Banks must leverage technology for automation, focus on building their brand, and adapt to new customer behaviors.
FREMONT, CA: Significant shifts demand immediate attention from financial institutions. The changes are redefining the parameters for success and necessitating the development of new skills. In contrast to the past focus on distribution and scale, several significant trends are reshaping the industry. Retail banks have competed based on their distribution networks, using a scale to build brand recognition and efficiencies. The strategy has limitations and needs to be challenged. Regulatory changes have driven some shifts in the business model, but the industry has yet to keep pace with customer experience innovations seen in other sectors.
Fundamental shifts are transforming retail banking, prompting banks to reassess their strategies. The pace of change is expected to accelerate, with emerging in the next few years, leaving less competitive institutions needing help to stay relevant. A retail bank's deposit share correlated closely with the size of its branch network. The relationship has weakened over the past decade. According to the data of McKinsey & Company, even as the largest U.S. retail banks reduced their branch footprint by 15 percent, they managed to double their deposits. The decoupling of branch density and deposit growth challenges the traditional distribution model.
Customer willingness to engage in digital transactions influences the pace of branch reduction. Banks are employing strategies like setting sales or service channel targets, using advanced analytics to optimize branch networks and developing digital sales capabilities to adapt to these changes. Customer experience has become a critical factor in determining a bank's success. Retail banks need to catch up in providing exceptional customer experiences seen in other industries. Banks need to focus on creating seamless interactions across physical and digital touchpoints. Delighted customers are more likely to deepen their relationships with the bank and open new accounts.
Experience leaders prioritize essential customer journeys and sub-journeys that impact satisfaction the most. They leverage advanced technology to automate processes, engage customers across channels, and translate data into personalized products and real-time offers. They enhance customer engagement and loyalty. Efficiency and scale have historically given larger banks a competitive edge. Technological advances like robotic process automation and AI are leading to new productivity improvements. The shift to digital customer acquisition channels allows larger banks to achieve lower customer acquisition costs than smaller peers.
Larger banks that harness technology and scale will be more efficient and effective in attracting customers. Customers increasingly hold accounts with multiple institutions, eroding loyalty. New entrants, leveraging better customer experiences and pricing, are targeting profitable market segments. The open banking movement further fuels this trend by enabling fintech to enter the market. Firms will leverage customer data to provide differentiated experiences and expand into broader financial services. Banks need to retain privileged access to transaction data and insights and develop innovative products. Banks can successfully navigate the unbundling and re-bundling phases by re-establishing strong customer relationships and offering superior value.
