April 2013 saw the release of the 10th annual World Banking Report from Capgemini and EFMA. World Banking Report aims to provide insights into the relationship of customers and their bank. Billy Bambrough takes a closer look at the report

According to the World Banking Report (WBR) one of the biggest problems facing retail banks today is their inability to stand out in an increasingly commoditised and competitive marketplace.

It goes on to say few banks are forging innovation in developing new products. Nor are they connecting with customers in a personalized way as the role of the branch continues to diminish.

The report is damning of new delivery channels [online and mobile] saying that "while they are offering convenience, they have created an inconsistent and disjointed experience for many customers."

The report looks closely at what makes customers for a positive experience at a bank. More than ever, says the report, banks have a need to decipher the customer experience to better understand the drivers of positive outcomes.

New channels have added complexity to this process, especially since customer preferences on banking channels may shift based on any one of a number of factors, such as how old customers are, what country they are in, or what type of products and services they are seeking, says the report.

The report uses the Customer Experience Index (CEI) to measure customer attitudes, incorporating customers’ standards and expectations, alongside their channel preferences, to shed light on whether customers are having positive experiences in the areas most important to them.

The findings of the report show that digital channels have a greater potential to distinguish banks, compared to products and services. The mobile channel in particular, claims the report, is expected to emerge as a primary competitive differentiator that banks can use to attract new customers and retain existing ones.

Conflicting sentiment

The report found that customers express conflicting sentiment towards banks.

– Despite low levels of trust, confidence, and loyalty, customer satisfaction with banks remains high in most regions.
– Satisfaction levels have little impact on loyalty. Despite overall high satisfaction, 40% of customers are not sure they will stay with their primary bank, and 9% are likely to change in the next six months.
– Canada’s banks led the world in customer satisfaction at 82%, followed closely by those in Switzerland (79%), the United States (78%), India (78%), and the Philippines (78%).
– Eight markets, including six in Europe, experienced double-digit improvements in customer experience.

In addition to anaemic trust and confidence, the report says that banks are inspiring fairly low levels of customer loyalty, a critical element of retail banking.

The report stresses the importance of consumer loyalty, arguing that this will become more important in times of stress. The report says: "Loyal customers not only buy more products over longer periods of time, they become advocates of a firm and inspire other people to buy its products.

"Especially in times of stress, as when the global financial crisis and the European debt crisis caused banks in the U.S. and Europe to experience a surge in withdrawals and a drop in loan applications, institutions with the most loyal customers benefit by having a reliable base of individuals to supply both deposits and a demand for loans.

"Customer loyalty will become more important as nonbank competitors enter the market and increase the array of available financial transaction options for consumers."

Mobile banking growth

The report identifies that there is still wide areas for growth in the mobile channel.

– Customer-experience improvements are most likely to occur in the mobile channel, except in North America and Asia-Pacific, where they are happening in the branch.
– The branch and internet continue to have the highest customer experience levels, but mobile is approaching them, presenting an opportunity for aggressive players.
– Mobile banking is still nascent, but adoption could accelerate, matching or even surpassing the rate of adoption of internet banking.
– Innovation in mobile banking is hampered by security concerns, a lack of harmony in the mobile banking ecosystem, and issues of usability.

Going forward, the report recommends that banks keep in mind three tenets of mobile-banking development:

First, customer demand for functionality, combined with the small screen sizes and processors of mobile phones, will require banks to develop highly useful, but simple services.

Second, banks should evaluate how they want to position the mobile channel alongside existing channels, given the current and expected importance of those channels.

Third, given mobile’s flexibility in fulfilling a number of different strategies, banks should have a firm understanding of the customer segment they intend to target with mobile banking.

The Ground Beneath Banks Is Shifting

Retail banks around the globe are facing challenges more severe and intractable than any they have encountered before. Some are the culmination of long-term trends; others the result of short-term shifts, says the report.

The WBR see the ongoing legacy issues that continue to bedevil the industry, including aging technology systems and expensive branch networks as adding to these challenges.

One of the biggest potential problems, says the report, has been building for decades, but is only now poised to have an impact. Steadily growing levels of public and private debt in developed economies around the world since the 1980s have resulted in debt loads not seen since just before the Great Depression.

According to the WBR, economists call it the debt super cycle, and it portends an extended period of sluggish growth worldwide, high unemployment, and volatile markets.

On top of the economic burden is a regulatory one, argues the report. New rules and requirements to come out of the 2008 financial crisis have been particularly onerous.

The report found that while past regulations may have imposed extra administrative work, many of the most recent ones are having a direct impact on revenues. Changes to the way U.S. banks can charge for basic products like current accounts, and credit and debit cards, for example, have eliminated billions of dollars of retail-banking fee income.

The too-big-to-fail mandate that has long characterized global banking policy is now getting increased scrutiny, claims the report.

Opposition is coming not only from the populaces of countries that have imposed austerity measures, but from high-level policy makers who have proposed that being too big to fail is too big, period.

The WBR argues that rather than a wholesale dismantling of large institutions, however, the more likely outcome will be enhanced regulatory oversight of globally important firms, with perhaps one or two firms dismantled by market forces and/or government intervention.

Not surprisingly, says the report, all of the pressures on retail banks have constrained profitability, the report found. The top global banks saw profits drop significantly during the financial crisis, with retail banking negatively affected by deposit withdrawals, reduced lending, and rising rates of mortgage foreclosures.

During and after the crisis, the main drivers of retail banking profits experienced lower margins, the report found. Consumers deleveraged, reducing credit card and other debt, and house prices and sales volumes fell. Even though profits recovered somewhat in 2010 and 2011, the ongoing sovereign debt crisis in Europe and fears of a double-dip recession are putting profitability under pressure again.

The Way Forward: Extreme Measures for Extreme Times

The WBR advises that to prepare for the future, today’s retail banks must reduce their complexity.

Retail banks are currently heavily invested in all aspects of the business — they develop products, create and manage the channels for delivering them, oversee risk, and run the internal systems required to keep the entire operation going. In the future, retail banks must maintain a much leaner operation, the report recommends.

They should work now to identify their strengths within the three emerging models of product leader, distributor, and utility/processor. Over time, banks should seek to focus on one, or at most two, of these three key business areas, and strategically develop them into true specialties.

The reports’ executive survey found that more than one-third (34%) of banks expect to target an end-to-end model in the future, up from 23% currently.

This "do-everything" approach, says the report, will require a large investment across all three functional areas, and may become increasingly difficult to maintain in the current environment of depressed profits, greater regulatory scrutiny, and increased economic and competitive pressures.

An increasing percentage of banks are seeking to pursue a hybrid model, the report found. Forty-four percent of banks expect to focus on two core areas in the future, up from 38% currently.

The most popular approach is to combine product leadership with distribution, favoured by 25% of banks in the future, up from 19% currently.

"Retail banks face a choice", says the report, "They can continue trying to support an end-to-end model and invest their finite resources across all facets of that model. Alternatively, they can opt to become a purist, focusing on a specific business model, or take a hybrid approach, in which they combine different models."

Retail banks able to identify their core areas of strength and build upon them will be positioned to be leaders in the field.

Those that continue to follow an unfocused and undifferentiated approach may find themselves as laggards, the WBR report concludes.

You can download the full report at uk.capgemini.com