Reforming Retail Banks: Improving Banking for the Next Digital Age


The most direct path to success is to target profit pools in specific businesses of the universal banking model—everyday banking (deposit, payment, and credit card accounts), navigating life events (with complex loan products), or building and protecting wealth—where the bank can define and deliver a value proposition that can succeed in our new digital age. While much has been made of the threat of fintech and big tech, we believe that established banks will continue to lead retail banking. Banks running the old playbook, however, will not survive; The new winners will operate as technology companies, with advanced data capabilities, a cutting-edge technology stack, and an agile operating model.

Banking faces severe challenges

Differences in the profitability of key retail banking businesses have always existed to some degree, depending on the market, and day-to-day banking has often served as the foundation for building lifelong customer relationships.

However, to succeed in today’s fast-moving market, which leaves little room for underperformance, it is imperative that banks around the world know where they are and are not profitable (Chart 1), and to protect and expand their most strategic assets. income streams. While the need for a closer look at profitability is global, the severity of the challenges to the traditional universal banking model and the underlying strategic imperatives generally vary by region:

  1. In Europe, North America and developed Asia, the imperative for retail banks is to embrace new technologies, including a digital-first business model and a hybrid cloud core technology stack, to move to a fundamentally steeper cost curve. low, fight innovation attackers, and identify new revenue streams in complex lending and wealth/protection through travel and end-to-end personalization.
  2. Banks in China and emerging Asia should fight for portfolio share while focusing on increasing penetration of higher value businesses, especially complex loans; they should improve the economics of complex lending and wealth/protection through innovation and product segmentation.
  3. In Latin America, the Middle East and North Africa, banks must take advantage of the current gains from day-to-day banking to defend their market share against digital attackers and avoid the economic challenges to day-to-day banking seen, for example, in the Americas. from North. This could be achieved by diversifying the source of profitability within day-ahead banking or by deepening relationships with day-ahead banking customers through cross-selling of complex loans or wealth and protection services.

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The inherent vulnerabilities of the universal banking model are becoming more severe as three key trends continue to reshape the competitive landscape:

  • shift scale advantages from branches to innovation
  • digital attackers take the first significant bites out of traditional banks’ revenue streams
  • consumers who want more digital offerings and superior experiences

The fight for customer relationships has moved into new unfamiliar terrain for banks, and many incumbents are ill-equipped to defend market share on the digital battlefield. This is a battle banks cannot afford to lose, and will need to be fortified with new, reinvented, fit-for-purpose business models and value propositions.

How customers will engage with the retail banking of the future

To thrive in the new digital environment, banks will need to reframe their value proposition, taking into account the power to simultaneously simplify and improve the customer experience and create value through data. Each bank should prioritize one retail business or, depending on capital resources and competitive strengths, multiple businesses, and develop a digital platform that supports the full value chain of finding, buying, and managing the priority businesses (Exhibit 2):

  1. The daily banking platform it would focus on simplifying everyday shopping activities by seamlessly (and often invisibly) embedding transactions within customer journeys and giving customers quick and convenient access to various retailers and service providers.
  2. Home and life events. (or complex lending) would increase customer value through ecosystem partnerships that support end-to-end journeys for major life businesses, from search and selection to financing and ongoing management and maintenance.
  3. The platform for wealth and protection. the services would compete on the appropriate use of client data to deliver hyper-personalized advice, enabling investors to make well-informed decisions about growing and protecting wealth for decades.
Banking models focused on customer journeys allow for greater participation.
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Each of the three business models – everyday banking, navigating life’s events, and building and protecting wealth – if executed successfully, could provide a much-needed boost in profitability for retail banks, at a lower cost. -Target income between 40 and 50 percent. . Cost reduction levers would be different for each model, but would include optimization of branch networks and maximum automation of customer acquisition/onboarding, credit underwriting, servicing, and more. In addition to increased product penetration in the customer base, revenue drivers include new revenue streams with ecosystem partners (Graph 3).

Banks can reduce cost and revenue ratios by 40-50 percent by developing value propositions for one of three specialized business models.
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The adoption of platform-based business models will trigger a kind of internal disruption, requiring banks to forgo revenue in some areas (for example, net interest margins, transaction fees, and commissions on securities trading). ) as they position themselves for rapid growth in the target business.

Operate as a technology company

To offer a value proposition based on a market-leading platform, banks will need to work like a technology company. Leaders must act quickly to leverage strong financials and double down on the three key capabilities essential to a platform-based business model: data analytics, a cutting-edge technology stack, and an agile operating model.

  • Leverage data for personalization and increased customer engagement

    Crucially, banks have real advantages over Big Tech with respect to customer engagement and data, but they have yet to extract full value from these assets. To compete for data on an equal footing with technology companies, banks will need a comprehensive data infrastructure to support advanced data collection, storage, and analysis, as well as a digital marketing engine to translate analytical insights into personalized messages that anticipate individual customer needs and intentions

  • A cutting-edge technology stack to reduce costs and accelerate innovation

    Each of the major retail banking business models requires an IT infrastructure that is capable of handling significant variations in demand for transmission and processing capacity and delivering new solutions through rapid innovation cycles.

    The main challenge in designing the new architecture is deciding which components should be developed in-house to strengthen competitive differentiation and which elements of the infrastructure can and should be outsourced to reduce the cost and risk of service interruptions related to upgrades and upgrades. Additionally, cloud services available today have reached a level of maturity and accessibility that provides banks with various options (including in-house development and various partnership models) to meet the requirements of a digital-first and highly automated business. .

  • An agile operating model to respond to rapidly changing markets

    Winning banks will develop speed as a core competitive advantage, and they can do so through two main avenues: an agile operating model and creating the right mix of talent and skills.

Banks must continue their transition to an agile culture, removing barriers to cross-functional collaboration and building semi-autonomous teams that can rapidly deliver solutions in line with business strategy. Consistency in roles, communication, and work patterns across teams allows an organization to quickly reallocate funds and form new teams as new opportunities arise and priorities change.

Maintaining this more dynamic operating model while adapting to a new, more digital environment will require a drastic change in skill profiles. For example, the primary role of branch professionals will change from teller to universal banker, and with an agile technology organization, a bank may see its ratio of developers to IT infrastructure and operations specialists change from 1:2 to 1, 5:1 (Graph 4).

Retail banks' talent needs will shift dramatically from processors to problem solvers.
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Managing this shift in the talent and skill mix will be a central challenge for banks. Training existing employees to be proficient in higher-value activities is a crucial lever, and our experience and research shows that retraining can be 20 to 30 percent more cost-effective than recruiting new talent. It also strengthens employee engagement, measured in higher employee retention and higher customer satisfaction, which also contributes to financial performance.

Today’s retail banking market is very different in shape and structure from the old environment, where the traditional universal banking model was financially sound. In the new world, the winning banks will be those that carefully choose the businesses in which they can lead and are committed to building a value proposition, core technology and operating model fit to win on the digital battlefield.


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