Traditional retailers are the envy of retail banks. Here is a sector adored by the consumer, whose weekends are happily spent wandering the aisles of Wal-Mart, perusing the store shelves of Apple, or seeking a bargain at Target. Contrast this with the way in which consumers see banking, and it’s clear why those in the industry are under threat, as they take pains to absorb some of the retail sector’s more desirable qualities.
Not unlike banking, the emphasis for retailers today is on customer experience. See Apple or Tesla, for example, both of which have opted not for shop space chock full of products, but something closer to a showroom, in order that they may better convey their brand identity and commitment to customer centricity. The ultimate ambition for retailers today is to make each store a ‘destination’ – a far cry from the transaction centres of old, which were designed simply to maximise efficiency and productivity, often to the detriment of customer experience.
It is this so-called ‘destination shopping’ that has seen enterprising retailers turn what many consider a chore into an experience. The internet has destabilised the all-conquering force that bricks-and-mortar sales used to represent, and shifted the focus from customer convenience to experience. Ultimately, traditional retailers have found themselves forced to contend with all manner of alternatives, and in doing so have happened upon a new era for retail, as well as a host of new opportunities for financial services.
While the circumstances for retail at first glance seem disconnected from the issues facing retail banking, many financial institutions are now beginning to consult traditional retailers as part of the process of rethinking the world-weary foundations on which the sector is built. Retail banks, to all intents and purposes, are retailers, with the biggest difference between the two being a long history of unrealised potential and an often narrow-minded means of interfacing with customers.
[M]any financial institutions are now beginning to consult traditional retailers as part of the process of rethinking the world-weary foundations on which the sector is built
Remaining competitive
The introduction of non-traditional business models such as peer-to-peer lending and e-banking has spooked the industry, and ramped up the emphasis on technology and convenience in order to remain competitive. One often overlooked obstacle, however, is customer experience, and if retail banks are truly to emerge from the post-crisis world utterly transformed, they must first take heed of sectors outside financial services.
Although the ramifications of the financial crisis have been far-reaching for banking, it has allowed onlookers a rare glimpse into the innermost dealings of financial services, shining a light on the extent to which the industry has been allowed to act irrespective of changes in consumer attitudes. Long-held values have slipped, margins have narrowed and “incumbent banks have just been so awful at serving their customers,” says Tony Greenham, Head of Finance and Business at New Economics Foundation.
As such, banks are increasingly looking to their not-too-distant retail counterparts for an example in how best to adapt to ever changing consumer trends, and are in some instances going so far as to combine the two sectors as a means to that end. Granted, product innovation, good governance and greater quality of service are all crucial facets of the transformation, but some firms need to look outside the traditional banking space in order to streamline operations, cut costs, and improve their offerings.
“Digital innovation does not mean the end of branches (see Fig.1), but a different kind of branch network. Good local lending needs a local presence and face-to-face meeting,” says Greenham. “However, the current number of branches is uneconomic. Branch sharing is the answer.”
New banks on the block
One example of this method in practice is M&S Bank. British fashion and food retailer Marks & Spencer and London-based bank HSBC came together in mid-2012 and set out with an ambitious plan to open up 50 branches across the UK. The bank has joined the likes of Halifax, First Direct and Tesco Bank, who likewise hope to challenge the already established group of British high street banks. Almost two years on from its establishment, M&S Bank has launched a current account with no monthly fees, cheap overdrafts and small overseas charges – along with a complimentary £100 M&S gift card – in an effort to test the mettle of the high street’s existing players. Crucially, the alternative banking solution marks an attempt on the part of HSBC to utilise M&S’ branch infrastructure. Here lies a radically alternative method of not only cutting branch-associated costs, but emphasising customer centricity by aligning brand values with those of another firm whose primary focus is on matching the ever-changing demands of the consumer.
“M&S Bank brings the trusted M&S brand values to banking, delivering a new choice on the high street,” said an M&S Bank spokesperson. “We’re already seeing new entrants in the market, such as M&S Bank, and this is something we’ll continue to see. This is bringing more competition to the industry, and more choice can only be a good thing for the consumer.”
Another benefit of note is that, contrary to the traditional nine-to-five opening hours of most high street banks, retail hours are more flexible and guarantee a greater stream of potential customers. For every store is another bank branch that need not necessarily be kept open. And in a time where margins are tight and efficiency key, the option is seen as a significant opportunity for retail banks and retailers alike moving forwards.
US retailers have also launched new financial services opportunities for consumers who might be disillusioned with or else excluded from traditional banking channels. For example, American Express and Wal-Mar launched the Bluebird service in 2012 to target low-income customers who were unable to contend with the high fees associated with traditional retail banking.
“The financial services landscape is changing,” said Dan Schulman, Group President of Enterprise Growth at American Express, in a press statement. “In an era where it is increasingly ‘expensive to be poor’, we have worked with Wal-Mart to create a financial services product that rights many of the wrongs that plague the market today.”
21st-century banking
These partnerships also bear a certain resemblance to correspondent banking, which has for some time now been employed by financial institutions, and more recently emerged as a vital component of retail banking in emerging markets. Whereas correspondent banking has historically been used as a means of conducting transactions abroad, the method is today being used to cut branch-related costs and reshape the retail banking environment.
Increasingly, regulated financial institutions are partnering with commercial entities to create an extensive and cost effective branch network, and in doing so they are able to access individuals they otherwise would not be able to with no added expenditure.
The changes in this space are again closely in keeping with a much wider shift in retail banking, as delivery channels quietly, though rapidly, expand far and above what they once were. ‘Customers are demanding seamless, multi-channel sales and service experiences and not consistently receiving them,’ reads a Deloitte report entitled Reinventing Retail Banking.
‘Simultaneously, other financial institutions and non-traditional players are looking for opportunities to invade this space or to redefine it through disruptive innovation. The result is forcing banks to examine a more balanced, integrated approach to the customer experience and growth.’
Most in the financial services industry have improved customer data, services and customisability. However, what the sector needs is not incremental improvement, but a wholesale shift in the way banking services are delivered to customers. In short, retail banks must cement partnerships with commercial entities and develop an entirely new set of tools, as well as dramatically rethinking the way in which they accomplish strategic goals.
Alternate distribution channels
Crucially, young, affluent consumers are coming to the counter with greater expectations than before, and expecting in-branch assistance to be personable and intelligent, given that the vast majority of simple tasks and transactions can just as easily be done online. The task for retail banking moving forwards is a complex one: it must at once simplify distribution and develop a more comprehensive branch network. In order for banks to come to terms with these new heights of expectation, they must surely look to entities whose primary business is not banking.
As a consequence, various industry experts predict that commercial entities, technology companies and traditional retailers in particular, could well prove crucial to the banking shake up moving forwards. And provided the rate of change – technological or otherwise – continues at the same pace it has been going in recent years, alternative retail distribution channels could come to constitute a large part of the industry and a saving grace for the profitability of retail banking moving forwards.
“Retailers have brand and distribution but have tended to rely on existing banks to operate their own retail banking operations. I guess they are not as important in changing the industry as the new disruptive business models from new entrants,” says Greenham. The solution does not lie solely with retailers, however; and in a more general sense banks must ensure they broaden delivery channels for customers if they are to remain competitive.
Therefore, retailers should be seen not as a fix-all solution, but as one part of a much larger solution for traditional banking moving forwards. As low-cost business models such as peer-to-peer lending and internet banking squeeze margins further still, existing players must take pains to ensure they’re engaging with customers in every way they can.
