It's no secret that a new generation of technology-enabled competitors -- both new companies such as Square or Dwolla and familiar players such as Google, PayPal and Walmart -- are shaking up the financial services business and attracting customers who aren't finding what they need from traditional banks. But new research from Accenture suggests this upheaval is more extensive and happening more rapidly than many in banking may have thought. And the efforts banks are putting into efficiency, productivity and stronger financial performance, while essential, are not enough to stem the tide.
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Part of the firm's Banking 2020 Leadership Series, the Accenture study predicts that by 2020 an estimated 15% of traditional banks' revenues could shift to online-only players, and another 20% could more to "retail-driven players with a mass-market focus." Other findings of the research:
- There has been a 50% increase in mobile banking activity over the past year.
- Sales of mortgages via the Internet increased 75%, while sales in branches dropped 16%.
- Online sales of auto loans nearly doubled, while branch sales dropped nearly 10%.
- Online banking was cited (by 43% of respondents) as the number-one area in which banks should be investing.
- The top-25 U.S. banks spend more than $50 billion per year to maintain branch networks.
The study of 2,001 retail banking customers from across the U.S. was designed to explore how consumers feel about their relationships with their banks, explains Wayne M. Busch, managing director, financial services, who leads Accenture's North American banking practice. And while a high number of respondents claimed to be satisfied, there's more to the story, he adds. Survey respondents "say broadly they are satisfied with their primary banking relationship, and they have trust in their financial services provider." But much of that loyalty actually is inertia related to the perceived difficulty of switching banks (cited by 26% of respondents).
These hassles notwithstanding, inevitably consumers are going to seek digital alternatives that their existing banks don't offer, Busch says. "There is a shift in consumer demand, they are choosing alternate providers [and] are finding it attractive, from a pricing or service model perspective to use digital" financial services, he explains. Even combining performance improvements and adoption of digital strategies, it is likely that, within the next decade, "new entrants will take up to 35% of current legacy bank market share."
Busch categorizes these new entrants within three groups. One is "niche digital providers focused on a subset of products, such as wealth management or cards and payments, in a more digital way than a physical distribution model. " The second is full-service banks, "but through their digital-only channels, not a physical footprint." The third group will have "a more retail flavor," Busch says. "Think of it as a retailer extending its footprint in banking, like Walmart." Banks will have to determine whether they want to continue to remain broadly focused "or if one of these models [is] where they could differentiate, and if not, how they can optimize their distribution models to allow them to compete."
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Banks don't have a lot of time to figure out how they are going to respond to these trends, Busch warns. Pointing to other industries that have undergone massive disruption, such as telecommunications, retailing and music, he asks, "Does it take 20 years like telecom industry took, 10 years like it took Amazon to shake out retailers in the book industry, or will it be more aggressive? When Google Maps launched, other GPS companies lost market value within 18 months." The good or bad news for banks, depending on your point of view, is that it is likely to be somewhere in the middle, according to Busch: "We think it's a five- to seven-year problem in terms of how it needs to be addressed. That is why this needs to be the focus for banks in the second half of the decade."
3 Building Blocks
So, what should U.S. banks do to deal with these threats? The keys, according to the Accenture research, involve three "building blocks:" Optimization and simplification (to drive efficiency and effectiveness in their current operating environments); agility (in order to take advantage of opportunities that arise in times of change); and continuous innovation ("the ideas, vision and leadership to proactively stay ahead of the market").
"It's a very dynamic environment, and it is not clear exactly how fast the transformation will happen," acknowledges Michael D. Goodson, managing director, financial services, client director, Accenture. "That is why we are advising banks to focus on being more agile and nimble, to reduce systems and products complexity [and] move more of their capabilities into a digital model as opposed to a physical distribution model. To deal with the questions on the horizon, agility will be important."
Some of this will come from adoption of the current hot technologies of cloud, mobile and analytics. There's no question that these are the foundations of the emerging digital financial services model, Busch says. "The ability that a digitally enabled environment gives you from an agility perspective is significant because it doesn't require changes to branch. You change something once and it is instantly available to your consumers." The hitch is that the new competitors have these capabilities, too. "The new market entrants won't [start] out by building branches. They start narrow, then figure out how to expand the number of products."
Another concern is that when banks adopt capabilities such as mobility, analytics or cloud it's almost as "add-on capabilities, rather than looking at their overall operating model and how they want to compete," Busch says. "It's not natural for banks to think of the customer first and eliminate branches and the distribution model. Digital is a chance to rethink that. It's a movement away from the legacy model, really driving a customer-centric agenda versus a product-centric agenda."