August 08, 2011

The challenges facing retail banks in the post-crisis era are well known. They range from weak economic growth and protracted high unemployment to regulatory strictures which impinge on allowable fees and interest rate levels, increase capital requirements and raise the cost of doing business. If those were not enough, shifts in the country's demographic makeup and wealth distribution add to the complexity of developing executable strategies for creating shareholder value.

Further, retail banks generally have sales, service, transaction processing and risk management infrastructures that are aging. They were largely designed and implemented in a different era, to support business strategies that are not as well positioned with new economic, market, competitive and regulatory conditions. New technologies such as next-generation mobile communications are emerging, which can provide additional product features and benefits to customers. However, in the past, banks have not generated adequate returns on investments in new technologies.

Instead, much of the value of such investments has been captured by customers due to competition among banks. Banks will need to better understand the financial as well as the market consequences of new, retail-oriented technologies.

Ernst & Young recently completed a global survey that reinforced the importance of strategies that rebuild trust with retail clients. The 2011Global Banking Survey also highlighted the challenges and operational implications of refocusing on the consumer, especially when considered in combination with the host of regulatory changes being implemented. Below are seven ideas that leverage the survey findings and that retail bankers should take into consideration as they develop new strategies:

  • Develop a richer understanding of the retail bank's cost structure. Bank managers need better information about their cost structures, i.e., which costs are fixed (and over what volumes and time frames) and which are variable (and by what factors and to what extent). Making correct decisions about product features, distribution channels, service levels and pricing is almost impossible without accurate cost models.
  • Identify ways to leverage existing infrastructure and assets, including information. It will be critical for retail banks to generate incremental revenue streams without incurring significant capital charges. This will require putting existing capabilities to new uses. For example, banks could package information and analytics on customer and segment financial behaviors and resell to other users such as retailers, insurers, and health care companies. Banks could also "white label" parts of their distribution channels for use by other companies or advertisers.
  • Profitably serve underbanked or otherwise underserved demographic segments. A growing number of U.S. consumers do not have bank accounts -- deposit or credit. Also, some demographic segments are underserved in terms of banking product usage. The fight for affluent and mass affluent segments will be crowded and costly. As a result, banks should develop creative and profitable ways to serve less affluent customers through product design and pricing, distribution and servicing.
  • Rethink operational and organizational models. While banks have touted their purported "customer-centricity" for years, their operating models and organizational structures are still very much "silo" oriented. Further, their foundations are far from customer-based and usually reflect products, channels, functions and geographies which impede success of "one bank" strategies. Retail banks may want to consider customer-oriented organizational structures.
  • Employ measurement frameworks and metrics better aligned with strategy. Some of the traditional measures used to indicate the performance of the retail bank and its component parts are not well suited to new needs. For example, using measures such as efficiency ratio, net income and return on assets to show retail line of business performance does not sufficiently account for risk. Measures such as return on equity and net income after capital charge are superior in that regard. At a more granular level, traditional measures of branch profitability are flawed. In effect, they treat each branch as a mini-bank rather than as a sales and service channel. Monthly measures of each branch’s new business generation and customer service activities relative to operating costs would be better indicators of performance. Also, looking at the value of customers over time ("customer relationship value") as opposed to considering only period-by-period customer profitability provides more insight into the business.
  • Consider broadening distribution relationships with social media platforms and other external customer aggregators. Known retailers and consumer products companies have been very creative in finding ways to leverage these channels. These range from traditional alumni groups and trade associations to newer social networking sites. In effect, these aggregators have collected groups of customers with common interests and behaviors. Banks should develop ways to partner with aggregators to improve the value propositions they offer their customers.
  • Identify and close channel, operations and information gaps. Elegant strategies can be wrecked on the shoals of poor infrastructure and information. Most banks have gaps in their distribution, servicing and support infrastructures that will detract from success. For example, having separate product servicing systems and call centers that do not "talk to each other" makes it difficult to improve the customer experience (such as "one and done"). Also, it is difficult to execute a customer-centric strategy if information about individual customers is fragmented, inaccessible, inaccurate or incomplete.
Of course, there are other considerations that need to be taken into account as retail banks develop their strategies in light of the new environment: brand power, local competition and global expansion opportunities are some of them. However, the seven ideas summarized above will help banks preserve and enhance shareholder value in an increasingly challenging environment.

About the Authors: John Karr and Pat O. Schneider are principals, Financial Services, with Ernst & Young LLP.