The Changing Landscape of Retail Banking Competition

The retail banking business is undergoing a dramatic change. From the mid-90s until the recent banking crisis, many retail bank managers view their primary goal to be deposit generation – and specifically, DDA account generation. That seemed to make sense in an environment where DDA dollars could be put to work funding earning asset generation. In hindsight, many bankers now realize this profit model never worked well. Banks simply weren’t adequately compensated in many cases for risk; customers had little loyalty, so churn rates were very high; and the lack of transparency in the old pricing formulas contributed to today’s lack of trust in the banking industry. In order to achieve success going forward, the earnings equation has to change – and banks have to start getting paid for delivering well-understood value for the prices they charge. 

 

Fortunately, there are opportunities today to build new earnings streams in the retail banking business. These opportunities, however, require substantially different approaches to managing the business. Going forward, retail banking profitability will depend on a bank’s ability to earn premiums on its products and services – premiums over the prices charged by other providers in the market. This can only be accomplished if consumers are willing to pay this premium because they believe they are getting a superior product or experience. In this model, products, including checking, mortgages, etc. must work alongside other elements of the value proposition, elements for which consumers and small businesses are willing to pay a premium. 

 

In the future, the customer will be in charge.  In order to be ready for this new reality, banks must focus on five strategic changes.

 

What will distinguish individual banks in the future won’t be their products (and associated “give-aways” designed to drive volume). What will be ultimately distinguishing – and garner premium pricing – will be the quality of the experience for the customer: the skills and personalities of your frontline staff; the way you put customer information to work to recommend better solutions for customers; the ease of the account opening process; the way problems are resolved; the values of the company; etc.  Each retail banking organization must determine the specific elements of customer experience that will enable it to drive high levels of customer loyalty and charge premiums over competitors.

 

More finely-tuned segmentation analytics will make use of customer profitability information and combine it with demographic and attitudinal information to enable banks to design and deliver more relevant and targeted value propositions. But you can’t do this for everyone. To shift the business model to a value-based, premium pricing structure, banks will need to focus on distinct segments of the consumer and business markets and meet a broader set of needs for these target segments – leveraging critical elements of value that distinguish the bank from its competitors to build these deeper relationships. All elements of operations, marketing, sales, service, and distribution must work together to deliver the experience that leads customers to want to do more business with the company.

 

I know I’m not the first to tell you this: doing business with a bank is not considered a pleasurable activity by many consumers and small business owners. In fact, many banks struggle not only to create positive experiences but to minimize negative ones (how many calls did it take for the customer to get her problem resolved?). Customers interact with the bank in many different ways: the visual images upon entering the branch; the greeting received by bank staff; the way in which problems are handled; the ease of navigating the website; etc. The sum of an individual customer’s interactions with your bank creates that customer’s unique experience. No single unit of the bank can be responsible for service excellence and customer experience management: it’s everyone’s job.

 

Unfortunately, many banks haven’t defined the elements of customer experience that make a difference to their targeted segments and then engineered their businesses to deliver on these in every (or at least those that matter most) customer interaction with the company. In addition, many banks today place too little emphasis on service excellence in their goals and incentive systems.  Frontline staff, back-office employees, executive management – every person and business unit in the company must be held accountable for service delivery. 

 

An example might work best here. Business owners care about the treatment they receive from their bankers. Often, these customers want their bankers to act like staff members: respectful, proactive, available, etc. As a result, business bankers should spend the majority of their time in client-facing activities. The client doesn’t care who spreads the financials during the loan underwriting process. That responsibility should be centralized and should not be the responsibility of the lender – who is an expensive resource and should always be focused on activities the client really cares about. 

 

Banks must work hard to continue to lower the cost to deliver basic transactions and improve efficiency, not only because margins are slim, but also because more money must be invested to create experiences for which customers will pay a premium. The money to make these investments will have to come from lowering operational costs (fewer, smaller branches; mobile transaction capabilities, etc.) and, over time, relinquishing non-targeted segments of the market to other providers.

 

Rebuilding the retail bank skill set to compete in a business where the experience of the customer drives the earnings equation is perhaps one of the greatest challenges many banks face today. In terms of how customers experience a bank, the quality of the interactions with employees matter greatly. As the role of branches and other customer-facing channels change from order fulfillment to customer experience management, the skill sets and personalities of employees must also change. In addition, many frontline employees are still managed within a volume-oriented context, not a quality-oriented one: call center reps are measured on number of calls handled/call time; branch sales reps are given sales goals based on numbers of accounts. These metrics may be important inputs to managing efficiency, staffing levels, etc., but they make no sense from a customer-first cultural standpoint. When you combine volume-oriented metric management with unattractive branches or call centers that transfer customers multiple times to resolve one issue, is it any wonder that so many customers don’t like to interact with their banks?

 

Bank managers must feel a sense of urgency to change. The retail banking business is now driven by a new profit dynamic. Customers are becoming more accustomed to outstanding experiences – in other retail businesses (visit an Apple Store, check in to a Holiday Inn Express, or visit with a Beauty Consultant at Walgreens). Negative experiences are being voiced more loudly via social media, and people are listening. In this year’s strategic plan process, retail bank managers should be sure to put one threat at the top of the SWOT list: doing nothing.