Traditional retail banks, weakened, are facing unprecedented competition
They are recording disappointing results, particularly on the indicators such as CoEx and NBI.
A strong sign, despite an unprecedented effort on expenses, their operating coefficient deteriorated to 70.5%, its record level since 2008, an increase of more than 5 points compared to 2015. However, the retail bank has 20,000 fewer employees than in 2012 and closed around 2,000 branches between 2012 and 2017 (see infographic on the previous page).
At the same time, new banking players are finally taking off
Between 2013 and 2018, the number of online and neobank customers tripled, reaching 6.4 million. On the one hand, online banks (Boursorama, ING, Hello Bank, Fortunéo, BForBank, Monabanq) doubled their customer base over the period and report a proportion of primary bank customers of over 40%; on the other hand, neobanks (Compte Nickel, N26, Revolut, Orange, C-Zam) have won 2.3 million customers since 2016. Added to this are the strong initiatives of GAFA in everyday banking: telephone payments (ApplePay), pre-approved loans for professionals (Amazon), Libra electronic currency (Facebook).
From 2013 to 2018, traditional banks lost 8.7 million customers
Total number of customers published in the annual reference documents of major retail banks in France, while new banking players gained 4 million. Over the same period, traditional banks lost €2.41 billion in NBI while new banking players earned only €167 million. The new players, by principle very aggressive on commissions, were unable to convert their commercial success into net interest margin and their NBI thus represents only €0.5 billion, or 0.9% of the NBI of traditional players (€57 billion).
It is in this context of lasting and profound transformation that we have been reflecting on a vision of retail banking for 2030 (see box below). Looking ahead is, in our opinion, the condition for success in designing a new, coherent model for retail banks, in line with their purpose and their customer promise, and testing this model, adjusting it and rolling it out.
This analysis sheds light, as a preamble, on the major trends that will structure our society in 10 years, and which will affect “individual” customers. The analysis then represents, via 6 scenarios that we briefly describe below, the natural drift of the current retail banking model, to identify risks and room for maneuver, but also to identify the decisive questions in the transformations to be carried out. Finally, it evokes the 6 decisive questions for successfully transforming retail banking by 2030.
2030: SIX SCENARIOS FOR RETAIL BANKING TRANSFORMATION
In this context of societal evolution and the metamorphosis of the banking world, which was once “sanctified”, we studied 6 retail banking transformation scenarios, with different assumptions of banking mobility and market shares of new players. The aim here is to model possible transformation scenarios taking into account the development of new players (direct banks, neobanks, GAFA, etc.), the increase in banking mobility between players, changes in pricing (decrease in BAQ commissions, etc.), and the possible automation of support and back office functions (see “methodology” box below).
6 scenarios are being investigated, according to an increasing intensity of disruption for traditional players
SCENARIO 1: CONTAINMENT
If the behaviors (mobility) and preferences (relationship with an advisor) of the French change little, traditional banks will only have to adapt to a limited extent: adjustments to BAQ pricing to align with online banks and closures of less frequented points of sale will be enough to block the offensive of new players and optimize costs.
SCENARIO 2: THE CHEETAH
If, on the other hand, French behavior changes more in terms of banking mobility, banks will have to make a significant effort regarding customer experience so that this mobility does not result in a flight to new players. This scenario is thus a nod to the famous phrase from Visconti’s film, “everything must change so that nothing changes.”
SCENARIO 3: THE WASHING MACHINE
Multiple government initiatives could lead to a revolution in banking mobility (Macron Law, possible IBAN portability, etc.). Changing banks would thus become common practice, in search of better offers, without new players breaking through, as the French remain attached to a relationship with an advisor. Among traditional banks, this scenario would not be neutral and would undoubtedly increase pressure on players with lower penetration among individuals. This scenario would also significantly increase customer acquisition costs.
SCENARIO 4: THE RIFT
The relationship with money and one’s bank has a strong personal dimension that could lead to a customer segmentation between local relationship banks and basic, inexpensive remote banks based on customer autonomy. This segmentation would have no connection to age, education level, or income. In this scenario, the customer base would thus be divided between fans of traditional banks and fans of new players, at a relatively slow pace due to banking mobility similar to today’s. This “rift” would lead to a greater loss of customers for traditional banks and a greater reduction in branch networks.
SCENARIO 5: THE BARBARIAN INVASIONS
If, on the contrary, remote banking were to establish itself as the new banking standard even as the mobility of the French accelerates, customer attrition would become massive for traditional banks. A closer alignment with the reduction of day-to-day banking fees and a more significant reduction in branch networks would not be able to prevent a significant erosion of their business.
SCENARIO 6: THE 30-YEAR WAR
In this scenario, the most “aggressive” in our model, the explosion of banking mobility and the market share gain by new players are such that, in reality, by 2030, traditional banks would only have their oldest customers—the least mobile. However, these customers are the main holders of financial wealth and, as such, account for the bulk of GDP, thus providing significant resilience to traditional players. This anchoring effect, however, could not prevent the collapse of these players’ business with their deaths over the next 30 years, hence the name of the scenario.
Ultimately, the business model of traditional retail banks is structurally resilient by 2030, due to the reduced mobility of “elderly” customers, who generate the highest unitary NBI. The profitability of retail banking activities is, however, seriously threatened in the event of a strong breakthrough by new banking players. Beyond 2030, a strong breakthrough by these new players would condemn traditional banks if they do not structurally transform their model. We believe this transformation must be carried out in the next 3 to 5 years based on a medium- and long-term vision of what retail banking should be by 2030. 3 to 5 years to design, test, and deploy: the transformation of retail banking has only just begun!
SIX DECISIVE QUESTIONS FOR TRADITIONAL PLAYERS TO ADDRESS
For traditional banks, six questions will be crucial between now and 2030:
How to limit customer attrition ? What new revenue and service model? What relationship model? What operational model? What information system architecture? How to transform HR?
How to limit customer attrition?
Retail banks can capitalize on two major assets to their credit, to preserve and strengthen: the relational dimension (remember that the need for a physical contact or a dedicated advisor are two of the four main obstacles to migrating to an online bank) and trust (another major obstacle to migrating to an online bank). To do this, they have four challenges to overcome: pricing ( day-to-day banking fees are the first “emergency” for traditional banks, because it is one of the three main factors of banking mobility), loyalty ( poorly worked today, it must be a retention tool tomorrow, via specific commercial practices), digital marketing (it will be necessary to compensate for the decline in the number of advisors by making better use of this formidable tool) and customer journeys (responsiveness, fluidity, simplicity of journeys are essential to winning and equipping customers).
What new revenue and service model?
The traditional revenue model of retail banking is running out of steam with its traditional cash cows (day-to-day banking, electronic banking, consumer credit, ADE, etc.). Only insurance and life insurance remain. At the same time, the pricing model is being challenged; the banking product, which generates no customer loyalty, is deemed too expensive. A new model must be built, based on a new customer promise: pay as you need (customer free choice regarding their equipment and level of advice). Traditional banks must dare to price what the customer really expects: the relationship and advice. Beyond the model, banks must also expand their offerings in non-banking areas, to support the customer upstream and downstream, since it is this support that generates value.
What relationship model?
Faced with customer expectations that are difficult to reconcile (proximity, advice, personalization, expertise), banks are searching for solutions. The model of the universal, dedicated advisor across all areas of need is outdated (too much turnover , too difficult to ensure a complete range of expertise). Several alternative models are possible, but they must be consistent from front to back in relation to the customer promise, the DNA, and the size of the bank’s network:
- a promise of expertise with advisors specialized by area of need, with little middle office since these advisors are supposed to be experts
- a promise of responsiveness with an agency team working on a single consumer portfolio between several positions (telephone/email, appointments, risks), with middle office support (client contact or expertise) when necessary
- a promise of personalization with a dedicated advisor, who must at least be very stable in his position but could rely on remote experts, while maintaining the
What operational model?
Today, we are seeing a strong separation of HR and IT between front and back offices, limiting seamless processes for customer service. At the same time, the opportunities for automation (AI, robotization) are enormous. Paradoxically, the workload is likely to decline faster than the workforce, even if not all retirements are replaced. This will lead to a rethinking of operational models: task distribution, tools, and skills.
What IS architecture?
Traditional banks are penalized by an increasingly complex, cumbersome, fragile, and costly IS. It now represents around 10 to 14% of NBI – versus 7% 10 years ago. New players, such as Fintechs and neobanks, are building simpler, more recent, and homogeneous systems in a matter of days or months – although their capacity to handle the volumes of traditional banks is limited. Should traditional banks continue API-ization and modernization of their legacy systems, while architectures are being completely renewed, for example with the cloud? Shouldn’t they completely overhaul their core systems, and if so, what architecture and IS trajectory should they adopt? The question must be asked, rather than taking the risk of continuing to develop new layers on a cumbersome and failing legacy system.
How to make the organization more agile and transform HR?
The traditional retail banking organizations are now at their wit’s end. The principles of control and specialization have led to the stacking of managerial layers, the Taylorization of tasks, and siloed operations. In an environment that is now highly mobile and under strong economic pressure, these organizations, and the behaviors that go with them, are most often counterproductive.
The issue of organizational agility is a concern for most stakeholders. Beyond organizational agility, a real HR transformation must take place, across a wide range of areas: project skills, new cross-functional skills, new working practices (a customer perspective, a digital perspective, innovation, delegation, experimentation, etc.), with, in parallel, the renewal and training of the management chain.
Conclusion
The scale of the challenge of transforming retail banks is likely to dampen some enthusiasm and lead to a retreat into comforting hopes. One of these is the predictable failure of new players. Mentioned here and there are the inability to cross- sell to equip customers beyond their day-to-day banking needs, the lack of equity to fund customer credit, the inevitable rise in interest rates that would deprive them of resources, and the negative operating ratio. Each of these arguments has some truth, but only some. In fact, online banks have a gross margin per customer equivalent to that of traditional players despite unit revenue three times lower. It is their aggressive acquisition policy that largely explains their current lack of profitability (welcome bonuses, communication budget).
A rise in rates would also allow them to make a profit on the credit side of the customers acquired over the last 5 years.
Furthermore, traditional banks have all the keys in hand (legitimacy, time, financial and human resources) to succeed in their transformation if they give themselves the means to design and test their target model, remaining faithful to their historical promise (proximity and advice), remembering that the current model is more the fruit of their action than the result of customer demand. Innovating today is the best way to prevent “barbarian invasions” in 2030! In The Art of War, Sun Tzu said: “our invincibility depends on us, the enemy’s vulnerability on him.”