Connect with us


Rewriting the rules in retail banking



  • Four important trends are changing the terms of success in retail banking. Banks need to act now to develop new skills.

Retail banks have long competed on distribution, realizing economies of scale through network effects and investments in brand and infrastructure. But even those scale economies had limits above a certain size. As a result, in most retail-banking markets, a few large institutions, operating at similar efficiency ratios, dominate market share. Changes to the retail-banking business model have mostly come in response to regulatory shifts, as opposed to a purposeful reimagining of what the winning bank of the future will look like.

Retail banks have also not kept pace with the improvements in customer experience seen in other consumer industries. Few banks stand out for innovation in customer interaction models or branch formats. Marketing investments have traditionally focused on brand building and increasing loyalty: a reputable brand stood for trust and security and became a moat, providing protection against new entrants to the sector.

Today, the moats that banks have built are more likely to restrict their own progress than protect them from attackers. Four shifts are reshaping the global retail-banking landscape to the point where banks need to fundamentally rethink what it takes to compete and win. This should be an urgent priority for banks. The pace of change will likely accelerate, with a select set of large-scale winners emerging in the next three to five years that will gain share in their core markets and begin to compete across borders, leaving many subscale institutions scrambling for relevance.


Four Shifts Reshaping Retail Banking

Over the next three to five years, it is expected that a few players will emerge from the competitive scrum to gain dominant share in their core markets and possibly beyond. These firms will have taken bold and decisive actions to capitalize on the following shifts that are reshaping the industry. In some cases, these winners will be incumbents that build on an already significant share; in others, they will be institutions newer to the banking industry, which use their agility, strategic aggressiveness, and sharp execution to attract customers.


The traditional distribution-led growth formula no longer applies

Until the financial crisis in 2007, a retail bank’s total share of deposits was tightly linked to the size of its branch network. Over the past decade, this relationship between deposit growth and branch density has weakened.

Retail-banking branch networks are contracting even across Europe, North America, and the United Kingdom, although the pace of change varies considerably between regions.

The rate of branch reduction is often tied to customer willingness to purchase banking products online or on mobile devices. While customer willingness to purchase products via digital channels varies, however, the common thread is that in all markets this readiness is far ahead of actual digital sales and will require banks to catch up to consumer needs and expectations. Within any specific market, of course, there are banks that have acted swiftly to adopt digital and remote as their main channel for interactions; these banks are pulling away from the pack and have taken decisive actions on several fronts:

  • Set a bold aspiration for sales/service channel mix. Banks must do more than react to shifts in consumer preferences—they need to set aspirational targets for sales and service across channels. Some customers will self-select into digital channels, but banks can do more to encourage less motivated customers to make the shift.
  • Use advanced analytics to reshape the physical footprint. Optimizing the branch network requires a deep understanding of consumer preferences in every micromarket, and of the economics of making changes at the branch level. Leading institutions are using combinatorial optimization algorithms to optimize the net present value (NPV) of the network based on granular customer data on characteristics such as digital propensity, willingness to travel, needs based on transaction patterns and branch usage, and the size and space/format of branches.
  • Develop cutting-edge digital sales capabilities. Achieving meaningfully higher levels of digital sales requires sophisticated digital marketing and an understanding of how to optimize each stage of the funnel. Most consumers already seek information on financial products on digital channels, but few institutions are highly effective at converting these inquiries into digital sales. Leading banks use first- and third-party data (for example, geospatial, browsing behavior), a robust marketing technology stack (such as 360-degree view of customer, omnichannel campaigns), and an agile operating model (for example, cross-functional marketing war rooms). With these elements in place, progress can be rapid.


Customer experience is beginning to generate meaningful separation in growth

Across all retail businesses—including banks—customers now expect interactions to be simple, intuitive, and seamlessly connected across physical and digital touchpoints. Banks are investing in meeting these expectations but have struggled to keep pace. Many are hampered by legacy IT infrastructures and siloed data. As a result, few banks are true leaders in terms of customer experience. Even for institutions ahead of the curve, typically only one-half to two-thirds of customers rate their experience as excellent.

The impact of this less-than-stellar performance is measurable. The few “experience leaders” emerging in retail banking are generating higher growth than their peers by attracting new customers and deepening relationships with their existing customer base. Highly satisfied customers are two and a half times more likely to open new accounts/products with their existing bank than those who are merely satisfied.

These experience leaders are adopting tactics pioneered by digital-native companies in other sectors such as e-commerce, travel, and entertainment: setting a “North Star” based on proven markers of differentiated experience (for example, user-experience design, carrying context across channels), redesigning journeys that matter most for digital-first customers and not just digital-only customers, and establishing integrated real-time measurement that cuts across products, channels, and employees. These banks know that customer experience is not just about the front-end look and feel, but that it requires discipline, focus, and investment in the following actions:

  • Focus on the journeys and subjourneys that matter. The relative contribution of subjourneys (such as app downloading; activating account) in determining overall customer experience varies considerably. In fact, ten to 15 subjourneys have the biggest customer-satisfaction impact for most products and should thus be the first priority. For instance, when opening a new deposit account, the researching options subjourney has eight times the impact on customer satisfaction than other account-opening subjourneys, on average. For banks, the key is to prioritize these high-impact subjourneys and systematically redesign them from scratch—a process that can take about three to four months and result in at least a 15 to 20 percent lift in customer satisfaction.
  • Change the way you engage with customers. Experience leaders understand that digitization is not just about creating a cutting-edge online and mobile experience, and that satisfaction is shaped by customer experience across channels. The experience should be seamless, especially on journeys that are more likely to take place over multiple channels, such as new account opening, financial advice, or issue resolution. Banks need to deploy these tools broadly and empower their frontline staff to play a more consultative role that blends human and digital recommendations. They will also need to revisit how these employees are incentivized, shifting to a longer-term view of relationships and profitability rather than just product sales.
  • Translate data into personalized products and real-time offers. The amount of data available on individual customers or prospects has exploded in recent years. The challenge is to convert these data into actionable nudges and highly relevant offers for customers that are delivered at the right moment. Credit-card companies have long offered discounts on specific spending categories or with specific retailers. Today, they can improve loyalty and share of spending by providing location-specific offers right when a customer enters a coffee shop, movie theater, or car dealership.


Productivity gains and returns to scale are back

Larger retail banks have historically been more efficient than their smaller competitors, benefiting from distribution network effects and shared overhead for IT, infrastructure, and other shared services. Analysis of over 3,000 banks around the globe shows that while there is variation across countries, larger institutions tend to be more efficient both in terms of cost-to-asset and cost-to-income ratios. However, beyond a certain point, even larger institutions struggle to eke out efficiencies or realize benefits from scale.

We expect this paradigm to change over the next few years, as structural improvements in efficiency ratios and increasing returns to scale enable some large banks to become even more efficient. The reason is twofold: first, advances in technologies such as robotic-process automation, machine learning, and cognitive artificial intelligence—many of which are now mainstream and commercially viable—are unleashing a new wave of productivity improvements for financial institutions. Deployed effectively, these tools can reduce costs by as much as 30 to 40 percent in customer-facing, middle-, and back-office activities, and fundamentally change how work is done.

The second factor leading to a wave of productivity improvement in retail banking is the shift from physical to digital channels for customer acquisition. Banks with scale—and skills in leveraging that advantage—will achieve customer-acquisition costs of up to two to three times lower than their smaller peers. Their outsized volumes of customer data will lead to better targeting and funnel conversion. As investments shift toward digital channels, the productivity gap between large and small banks will widen.

This dynamic has played out in more digitally mature industries, with firms like Amazon and Priceline acquiring customers at a significantly lower cost than competitors. As in these industries, eventually a limited number of dominant firms will emerge, squeezing out undifferentiated midsize and smaller competitors. Banks that succeed in this new wave of productivity will also have taken the following actions:

  • Use cutting-edge technology to automate. Over the next few years, banks will increase their use of technologies such as natural language processing and artificial intelligence to automate customer-facing interactions and complex internal tasks.
  • Build and reinforce the brand. With rising digital sales consumers have more choice than ever in selecting a financial-services provider. However, research shows that across most categories, consumers actively consider only two to three products before deciding on a purchase. So it remains as important as ever for a bank to be part of the initial consideration set. Brands with superior awareness and recognition are not only more likely to be part of the initial consideration set but also achieve higher conversion rates than lesser-known brands when they are considered.


The unbundling and ‘rebundling’ of retail banking

The tight one-on-one retail-banking relationships of old are unbundling. It is common to have a mortgage with one bank, an unsecured loan with a different lender, and separate deposit and investment accounts. The banking relationship is fragmenting even faster in countries with higher digital adoption.

This decline of customer loyalty provides a perfect context for firms seeking to enter banking in a selective way—focusing on the most profitable segments. Some attackers have demonstrated that while they cannot compete with incumbent banks’ broad access to customer data, they can compete effectively on customer experience coupled with aggressive pricing.

New entrants in financial services typically begin by focusing on a niche—making either a product- or segment-focused play. Their ambition, however, is often to own the full banking relationship of this segment over time—providing cards, mortgage products, and broader banking services.

The requirement for banks to share data and provide access to consumer and small-business accounts through a common framework of application programming interfaces is likely to fuel a wave of innovation and level the playing field for fintechs and technology providers seeking entry through payments or consumer financing.

The trend toward unbundling in financial services is well under way, but where it will lead is still an open question. In industries such as music, television, e-commerce, and transportation, digital distribution led to unbundling that destroyed value for incumbents in the short term; over time, consumers tend to converge on a single provider—often an attacker. In this context, firms that effectively orchestrate platform or ecosystem environments tend to eventually emerge as winners.

The history of the music industry over the last 20 years provides a possible model for how things will go in banking. Until the 1990s, music distribution was dominated by stores selling tracks that record companies “bundled” onto albums. In the early 2000s, digital distribution, especially via iTunes, radically reduced distribution costs. Consumers could now “unbundle” albums by purchasing individual tracks online; not surprisingly, many record stores went out of business.

If we apply this scenario to banking, winning firms will be those that leverage superior access to customer data to provide truly differentiated and cutting-edge experiences—potentially extending beyond financial products and services. To do this effectively, banks will need to retain privileged access to information about consumers’ sources and use of funds, especially through payments and transaction activity. Banks that rebundle effectively will use this data to deliver compelling and integrated experiences that provide seamless funding, investment, payments, and money-movement capabilities. The bottom line is that in order to reverse the unbundling of financial services, banks need to make it worthwhile for consumers to have a relationship with one institution; they need to deliver not only simplicity and convenience, but also superior value. Only a few banks in each market are likely to be able to succeed with this strategy.

Already, large technology firms such as Amazon are extending into parts of the financial-services value chain, starting with areas where they have a data advantage such as payments, short-term financing for purchases, and working-capital loans for merchants on their platform. To counter the unbundling of their most profitable products, banks need to develop capabilities that few currently possess, and follow the lead of successful technology platforms:

  • Retain superior access to data on transactions and financial behavior. As vast amounts of data are captured by tech firms on consumers’ behavior and preferences, one of the last bastions of valuable information is data on transactions and financial behavior. To retain unparalleled access to this data, banks will need to continue to own the transaction layer, giving them a full view of inbound and outbound activity, to form a complete picture of consumer balance sheets. Historically, this required a bank to be a customer’s primary checking-account provider; over time, we expect that institutions could do this without necessarily owning the checking-account relationship. In some cases, payments or transaction providers could see a significant share of customers’ spend volume. Financial aggregators may also be in a position to capture a broad spectrum of customer activity and use it to build an analytics advantage.
  • Leverage insights to develop innovative products and features. The traditional suite of products that financial institutions offer has remained largely unchanged over the past few decades and is often structurally hard to change given how banks are organized. More nimble firms will be able to leverage insights to create unique offerings.
  • Extend beyond purely financial services and products over time. There are a couple of clear benefits that financial institutions are likely to have relative to ecosystems being created by large tech firms. Superior access to financial information enables them to create faster and more precise offers for big-ticket products that have financing needs associated with them (such as homes or cars). For these types of products, banks could be well positioned to own the full customer journey, including the browsing experience and the transaction.


Retail banking is at an inflection point, and we expect the pace of change to accelerate significantly over the next three to five years. Success will require clarity in direction, and speed and agility in execution. Retail banks that capitalize on current shifts in the market will emerge with a winning position in their core markets and begin to compete across borders.


  • By Vaibhav Gujral, et al

Continue Reading
Click to comment


Managing a Customer-Experience Transformation in Banking



Regulation, fickle customer loyalties, nontraditional competitors are some of the woes of the global banking industry. As if a decade of razor-thin margins and reputation issues weren’t enough, the mix of challenges facing global banks makes it easy to see why so many now voice a commitment to improved customer experience as a legitimate differentiator in an increasingly competitive environment. The global large banks have now pledge themselves to some form of customer-experience transformation.

The benefits of such a strategy have been increasingly clear for some time across sectors and geographies. As demonstrated by some practitioners, real value resides not only in the products and services a company provides but also in the way that it delivers them.

A seamless customer experience can be worth at least as much as a superior product or efficient process—building customer loyalty, reducing costs, making employees happier, and boosting revenues significantly. One bank that undertook a customer-experience transformation concluded that the lifetime profitability of a satisfied customer willing to actively recommend the bank to his or her friends was five to eight times greater than one who had a negative perception.

Many leading banks are pouring tremendous resources into transforming the customer experience, often with mixed results. This is understandable. A customer’s banking relationship includes key journeys that range from onboarding and transacting to maintenance and problem resolution.

Effective transformations must not only recognize the complexity of these relationships but must also make a priority of the parts of the experience that matter most—in order to manage the cross-functional, end-to-end nature of customer needs rather than deferring to existing organizational structures.

Depending on a bank’s customer-experience goals, transformations can vary in regard to the time and resources required. A handful of elements are necessary to execute any program that will deliver durable impact. These include, among other things, a consistent focus on value, ensuring the customer’s central role in any transformation, and the ability to scale a program.

The following explores the ways that some banks have implemented these and other critical steps in constructing successful customer-experience transformations.



Customers are central to a wave of new opportunities and challenges facing banking executives, with regulators increasingly expecting banks to deliver on more than just credit-risk management and associated capital requirements. For example, regulators around the world increasingly examine customer complaints for examples of problematic sales practices and inadequate customer service. For the biggest banks, how they treat their customers is becoming more of a political issue.

Customers’ loyalty is also at risk. Banks face an expanding array of new competitors. The entry of companies like Alipay, Amazon Cash, Facebook Messenger P2P, WeChat, and other services skilled at customer ease and experience may, in the longer term, disintermediate traditional banks from customer relationships and reduce banks’ distribution margins.

Another consequence is that players outside the traditional financial-services industry are starting to set the benchmarks for customer experience in banking. Internet retailers and other e-commerce players typically sit atop customer-satisfaction rankings. Banks often lumber in the middle of the pack.

As banks pour more effort into improving experience, we find three missteps to be the most likely culprits when efforts fall short of the mark. First, many banks ignore the need to achieve early, quick wins to demonstrate value and build momentum for change.

Teams eager to achieve dramatic impact set out to create moments of customer delight and fix pain points across all journeys or processes at the same time and are often overwhelmed by the complexity and costs of redesign.

Ironically, another way that customer-experience transformation efforts go awry is by leaving the customer out of a front-and-center focus in propelling a change effort. Despite the growing awareness of the value in superior customer experience, efforts to improve it are rarely held to the same rigor as an effort behind, say, a traditional productivity transformation. The customer’s voice is often left silent as change agents latch onto digitization to leapfrog competitors, self-service improvements, and revamped staffing models.

Finally, banks often fail to set up transformation programs with scaling in mind. In complex organizations it is easy for change efforts to get stuck in the depths of business silos, even when the objective is to create a cross-functional platform for tracking customer preferences and improving outcomes.

Efforts that don’t give customer experience the same top-team and board attention as large-scale productivity-improvement efforts, and that don’t devote the same resources to oversight and measurement, risk lapsing into cursory efforts marked by meaningless bulletin-board slogans such as “customer experience is everyone’s job.”



Banks increasingly finding success with “at scale” transformation efforts. These efforts define the bank as a series of customer journeys that can be reimagined and applied across functions and the organization as a whole. As value is demonstrated, larger and larger parts of the organization are included.

In the early stages, such transformations take advantage of cross-functional teams that work within existing roles and in parallel with reporting structures. Over time, by emphasizing this type of agile collaboration, organizational structures can be revamped to deliver the new experiences sustainably over multiple years.

The result is a transformation that delivers early impact and momentum and an opportunity to evolve as needs change, without the disruptive shock of tearing up an operating model in the fragile, early stages.

Every customer-experience transformation following such a model relies on certain prerequisites:

These begin with a top-down, unwavering C-suite commitment to the program and to modeling the customer-experience behaviors that the organization espouses. They also include commitment to a bottom-up feedback loop to measure progress and involve employees in implementing and refining improvements.

At the center of such efforts lies a dedication to a customer’s end-to-end experience with his or her bank—that is, the whole journey rather than individual, transactional touchpoints in the relationship. In turning that commitment into a successful business strategy for banks, there are five elements critical to implementing a superior customer-journey and experience transformation at scale.


Hard wire customer experience to value

The financial benefits of improving customer experience are clear. Some customers see their banks as their main financial institution—a key driver of overall lifetime revenue. Many customer-experience programs are launched off the back of analyses such as this. However, few of these programs home in on where the value comes from. In addition, many do not hold themselves accountable to deliver greater profitability. Without a quantified link to value and a sound business case, transformation efforts can’t show early gains, build momentum among functional executives, or earn a seat at the executive team’s table.

To that end, it is useful for banks to apply the same rigor of value attribution to customer experience as they do for productivity programs.


Stay agile to ensure scalability

While the overall transformation needs to be broken up into manageable work efforts, setting up for scale should be the goal from the first day. Too often, retail banks build oversize, bespoke teams and processes to address individual customer journeys with inadequate ways of collaborating across functions and measuring progress.

The next step was to then systematically redesign and reengineer the customer journeys at scale. In order to provide senior management with a consistent way of discussing the status of journey redesign, bank managers set out to define a common “maturity” model that could be applied across all journeys.

The maturity model addressed four key gates to pass through on the way to customer-experience improvement.

The work at level one is to establish a fact base behind prioritized customer journeys, for example, understanding what truly drives customer experience and satisfaction in securing a home loan.


At the next level, define an overall target for improving the journey and established an “agile studio” to stimulate solution ideas and execute improvements. Such sprints take place over periods of two to four weeks. At the third level, map pain points to the underlying elements for each critical step in the journey and their importance to overall customer experience.

The end result: a set of actions that encourages early, better conversations with the customer on price. Throughout the process, a team also continuously tracks impact via customer and employee feedback.


Don’t forget the customer

Even banks that have thoughtfully created a flexible, iterative improvement process at times inadvertently overlook the most critical stakeholder: the customer. In the rush to digitally enable customer journeys and transform the customer experience, it’s easy to be swept away by a bias for technological solutions. But key customers can easily become skeptical about not having a human representative to call when things go wrong.

The right balance requires study, but when interactions are new or particularly complex, the personal touch is still an important differentiator of customer service. Without an explicit link to and inclusion of the customer, no transformation will ever be fully right.

Similarly, gathering and segmenting data are classic starting points in understanding customers. But data by themselves are insufficient. The most successful customer-experience efforts apply a human filter to collected information to address key questions about the motivations and wishes of customers.

Some of the successful transformations we’ve observed have included customers in their design via a variety of techniques: structured interviews, customer panels, zero-based-design workshops, and executives spending time in call centers and branches to experience firsthand what customers encounter and to shape customer-centric responses.


Continuously push for more value

Improving customer journeys is not a linear process. Often the first round of initiatives will not deliver the desired satisfaction levels. Moving from good improvement to great will require regularly going back to the drawing board and maintaining patience and a mind-set of always pushing for more in the interest of customers.

Such a continuous-improvement regimen can help foster a superior customer-experience mind-set. One way is at the front line, with employees closing the loop with customers on direct feedback, then using those insights to change the way the process is designed. A second benefit accrues from continuously improving service design.

Product companies understand better than banks and other service organizations that using customer insights is a way to develop a superior product. But banks have rarely invested the same way in service design. Creating a pipeline of feedback and actions, rather than simply reporting metrics, is one way to ensure that the customer’s voice is always present in any transformation effort.


Establish a cross-functional team with C-suite backing

Transforming customer experience in a bank requires bringing stakeholders from distribution, product, risk, legal, pricing, and other departments to the table. Regular risks include potentially conflicting agendas or timelines. Resolving these barriers requires active sponsorship from the top.

Leaders in customer experience pursue a number of approaches to overcome this kind of complexity. One way is to set up a dedicated customer-experience organization within the bank. Dedicated teams encourage a continuous focus on customer experience across product, service, and geographical silos. In contrast, trying to fit customer-experience team members seamlessly into the existing organization can wind up emphasizing narrow customer touchpoints, which reduces effectiveness. In all cases, the CEO must make customer experience a priority, and in some cases the appointment of a chief customer officer can serve to underline that commitment.

Continue Reading