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Retail Banks Must Change to Stay Relevant


As Technology Transforms Industry Economics, Incumbent Banks Must Forge New Capabilities and Make Strategic Choices to Compete with Peers and Digital Challengers--and Stay Relevant to Customers, Says Report by BCG

Published on October 24, 2019

With customer behaviors changing across multiple dimensions and challengers such as digital giants, fintechs, and neobanks vying for market share, traditional retail banks must act now or lose out later in their quest for growth, according to a new report by Boston Consulting Group (BCG). The report, titled Global Retail Banking 2019: The Race for Relevance and Scale, is being released today.

The report, the latest in a series of annual BCG studies of the retail banking sector, provides a comprehensive look at the industry, exploring topics such as the industry’s changing structure, its overall direction, the battle among banks and newer market entrants for customer relevance and scale, and the strategic business model options for incumbent banks. The study also offers action steps for banks embarking on new competitive paths.

“Customer behaviors are shifting, sometimes dramatically, led by those who want seamless digital banking capabilities embedded in their daily lives,” said Sam Stewart, a Sydney-based BCG partner, coauthor of the report, and global leader of the firm’s retail banking segment. “The combination of these expectations and technology-enabled solutions will eventually erode banks’ traditional advantages, so they need to take action now.”

The Future Is Stacked. According to the report, retail banking is experiencing a strong pull away from vertical integration toward a platform-based or “stacked” industry structure. For incumbent banks, the shift to a stacked structure will undermine the advantages of integrated value chains as differing economies of scale—by a layer of the banking stack—drive the emergence of new business models. For example, at the top of the stack, companies that offer better (or more attractive) customer interface options can provide a broad variety of financial and other services through ecosystems, without having to develop their own banking products and infrastructure. This transition is occurring at an ever-increasing speed, which means that retail banks must rethink their positioning and business models.

Where Retail Banking Is Going. The report says that while there is a clear trend toward more digital engagement, human interactions clearly still matter to many customers. Indeed, since financial decisions can be complex, high value, and emotionally important, many banking customers still value face-to-face advice from knowledgeable experts. This means that branches will remain an important channel, particularly in some geographic areas, but will play a fundamentally different role in the evolving omnichannel universe. At the same time, other innovative means of interaction (such as video or webchat) are being explored.

“The challenge for incumbents,” said Thorsten Brackert, a Frankfurt-based BCG partner and co-author of the report, “is to transform the traditional relationship model into the digital world while continuing to build trust and credibility—and while also finding new ways to interact virtually with customers and maintain their loyalty.”

According to the report, retail banking revenues globally are expected to rise at a compound annual growth rate of 4.2% through 2025, to reach nearly $2.9 trillion. Emerging markets will lead this expansion.

The New Battleground: Relevance and Scale. According to the report, banks face a new fight for customer relevance and scale—relevance meaning the ability to offer ubiquitously available banking solutions, and scale being about the number of customers banks can hold onto in the face of non-traditional competition. Incumbents face the dual challenge of battling both their peers and the new entrants. To win in the new climate, new skills will be required in addition to traditional banking capabilities. Critical new capabilities will include improving customer centricity and personalization, widening the breadth and depth of customer reach, and embracing open banking and ecosystems.

The Options for Incumbents. The report says that incumbent banks need to rethink their strategies and the business models they want to pursue in the evolving industry landscape. BCG sees four viable options emerging to various extents in different markets:

  • Digitized Full-Service Banks. In this transformational approach, banks invest heavily in digitizing their core to defend the vertically integrated model and continue to offer a proprietary catalog of their own products through their best-in-class digital channels and branch network.
  • Open Banks. These banks build and distribute their own products to their own customer bases while simultaneously expanding their reach—using distribution allies to enhance their product and service offerings.
  • Ecosystems. Even more so than for open banks, this model requires seamless integration with partners and the ability to capture and share data from multiple sources to provide customer value—both in and beyond banking.
  • Product Engines. In this model, banks recognize that new competitors may be better placed to win the customer interface, so they refocus to act as manufacturers of best-in-class products that are distributed mainly through third-party channels.

The report says that banks should start their adaptation by assessing their own position versus current and emerging competitors, evaluating the business model options, and prioritizing investments to pursue their chosen path.

“Whichever model a bank chooses,” said Muriel Dupas, a London-based BCG retail banking expert, “it must be clear on its value proposition for target segments, as well as on the business and operating model needed to deliver on that proposition.”

SOURCE Boston Consulting Group (BCG)
Associate Writer