The future of retail banking: A global perspective
Sunday, 3 June 2007
AS we have been working with our existing bank clients inside and outside the country, we have been struck by the rapid and provocative changes facing the retail sector. While the pace and direction of change seems to vary somewhat from country to country, retail banks everywhere are working vigorously to address new technological, regulatory and competitive realities. Collectively, they are trying to determine strategies and tactics needed to secure their franchises and their futures.
This project addresses three questions from a global perspective. First, what are the key factors driving the almost universal changes in retail banking? Secondly, where will these drivers take the industry in the future? Thirdly, what are the general strategies that retail banks can undertake to succeed over the next decade?
This study is not an academic exercise. Rather, it has grown out of a common thread of themes which are emerging from client assignments worldwide. These themes have been assessed and micro-economic analysis undertaken in order to understand how they operate and where they are taking the industry.
Trends underway: So what are the trends that we see in retail banking? Our core conclusion is that the retail banking industry, owing to a variety of factors, is currently not susceptible to scale economies. By this, we mean that retail banks do not seem to get anymore efficient as they get larger. If anything, the reverse appears to be the case. However, there are a number of strong reasons to suppose that this will change in the future. We believe that retail banking will increasingly be susceptible to scale economies. In turn, this will create pressure for the industry to restructure.
Analogies from other industries support this train of thought. We have assessed two recently deregulated industries -- the power industry, and the telecommunications industry -- and noted that the forces which drove their restructuring, and the consequences. Modifying the driving forces for these industries to those circumstances which are particular to retail banking, we have been able to come to a vision of how the retail banking industry is likely to restructure over the coming decade.
We have also looked at other trends. Technology in particular will change the retail banking industry fundamentally in the years to come. The first key consequence is that banks will lose their monopoly as centres for money transmission. In other words, the activity of transmitting money from one person or company to another will increasingly be able to be carried out be a variety of providers. As with telecommunications, vigorous cost competition will result. The second key consequence of technology will be the proliferation of distribution channels for retail banking products. Whereas in the past, the bank branch was the only channel for distributing most financial services products, in the future a number of different channels will continue to erode the branch's predominance. Many of these we are currently familiar with -- telephone, especially Mobile phone, ATM's, email etc.
In addition, however, new channels are slowly emerging from the primordial soup of the information superhighway. Although we can only guess at how they will affect the distribution of retail banking products, we are confident that these will ultimately supplement the other alternative channels and further erode bank branch's share.
Consequences of these trends: The consequences of the above will be wholesale restructuring. We believe that retail banking will disaggregate into an interlinked portfolio of activities with three broad categories:
l Product Formulators: Within retail banking there will increasingly be divisions or stand-alone companies who focus on formulating products such as mortgage or savings, for delivery either direct to clients or to intermediaries.
l Customer Gateways: We believe that there will be an opportunity for an intermediary to capitalise on superior customer knowledge and efficient delivery channels to sell and service a range of products to individual customers through a range of delivery channels of the customer choosing.
l Industry Services: Increasingly the support functions which are at present woven in to the fabric of the bank will be seen as peripheral supporting activities, and spun off to either separate divisions within a bank or to third party "outsource" providers.
This will eventually create an industry for bank services, with new providers offering a broad range of support activities.
The evolution outlined above will vary significantly by country. This is firstly because the structure of the retail banking industry today is different in each nation -- a legacy of historical market evolution and regulation. In addition, the manner and rate at which markets will be deregulated in the future will also vary. This means that not only does the retail banking industry in different countries start from a different point, but that its change trajectory in the future will also vary as the result of nationally-idiosyncratic deregulation.
The bank of the future will not win by creating a single strategy. Rather, each of its activities within products, customer channels, and support services will be the subject of a discreet "business unit" strategy, which will be benchmarked against market-segmented customer demand and profitability, and competitors' businesses in this area. Let's site an example i.e. how many people/customer visit departmental store a day? Answer is simple, much more people visit store than the bank branch. What does it mean and who has more information in this respect? Naturally the store has much more information compare to the bank.
A corollary of this evolution will be that branches will increasingly be but one of a number of channels of distribution to customers. As a result, their numbers will decline both as a percentage of all banking transactions, and in absolute numbers. Winning banks will actively address this issue, migrating their customers to alternate channels where appropriate.
As with any global-oriented study, the above conclusions are broad and must be interpreted by any financial institution in the light of its unique circumstances. Nevertheless, we are confident that the answers to the questions posed will be of value to banks and to other financial industry executives as they ponder their strategic alternatives in the future.
The writer is Senior Executive Vice President and Manager, the Premier Bank Ltd., Motijheel Branch, Dhaka
This project addresses three questions from a global perspective. First, what are the key factors driving the almost universal changes in retail banking? Secondly, where will these drivers take the industry in the future? Thirdly, what are the general strategies that retail banks can undertake to succeed over the next decade?
This study is not an academic exercise. Rather, it has grown out of a common thread of themes which are emerging from client assignments worldwide. These themes have been assessed and micro-economic analysis undertaken in order to understand how they operate and where they are taking the industry.
Trends underway: So what are the trends that we see in retail banking? Our core conclusion is that the retail banking industry, owing to a variety of factors, is currently not susceptible to scale economies. By this, we mean that retail banks do not seem to get anymore efficient as they get larger. If anything, the reverse appears to be the case. However, there are a number of strong reasons to suppose that this will change in the future. We believe that retail banking will increasingly be susceptible to scale economies. In turn, this will create pressure for the industry to restructure.
Analogies from other industries support this train of thought. We have assessed two recently deregulated industries -- the power industry, and the telecommunications industry -- and noted that the forces which drove their restructuring, and the consequences. Modifying the driving forces for these industries to those circumstances which are particular to retail banking, we have been able to come to a vision of how the retail banking industry is likely to restructure over the coming decade.
We have also looked at other trends. Technology in particular will change the retail banking industry fundamentally in the years to come. The first key consequence is that banks will lose their monopoly as centres for money transmission. In other words, the activity of transmitting money from one person or company to another will increasingly be able to be carried out be a variety of providers. As with telecommunications, vigorous cost competition will result. The second key consequence of technology will be the proliferation of distribution channels for retail banking products. Whereas in the past, the bank branch was the only channel for distributing most financial services products, in the future a number of different channels will continue to erode the branch's predominance. Many of these we are currently familiar with -- telephone, especially Mobile phone, ATM's, email etc.
In addition, however, new channels are slowly emerging from the primordial soup of the information superhighway. Although we can only guess at how they will affect the distribution of retail banking products, we are confident that these will ultimately supplement the other alternative channels and further erode bank branch's share.
Consequences of these trends: The consequences of the above will be wholesale restructuring. We believe that retail banking will disaggregate into an interlinked portfolio of activities with three broad categories:
l Product Formulators: Within retail banking there will increasingly be divisions or stand-alone companies who focus on formulating products such as mortgage or savings, for delivery either direct to clients or to intermediaries.
l Customer Gateways: We believe that there will be an opportunity for an intermediary to capitalise on superior customer knowledge and efficient delivery channels to sell and service a range of products to individual customers through a range of delivery channels of the customer choosing.
l Industry Services: Increasingly the support functions which are at present woven in to the fabric of the bank will be seen as peripheral supporting activities, and spun off to either separate divisions within a bank or to third party "outsource" providers.
This will eventually create an industry for bank services, with new providers offering a broad range of support activities.
The evolution outlined above will vary significantly by country. This is firstly because the structure of the retail banking industry today is different in each nation -- a legacy of historical market evolution and regulation. In addition, the manner and rate at which markets will be deregulated in the future will also vary. This means that not only does the retail banking industry in different countries start from a different point, but that its change trajectory in the future will also vary as the result of nationally-idiosyncratic deregulation.
The bank of the future will not win by creating a single strategy. Rather, each of its activities within products, customer channels, and support services will be the subject of a discreet "business unit" strategy, which will be benchmarked against market-segmented customer demand and profitability, and competitors' businesses in this area. Let's site an example i.e. how many people/customer visit departmental store a day? Answer is simple, much more people visit store than the bank branch. What does it mean and who has more information in this respect? Naturally the store has much more information compare to the bank.
A corollary of this evolution will be that branches will increasingly be but one of a number of channels of distribution to customers. As a result, their numbers will decline both as a percentage of all banking transactions, and in absolute numbers. Winning banks will actively address this issue, migrating their customers to alternate channels where appropriate.
As with any global-oriented study, the above conclusions are broad and must be interpreted by any financial institution in the light of its unique circumstances. Nevertheless, we are confident that the answers to the questions posed will be of value to banks and to other financial industry executives as they ponder their strategic alternatives in the future.
The writer is Senior Executive Vice President and Manager, the Premier Bank Ltd., Motijheel Branch, Dhaka