consumer behavior. Sometimes we see increasing loyalty, while in other areas loyalty decreases. Furthermore, loyalty is not enough anymore. Think experiences.
  • Decreased levels of trust: the impact of the 2008 financial crisis and uncertain economies today had a well-kown impact.
  • Last but not least – there is the arrival of fintech and other competitors with disruptive models that are better adapted to the increasingly digital consumer. There are also significant changes in the competitive landscape, depending on the region and context (e.g. the rise of Islamic banks in the Gulf countries).

Digital, disruptive and customer challenges for retail banks

Even if digital transformation is a priority for most retail banks, reality shows there is still quite some work in the area of digitization, a conditio since qua non for transformation, and of underlying processes that are often overlooked.

In a 2012 report (PDF opens), called “Digital transformation in 10 building blocks to boost customer exerience and ROE”, the EFMA (a financial industry organization promoting innovation in retail banking) and McKinsey indeed stated retail banking was lagging behind in digitalization/digitization. The report, based on data and perspectives from across the European banking sector, found that only 20-40% of processes are digitalized and 90% of banks invest less than 0.5% of their total spending in digital.

Four distribution archetypes - customer segments and the bank branch - source - digital transformation in 10 building blocks - paper by EFMA and McKinsey
Four distribution archetypes – customer segments and the bank branch. Source: digital transformation in 10 building blocks – paper by EFMA and McKinsey

In an article in the Financial Times, McKinsey London’s Tunde Olanrewaju, wrote that “retail bank customers don’t experience the same level of digital choice, freedom and empowerment as in other industries” such as travel, to quote just one. And that is a challenge as the experiences, choice and digital expectations of consumers are shaped by those in all industries. We expect the same level of service and – even more importantly, empowerment – from retail banks as we do from other industries leading the digital evolutions.

As mentioned before, there are more risks: fintech start-ups and newcomers with a clear and customer-centric digital approach and/or a disruptive approach enter the market and consumers won’t wait until banks have closed the digital gap neither. Furthermore, digital laggards will become more visible as their competitors do close the gap, Olanrewaju emphasizes.

10 retail banking priorities and challenges
  1. Cost reduction (among others lowering cost per transaction) and increasing sales (cross-selling, up-selling, acquisition), which is a challenge for many.
  2. Customer focus: optimizing the customer experience and enhancing customer service in a consistent way: from cross-channel and multichannel to omnichannel.
  3. Single customer view: connecting systems and processes to achieve the above with an increasing role for digital channels and (connected) CRM.
  4. Developing new offerings, products and services that are adapted to the evolving customer reality, competitive landscape and area of activities. Noteworthy: after the bank crisis in 2008, in many regions, retail banks across the globe looked less at the Western banking system and more at their own markets and strengths/challenges/approaches. Innovation often comes from developing countries.
  5. Digital and direct banking with a clear role for mobile banking, especially in areas with less branches, high mobile penetration and cost reduction programs. More below in this article.
  6. Segmentation. Adaptive and agile business models, taking into account customer segments, based on various parameters (more below).
  7. Branch consolidation (and innovation), among others for cost reduction purposes, but also to introduce new – cost-effective and customer-adapted – ways to digitize specific processes and tasks (with experiments to see what works).
  8. Analytics and ways to combine all interactions, information and – predominantly unstructured – data (also Big Data) to optimize customer service and touchpoints, while having dashboards, enabling cost control.
  9. Identifying silos that are omnipresent in virtually all business functions and processes. And finding ways to build cases that enable improved efficiency across silos.
  10. The use of digital marketing and customer service strategies to acquire, retain and service customers, adapting to the digital consumer but also promoting digital services to reduce costs, both in services and marketing spend.

Getting digitization right: beyond front-end functionality

A key question is why (retail) banks haven’t been moving more aggressively towards digital and still lag behind in digitization, for instance.

Tunde Olanrewaju provides the answer in the previously mentioned article: bank executives have tended to view digital transformation too narrowly with a focus on front-end functionality delivered to customers.

This is indeed what we see happening. Many banks have come up with state-of-the-art apps, calculators, comparison charts, servicing tools, etc. While this focus on the customer is to be applauded, it cannot work if the underlying connected processes (internal…), resources and data and information flows and integrations aren’t in place. This often results in banks as being perceived as digital frontrunners in the public eye with nifty applications but that perception ends once the customer is beyond those – first – digital touches.

It’s in the integration of front end, back end and other areas that true digital transformation often still needs to happen.

From a pure digitization viewpoint, in retail banking we often still notice:

  • Lots of information-related processes happen manually and leave room for errors.
  • Disconnected systems, resources and – again processes – are time-consuming and costly.
  • Organizational silos remain huge and different projects and goals live in isolation, thus standing in the way of cross-fuctional optimization.

If one of the underlying processes is slowed, this inevitably has an impact on other processes and of course on the overall customer experience, exactly an area where retail banks need to focus on. Olanrewaju rightfully states that, among others, there is a lot of value to gain in the automation of servicing and fulfilment process.

From an information and data perspective following elements can lead to cost reductions, improved customer experiences, faster speed to business, lower risks and higher revenues and loyalty:

  • Reducing the manual labor that still happens in several back-office processes as mentioned earlier. This is not so much a matter of the cost of labor but especially of the mistakes that are inevitably made when capturing and processing any form of input or information (from loan applications to customer service questions) occurs. It’s part of the essence of digitizing information. Reducing manual labor, processes and workflows is a key step towards a higher goal, being automated processes that are connected or integrated with other systems to improve process efficiency and in the end customer and business goals. In today’s digital context, connecting processes, applications and digital information flows are inevitably connected. Siloed information is the enemy of digitization, optimization, transformation and even innovation.
  • On top of traditional channels consumers still like to use such as paper and email, there is a range of new channels whereby it’s clear that today’s customer prefers fast interaction with unstructured data and content being the pre-dominant form of communication. This is not just a challenge in retail banking but it certainly plays a crucial role. The increasing use of direct and digital channels is a very broad and radpidly evolving challenge as such.
  • The changing role of the retail bank branch. It’s clear that the branch consolidation and branch shutdown will continue in many environments. This movement, among others driven by the need to cut costs and invest more in the customer experience and digital transformation, doesn’t mean branches will die. We’ll take a look at the changing role of the retail bank next.

The changing role of the retail bank branch: evolutions

Customers want omnichannel service and access to information on their terms. They also want to communicate on their terms. With the advent of a digital prosumer, used to (and wanting to) take decisions in their terms, the focus of the retail bank branch is shifting.

This often includes requires investment in offering digitization possibilities and digital experiences within the branch, while reconsidering the tasks and roles of various branch employees, depending on their typical visitor segments and their tasks, which again depends on a broader context (e.g. location). Many retail banks are also experimenting with co-branding, hybrid branches, immersive experiences within branches, design, etc.

These experiments and actual transformations in the role of the retail bank branch can lead to staffing changes as mentioned. An example: the mix of employees in the branch can move more towards supportive functions if customers dispose of more digital tools and services on the spot, while offering special spaces and slots for financial advice, even if here as well we see digital evolutions whereby the ‘expert’ is not physically on the spot.

It’s clear multiple options are possible and there is no one-size-fits-all. The key driver will be the evolution of the various typical customers, which can be steered with incentives and come with possible education and engagement initiatives. It’s also clear that the digital and physical interaction preferences will change and vary country per country (e.g. existing government-driven digital evolutions, use of mobile in banking and thus penetration), bank per bank (e.g. maturity, connected processes, legacy systems), branch per branch (e.g. rural versus city) and customer segment per customer segment, to sum up just a few parameters.

Finally, the nature and broader business ecosystem of the retail bank also plays a role (compare broad-offer banks with disruptive players, online pure players and retail bank services by postal services and even business that don’t have banking as a core business, for instance).

Customer first: segmenting the retail bank experience

However, the main contextual differentiator remains the customer and his overall preferences, needs and desired experiences.

Baudouin Thomas - Financial Services Accenture Belgium
Baudouin Thomas – Financial Services Accenture Belgium

In the previously mentioned research by the EFMA and McKinsey (and as the image shows), four distinct customer segments were defined with the so-called self-directed becoming by far the most important segment (80% by 2020).

However, the digitalization of transactions in the branch is at least as important for the so-called ‘branch lover’ segment, where banks will offer more digital possibilities. With unstructured data and digital information being key, this opens up plenty of new opportunities for retail banks to change the “experience” in their branches.

As Baudouin Thomas, Managing Director Accenture Belgium, says in an interview with Banking Boulevard: “customers should also benefit from this digital transformation when visiting their local bank branch”.

Shifts in the tasks and core business of retail banks

Making the branch a point of human/digital interaction and of digital information capturing and processing can start at the level of enabling customers to digitize their own documents or training branch employees to quickly do so themselves or assisting customers using state-of-the-art capturing and processing technologies, designed for use in customer-facing situations and the processes underlying them.

In a paper, called “Inside Tomorrow’s Retail Bank” (PDF), AT Kearney also emphasized the evolutions in the behavior of different retail bank customer segments. The company divided customers into two major groups of retail bank customers: Generation Facebook and a large group of digital deniers, in practice and in developed markets the latter are often elderly people.

In the paper, AT Kearney also identifies some basic demands both groups (essentially both at the two extremes of digital savviness) and sums up some more evolutions retail banks witness in a mobile, social and digital era, with mobile and social being important phenomena in the retail bank, according to the company.

Interesting – and probably even more driving transformation in the industry – is the shift of the control regarding specific tasks in banking, some of which are done by the bank today and will be done by the customer tomorrow. Knowing that some of these tasks are key to the business of retail banks, analyzing these shifts is essential for banks.

Tasks executed by banks today that will be handled by customers tomorrow - source AT Kearney - paper Inside Tomorrows Retail Bank - PDF
Tasks executed by banks today that will be handled by customers tomorrow – source AT Kearney – paper “Inside Tomorrow’s Retail Bank” – PDF
Retail banking: the growing importance of direct and digital channels
Direct and digital channels are playing an increasing role in retail banking since many years now. However, there is still much room for improvement, depending on the context, geography and area of activities. Direct and digital channels matter from all customer perspectives: from gathering information to gaining access to customer service. For retail banks, direct and digital channels are an essential part of the omnichannel strategy and play a role across several goals, from acquisition to support. When and how financial consumers use digital and direct channels depends on numerous factors. With the advent of more digital disruptions and transformations in the overall finance and banking reality, it’s essential to understand the growing role of digital and direct channels.

Discover an overview of the growing importance of direct and digital channels in retail banking.

Back-office challenges in retail banking
The major part of digital efforts in retail banking revolved around the front-end, predominantly optimizing the customer experience across several touchpoints and tools. However, as mentioned, optimizing the customer experience and improving other business processes, is not just a matter of the front-end. It requires an integrated approach whereby the back-office and front-end are connected.

The consequences of not doing so? Among others inefficiencies that have a significant negative impact on customer experience as research shows. Or in other words: partial digit(al)ization whereby customer experience optimization investment on the front-end are outdone by poorly integrated overall processes.

More on the back-office challenges in retail banking