Do we need retail banks for banking?

With this post, I start a series of short posts of reflections on retail banking industry in the UK. However, I think that these challenges described here are applicable to the worldwide Retail Banking industry.

What do customers think about their banks?

If you are following the news about the retail banks in the UK recently, you might come to an impression that there is something inherently wrong with the whole industry. For example, in recent PwC research, just 32% of the respondents answered that they trust their retail bank. Although, it’s twice as many people than those who trust investment banks, still it is less than the proportion of people that have confidence in the police (52%) or the NHS Nurse (79%). Unfortunately, there is a good reason for the mistrust. Just in the years 2000-14, retail banks in the UK paid £38.5 billion in fines for misconduct on various issues ranging from unfair overdraft charges to Personal Payment Insurance mis-selling.

What are customers doing with that?

In contrast to what I said above, what is striking that the average relationship with the bank lasts for 26 years in comparison to 11 years of the average marriage. Despite the recent easier switching account procedure, 64% of customers decided to stay with their current bank apparently in fear that the new relationship will resemble the old one. It further strengthens the conclusion that the whole industry is being challenged rather than individual banks. Moreover, clients experience great customer services with other service providers like these from e-commerce and transfer these expectations to their banks.

Although, customers might not be switching banks, they are taking whole categories of transactions away from the banking sector to the financial technology disruptors. Nowadays, there is a disruptor almost at every product category offered by a typical retail bank (see the image below). Disruptors usually focus just on one product category, in which they serve their customers faster, deliver a better experience, and charge less for their service.

What does it mean for banks?

Therefore, the banks are under immense pressure as:

1. Their customers are getting more demanding
2. Their business model is unbundled to stand-alone services provided by the disruptors
3. Regulators are thoroughly evaluating them for possible misdeeds

Banks choose various strategies to cope with the situation like setting-up own low-frill digital-only banks, developing counter-propositions to the disruptor’s products, building alliances with disruptors or even purchasing them before they become too expensive to acquire. Despite all the right effort, it seems that banks are just trying to catch up a train that is getting on speed. However, why they are just catching breath instead of sitting in the conductor’s seat?

I believe there are three major factors that are hindering banks from becoming innovative, customer focused, and agile. Firstly, banks today are still organised around what we call “product silos”. In practice, it means that the manager responsible for credit cards develops and promotes her product in isolation from the manager that curates consumer loans. It happens despite the fact that the credit card and consumer loan are just different forms of satisfying the same customer’s need for cash. Secondly, regulation like “Know Your Customer” and limitation on the promotion of certain complex products make banks seem cumbersome in client acquisition, and value added sales. Lastly, the array of complex organisation structures and legacy information systems prevent banks from moving fast enough in order to respond to the industry challenges.

In the next posts, we will look at some solutions for the retail banks to this situation.