Traditional retail banking is facing a significant challenge from the rise of fintech and Big Tech. In order to stay competitive, banks must opt for retail banking digital transformation and focus on areas where they can establish and expand their dominance in the modern digital landscape.
This means creating and delivering a value proposition that can excel in the current digital era, with a strong focus on profitable areas such as daily banking, life events, and wealth building. The key to success is operating like a tech company, leveraging advanced data capabilities, cutting-edge technology, and an agile operational framework. While some may view fintech and Big Tech as a significant threat, we believe that traditional banks still have a strong advantage, but only if they adapt and leave behind outdated strategies.
Banking Industry Confronts Major Challenges Ahead
To succeed in the fast-evolving banking industry, it is crucial for banks to understand their profitable areas and protect and expand these strategic revenue streams. Different regions face varying degrees of challenges and require different strategies:
- In Europe, North America, and developed Asia, banks should embrace new technology, move to a lower cost curve, and focus on complex lending and wealth/protection services via personalization and end-to-end journeys.
- Banks in China and emerging Asia should increase penetration of higher-value businesses, particularly complex lending, and improve the economics of these businesses through innovation and segmentation.
- In Latin America, the Middle East, and North Africa, banks should leverage profits from daily banking to defend market share against digital attackers and deepen relationships with customers through cross-selling complex lending or wealth/protection services.
The vulnerabilities of the universal banking model are increasingly pronounced due to three major trends:
- The shift in advantages from traditional branches to innovation
- The emergence of digital attackers that are disrupting traditional banks’ revenue streams
- Consumers’ growing preference for digital offerings and better experiences
The competition for customer relationships has moved to new digital terrain that many traditional banks are not equipped to handle, putting their market share at risk. To survive, banks must develop new value propositions and business models that are better suited for the digital era and align with retail banking digital transformation.
Exploring the Future of Customer Engagement in Retail Banking
In order to succeed in the digital age, banks must redefine their value proposition by simplifying and improving customer experiences and leveraging data to create value. Each bank should prioritize a specific retail business or multiple businesses and develop a digital platform to support the entire customer journey, from search to purchase to management.
- The daily banking platform should streamline shopping activities by integrating transactions seamlessly within customer journeys and providing quick access to various retailers and service providers.
- The home and life events platform should form ecosystem partnerships to support end-to-end journeys for major life undertakings, from search to financing and management.
- The platform for wealth and protection services should utilize customer data to deliver personalized advisory support, helping investors make informed decisions about wealth management over time.
Retail banks can boost profitability by pursuing one of three business models with a target cost-to-income ratio of 40 to 50 percent: daily banking, life event navigation, and wealth building and protection. To achieve this, banks may optimize their branch networks, automate customer processes, and seek new revenue streams from ecosystem partners. Adopting platform-based business models will require banks to sacrifice revenue in some areas, but it’s necessary for rapid growth.
Why banks need to operate like tech companies in the digital age
To succeed in a platform-based business model, banks need to operate like a tech company. This requires prioritizing three essential capabilities: data analytics, a state-of-the-art technology stack, and an agile operating model. Bank leaders should act quickly to leverage their strong financials and double down on these capabilities.
- Utilizing data to enhance personalization and improve customer engagement
To effectively compete with Big Tech in terms of data utilization and customer engagement, banks have distinct advantages that they have not fully taken advantage of yet. To level the playing field, banks must establish a comprehensive data infrastructure to support data collection, storage, and advanced analytics. Additionally, a digital marketing engine is necessary to translate analytical insights into personalized messages that predict individual customer needs and intentions.
- Utilizing advanced technology to decrease expenses and accelerate innovation
Banks need a capable IT infrastructure to implement retail banking digital transformation models effectively. This infrastructure must handle varying capacity and fast innovation cycles. Determining which components to develop in-house versus outsourcing is a key challenge. Cloud services offer many options, including in-house development and partnership models, to meet digital business requirements.
- Adopting an Agile Operating Model to Keep Pace with Rapidly Evolving Markets
Successful banks will gain a competitive edge by prioritizing speed, which can be achieved in two primary ways: implementing an agile operating model and cultivating a workforce with the appropriate blend of abilities and expertise.
Banks must embrace agility and talent development to gain a competitive edge in the fast-changing market. This requires breaking down barriers to collaboration, creating semi-autonomous teams, and reallocating resources quickly. A shift in skill profiles is also necessary for sustained success in the digital environment.
Banks face a central challenge of managing the shift in talent and skills. Reskilling existing employees is key and can be 20-30% more cost-efficient than recruiting new talent, while also boosting engagement and retention. The retail banking digital transformation market has evolved, requiring banks to carefully choose their focus and build a digital-ready value proposition, technology, and operating model to succeed.
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