This blog post looks at the promise of new entrants into the UK retail banking sector. It also discusses in general where retail banks should focus on in order to stay competitive in an industry that is marked by ever more assertive customers and disruptive technology changes.
There is always a sense of expectation when a new challenger appears in the rusty old world of financial services. Over the past five years we had the arrival of an eclectic bunch of newcomers to the party in the UK:
- Metro Bank (2010), offering more transparency and a better service to customers
- Virgin Money (2012), establishing full retail banking services capitalising on the Virgin brand
- Handelsbanken (1973), but only recently gained critical mass, Swedish vintage banking without overheads, focused on personal relations with branch management and staff
- Co-operative Bank (2009), not new but tripled number of branches buying Britannia Building Society, one of the few remaining mutuals with a strong ethical identity
- Post Office (2013), announced last week that it will start offering current accounts to households, exploiting its unrivalled network of branches in the UK.
They all claim that they bring a unique new banking business model. To be fair to them, some have made good progress in moving customers away from the leading banks, the Big Five in particular. The likes of Barclays, HSBC, Lloyds Banking Group, RBS, and Santander still hold close to 80% of our current accounts. However, when we look closely at what these challengers are about, then there is a sense that we are being offered more of the same, albeit with a twist or a tweak. What unites these new entrants is an almost obsessive focus on one channel, the branch, and they arguably do a better job at serving the customer than the incumbents. Some say this brings banks back to the way they used to operate in the 1950s.
If we want to establish how innovative these new banks really are, we need to consider their entire operating model and how they serve their customers differently. Traditional banking operating models are marked by silo-ed IT infrastructures, data and applications, each of which are heavily transaction-oriented. Their systems are built on the branch model and this forms an important barrier to innovation. Renewing these platforms would require significant capital investments.
It is therefore quicker and cheaper to create a new channel (and supporting organisation) alongside the existing one, in the same way retailers used to run online stores 5-10 years ago. The multi-channel strategy that many of the old and – as it appears – new banks are pursuing may eventually lead to failure. Customers, and in particular the ‘digital generation’, move to the channel of least resistance and expect to be served seamlessly across devices and alternative channels. This will still include the occasional branch visit as well!
European retail banks are in a unique situation to grasp the opportunity of adopting an omni-channel presence in their chosen markets, the boundaries of which are still very much defined by European and national regulators. With today’s open enterprise technologies, web services and flexible mobile delivery platforms like HTML5 and CSS3 it is possible to ‘overlay’ a channel/device independent user interface on a rigid back-office infrastructure. So far I have only come across a few that are truly embracing omni-channel banking in a way that redefines the traditional banking service, its customer experience, operational processes, organisation and the underlying systems:
- Nordea, Scandinavian retail bank, teaming up with online challenger Holvi
- mBank, an award-winning Polish bank with a distinct omni-channel offering
- BBVA, a Spanish bank, arguably one of the most innovative in Europe.
These examples show what it takes to build an operating model that is truly omni-channel. They combine an intuitive online experience with seamless ‘hand-offs’ to mobile, call centre and in-branch (or should we now say ‘in-store’?) access points, picking up where the customer may have stopped the journey and continue the conversation at a natural pace. They offer a choice of online applications and advisory tools that enhance the banking experience beyond the traditional offering. At the same time the customer will have been exposed to more subtle marketing messages, relevant to their unique channel and lifestyle choices.
Incumbents vs. digital pure-play
There is a lot of hype around the hi-tech US start-ups, like Simple, Square and Mint being able to disrupt the European banking landscape, but unless they partner with licensed European institutions, the barriers to entry are set too high for them to have a direct impact. This is mainly due to stringent capital requirements, set by governments and regulators. More low-tech operators in the developing world have demonstrated that it is possible to disrupt the established banks using GSM mobile technologies (M-Pesa in Kenia and G-Cash in the Philippines). There is however an eerie silence in Europe, despite best efforts of the likes of Barclays, launching its mobile Pingit app.
The window of opportunity for any challenger in the UK – or Europe – to make a real difference with omni-channel banking is closing rapidly. Most major banks will have already an ambitious digital strategy in place to overcome flaws in their operating model.
The question remains how much retail banks are willing to invest in platform renewal and what it really means, something I will discuss in a future blog post.
There is a risk that when multi-channel players reach the end of the channel tunnel and see the light, it is probably too late to be counted in an omni-channel world.