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Banks Don't Have Much Time To Embrace Digital Model

To compete with the new breed of financial services competitors, banks will have to adopt a digitally driven business model, specialize and simplify their operations, according the findings of new consumer research from Accenture.

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.

[Former Walmart CEO Lee Scott discussed the changing consumer landscape, and the big box store's foray into financial services: Customer Experience Lessons From Walmart]

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."

[The slow uptake of mobile wallets could create opportunities for retailers: How Retailers Could Dominate the Mobile Payments Market]

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."

Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & Technology in 1991. In addition to ... View Full Bio

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Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
11/19/2013 | 12:48:29 PM
re: Banks Don't Have Much Time To Embrace Digital Model
Even a small community bank has a wealth of information on its customers, as well as access to vast amounts of (free) data on the web. A smaller bank could move very fast by embracing big data analytics and engage with customers in the way their larger banking peers could only dream of. I have a feeling we will be hearing some pretty innovative community bank/big data stories in 2014-15.
Steven Cavanaugh
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Steven Cavanaugh,
User Rank: Apprentice
11/19/2013 | 1:35:47 AM
re: Banks Don't Have Much Time To Embrace Digital Model
I think a lot of consumers have opted for smaller, community banks for exactly that reason. They want their bank to understand their needs, not to be just a number. But as even community banks acquire more customers and get busier, it becomes impossible to give clients that small banking relationship feel. Only by embracing Big Data can a bank anticipate and accommodate their customer's needs in a way that a small bank from 20 years ago could.
Ivy Schmerken
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Ivy Schmerken,
User Rank: Author
11/15/2013 | 4:30:51 PM
re: Banks Don't Have Much Time To Embrace Digital Model
I agree banks should embrace the digital model, but still should support the personal, customer service interactions that breed trust and loyalty from customers. Trust goes deeper than offering a mobile app or an online channel. Customers expect the digital channels but they want the human connection too.
KBurger
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KBurger,
User Rank: Strategist
11/15/2013 | 2:16:49 PM
re: Banks Don't Have Much Time To Embrace Digital Model
Thanks for your comments. Maybe part of the story is that the branch will continue to exist (although not so many of them) but it will be more of a live "portal" where a variety of mainly NOT bank transactional functions can be handled -- eg, financial education around not just banking but other services such as insurance (maybe via kiosks, enhanced ATMs or telepresence). It will be more resource center/facilitator, perhaps. And of course what goes on in the branch will be increasingly digital, again through use of tablets, ATMs, video, etc. Teller is an entry-level job for many young people -- maybe it actually will evolve into something cool and digital-focused & the promise of cross-selling in the brance finally could be realized.
KBurger
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KBurger,
User Rank: Strategist
11/15/2013 | 2:11:39 PM
re: Banks Don't Have Much Time To Embrace Digital Model
So I see on Finextra this morning "Barclays is set to axe 1700 customer-facing jobs from its branch network over the next year, citing the rise of new customer channels, particularly mobile banking." This can be viewed as an example of what the study outlines. What remains to be seen, however, is whether these cuts are viewed as efficiency, cost savings, operational streamlining, etc. -- which, according to the Accenture study is kind of missing the point -- or as part of a rethinking of the whole delivery & engagement model. The shift to digital channels doesn't mean customers want less service, if anything they want more (and more customized) service. As you point out, that trust & loyalty is critical and if anything the shift from branch to digital really raises the stakes on that.
Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
11/15/2013 | 11:23:22 AM
re: Banks Don't Have Much Time To Embrace Digital Model
Like most people, I value having a local bank branch in my community and it is one of the reasons why I selected the bank. However, the last time I was in the branch was 3 years ago to sign mortgage paperwork that was 99.999% completed online.

I'm sure this is the typical experience for most customers as well...the branch needs to be close, although we never go there!
MarkJ421
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MarkJ421,
User Rank: Apprentice
11/15/2013 | 6:11:35 AM
re: Banks Don't Have Much Time To Embrace Digital Model
I read something recently that suggested banks of the future would most likely be tech IT companies that take on banking functions. This is already happening. I would argue one of the greatest assets traditional banks have is the high degree of trust and loyalty they enjoy from their customers. Yes banks need to embrace the digital model, but must also must continue to nurture and preserve the culture within their organisation that has given them such strong customer loyalty. If they do this then they will see off many of these new competitors.
Steven Cavanaugh
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Steven Cavanaugh,
User Rank: Apprentice
11/14/2013 | 9:53:35 PM
re: Banks Don't Have Much Time To Embrace Digital Model
I saw this study recently, thanks for sharing. What struck me the most is that so many respondents to the online survey cited proximity of branches as the #1 reason for not switching to another bank. The use of mobile banking is skyrocketing and in-branch activity is plummeting. As a result, banks absolutely have to get their digital act together, which the study astutely cites.
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
11/14/2013 | 7:47:04 PM
re: Banks Don't Have Much Time To Embrace Digital Model
I wonder when we will start seeing some of the new online loan activity moving to mobile. Especially for auto loans, I think it would be really convenient for a customer to be able to apply for a loan and get it accepted from the car lot.
Byurcan
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Byurcan,
User Rank: Author
11/14/2013 | 3:26:49 PM
re: Banks Don't Have Much Time To Embrace Digital Model
It is true, time is of the essence, we have seen many times in the past industries or individual companies that didn't respond fast enough to changing technology trends become irrelevant. Obviously, banks are always going to exist, but the potential to maximize potential of the digital age can't be given up.
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