Why retail banking presents rare opportunities right now
The world of banking is big—too big for one person to cover alone, especially with today’s digitally-fueled pace of change. In that spirit, I’m turning my blog over to my colleague Steven Smith for this post on the once-in-a-generation opportunity emerging in retail banking right now. Steve is a managing director at Accenture and our Banking Industry Lead for our US South market unit.
I still remember the night back in the winter of 1986 when my mom dragged me out into the cold Michigan night to look at Halley’s Comet. “Come on,” she urged, “it’s only here for a short time!” Halley’s Comet is a short-period comet visible from Earth approximately every 75 years, and she wanted to be sure I didn’t miss the chance to see it.
Retail banks today are in a similar position. They face a once-in-a-generation opportunity to serve their customers in new ways. The implications of missing out could span not years but decades.
The stars align
Consumer banking, like astronomy, is cyclical. Right now, major trends are aligning in a super-cycle. COVID-19, the war in Ukraine, inflation, rising interest rates, the Great Resignation and social unrest are just a few. Banks right now face a brief opportunity to capture increased profits from a rising-interest-rate environment and invest them in their transformation efforts.
Just how much money are they likely to have? Well, a conservative estimate based on a Credit Suisse analysis is that top-tier US banks will each gain additional revenue of more than $5 billion a year—possibly up to $7.5 billion.
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Some banks will be tempted to sit tight on this additional revenue or pass it on to shareholders. There are plenty of persuasive reasons for this, like economic uncertainty, reduced customer confidence, prolonged inflationary pressures, rising beta on deposits and potential higher credit losses. Research by Celent indicates that 65% of North American banks believe it is harder to win and retain business now then it was 12 months ago.
There’s also rising competition from fintechs, neobanks, and non-banks, each seeking to raise the bar for customer experience.
Some banks may feel that the digital customer experiences they offer today are sufficient. Certainly, most banks have achieved at least basic competence here. Research from MagnifyMoney found that users of the mobile apps of the 110 largest incumbent banks, credit unions and online banks in the region gave their tools an average rating of 4.1 out of a possible 5.
However, today’s digital banking experiences amount to a galaxy of indistinguishable stars. To use a favorite phrase of Mike’s today’s digital banking is mostly functionally correct and emotionally devoid. True differentiation going forward will depend less on the pixels and more on driving meaningful experiences through hyper-personalization, transparency, product innovation, human availability when it matters and, ultimately, measures that promote customers’ financial wellness.
This is especially true as retail customers shift from over-saving (a consequence of pandemic stimulus checks and the moratorium on student loan payments) to over-spending due to pent-up demand, inflationary stress on the value of the dollar, the increase in unsecured lending balances, and so on.
This is why I firmly believe that hesitation to invest these profits will lead to long-term regret. The question is not whether to invest but where.
The spotlight shifts to trust and innovation
As consumers brace for an economic downturn, they will be seeking a safe harbor where they can weather the storm. Trusted institutions have a head start in filling this need. For example, by explaining the difference between a cryptocurrency supernova and the growing constellation of central bank digital currencies, incumbent banks should be able to advise and protect their customers as they grapple with tricky, unfamiliar issues. Customers will be watching their banks closely to see if they are really “there for them” when it matters.
Fintechs are also feeling the impact of a pull-back in funding coupled with rising labor costs, which could lead to a culling of their numbers. However, those left standing are likely to be stronger—and even stronger competition for traditional banks. To counter this threat, incumbents will need to go beyond upgrading their mobile apps and building better digital versions of themselves. They will have to show clearly the value they provide their retail customers.
This value, and the differentiation it delivers, will be founded either in business model transformation (open banking, platform marketplaces, embedded finance) or innovation (new capabilities, hyper-personalization, partnerships in adjacent markets). Both strategies will require modernization from the inside out, as legacy platforms impose fundamental constraints on speed to market, data availability and innovation generally. Modern platforms will need to include event-driven architecture, advanced data and analytics capabilities, and modernization of the core.
But like Halley’s Comet, this opportunity will not be here forever. We believe retail banks that act now to redeploy the surge in net interest income will benefit from their transformation for many years to come.