Time for new contract between banks & their customers 2012

Customer 2012 Time for a new contract between banks and their customers?

IntroductionIn 2008 and early 2009, attention throughout the business world was focused on the shocks to the traditional banking system, and the efforts of governments to stabilize them. Arguably the banking crisis was the first sectoral failure in modern times to be driven by lack of observance of the principles of sustainability. As banks were restored to more orderly trading positions during the second half of 2009 and early 2010, it soon became clear that they were now operating in a new environment, where the economic fundamentals had changed, and even more significantly, so had the customer. Accenture set out to answer the three questions this raised:

• What is the new economic equilibrium for banks? • What does the post-crisis customer want from its banks?• What will differentiate winning banks in this new environment?

In 2009, Accenture published “Banking 2012: A Time for Bold Moves”, an analysis of the decline of banking return on equity (ROE), and the potential drivers for the return of ROE to a market competitive 15 percent (Figure 1). One of the most significant sources to rebuild ROE will come from more active customer management, including better pricing for risk and more effective (and cost-efficient) distribution. This was often discussed by banks in the past, but little acted upon in more elastic pre-crisis conditions.

Accenture follows this now with “Customer 2012: Time for a new contract between banks and their customers?“, where we describe our point of view on the post-crisis customer, and the choices banks need to make to position themselves to serve these customers successfully, both profitably and sustainably. Our view is based on a global survey of close to 50 senior retail banking executives at major banks, and an extensive analysis of current retail banking customer data, both proprietary to Accenture and in the public domain. It describes mass market and mass affluent customers, and while it has a strong focus on developed economies, it also reflects some notable changes in developing economies.

Figure 1: Return on equity evolution (retail and commercial banks, developed markets) Profitability of “good banks” will be rebuilt through a set of focused business model and operating model actions, in order to achieve “mid-teen” ROE by 2012

• Existing loan book re-pricing• Pricing optimization by product / segment*

• M&A• Divestitures• Geographic expansion• Low-cost bank creation*

• Direct channel push*• Branch rationalization to maximize performance*• Process simplification and reengineering* (increasing sales capacity)• Cost governance• Procurement rationalization* (IT, Telecom, Utilities, ...)• Product rationalization*• Shared services implementation*• Outsourcing and offshoring of non-core function*

• New fee income stream* (product innovation, new profit pools)• Marketing capability enhancement* (maximizing cross-selling, up-sell, acquisition and retention)• Needs-based offering*

• Risk management integration across risk types and business units*• Risk analytics to improve predictive management of loan loss ratio*• Non-performing loan factory*

26%

-5%

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-6%

-2%

-3%

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3%

5%

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* Levers used to quantify impact on ROESource: Accenture Research

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also see increased volatility, with 9 percent of consumers having switched in the past 6-12 months, and a further 13 percent indicating they intend to switch in the next 6-12 months. A further 26 percent of consumers indicated they had partially switched, staying with the same provider but moving some of their business or adding new providers, while a further 11 percent intend to adopt new providers in the future. Global retail banking senior execu-tives surveyed confirm this shift, identifying service quality and the ease of doing business with the bank as two of the most significant factors in a customer’s increased willingness to consider shopping around (Figure 4).

Customers tell us that they are much more willing than in the past to buy products from multiple providers. This volatility is a key factor in customer behavior post-crisis. Forty-six percent of customers surveyed are more open to independently source products from different suppliers as a result of the current economic situation (Figure 2). Customers had the tools to shop around before the crisis, in fact the banks had put them into their hands via direct channels, and the aggre-gators and informal blogs simplified the comparison process further, but the crisis has accelerated their will-ingness to use them. This key trend was described by retail banking senior executives Accenture interviewed, but has also been confirmed by recent market research amongst consumers.

This volatility is closely associated with a loss of trust in the banks. Two

thirds of global senior executives surveyed identified shopping around, decreased loyalty and price sensitivity as the key changes they are observ-ing in customer behavior (Figure 3). Importantly, more than half of the senior executives Accenture spoke to had seen customer trust drop in banking brands.

At the same time, customers have become more willing to punish and reward their financial services providers, particularly on basic service fulfilment. Service expectations globally are accelerating, with Accenture’s 2009 Customer Service Survey indicating that they have risen faster across service sectors in the last 18 months than in the previous five years, and that two in three consumers globally switched service providers in some sector during the last year. In retail banking and financial services, we

Source: Accenture Global Consumer Behavior Study, 2009

Figure 2: Consumer reactions to the financial and economic crisis Which of the following statements best describes your reaction to the current economic situation?

46%Become volatile

Stay the same 29%

Stick to ‘tried & true’ 25%

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The self-directed customer: a fundamental power shift from banks to consumers

Figure 3: Emerging customer behavior What key changes have you observed in how customers approach banking services in response to the global financial crisis and recession?


Shopping around 34% 63%3%

Price sensitivity 25% 63%12%

Customer loyalty 34% 7%59%

Trust in banking brands 25% 22%53%

Decreased IncreasedStayed the same

Source: Accenture Customer 2012 Bank Executive Interviews, 2010

Figure 4: Keys to differentiation What are the top three success factors required to differentiate from other players in the eyes of your customers?

Brand and reputation 58%

Quality of customer service 50%

Ease of doing business with 45%

Trust 33%

Personalized relationships 33%

Expert advice 28%

Multi-channel distribution 13%

Physical distribution network 13%

Other 10%

Tailored product offerings / bundles 8%

Lowest prices 3%

Product features 3%

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Secondly, it indicates a fundamental shift in power between the banks and the customer. The customer is already calling the tune, and his or her power to do so is likely to increase with greater consumer protection and a richer choice of products, services and channels as a consequence of new technologies and new entrants. Banks could ultimately lose their ownership of the gateway relationship with the customer of financial services prod-ucts to other players.

Thirdly, it’s here to stay and it’s global. Sixty-eight percent of retail banking senior executives inter-viewed believe that the changes in customer behavior will last for more than the next three years. Interviewees in Canadian banks less affected by the banking crisis confirmed that they see the same changes in behavior. In turn, while emerging market banks suffered less from lack of trust, the same self-defining patterns of behavior are observable there.

The opportunity for banks is to recog-nize the new nature of this self-directed customer early, to acknowledge the transformational nature of the change in the customer and for the bank’s business model and to mobilize to provide what that customer wants.

After all, in the developed world, and increasingly in the emerging econo-mies, an individual requires a bank account to be a full participant in the economy. Financial services products have arguably always had an element of grudge purchase about them, like toothpaste in the supermarket. Firstly, there is a direct impact on profitability, leading to price com-moditization, unbundling of higher margin products to provide trans-parency to picky consumers, and potentially higher cost to serve as banks seek to fix their basic service provision. In a world where almost half of retail banking senior execu-tives interviewed have already seen customer profitability drop between 5 percent and 15 percent, and where another 11 percent have experienced declines in profitability of more than 15 percent, this type of customer behavior is highly significant.

Half of retail banking senior executives have seen customer profitability drop between 5 and 15 percent.

Why does this damaged relationship with the banks matter?

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The new product and pricing: They care about value for money. They pre-fer simple unbundled products that are transparent and easy to compare (Figure 5). A senior executive at a European bank Accenture interviewed told us, “Product is dead”. While he was talking about mass affluent cus-tomers, this is likely to be even more relevant for mass market customers. Inevitably, this challenges the exist-ing banking model of driving margin through complex product bundling.

The new distribution: Customers tell us they want multiple access points,

and they want connectivity between them. They show no desire to give up using branches, but at the same time they show increased usage of direct channels (Figure 6). They adopt new technologies quickly, and the growth in use of mobile banking applica-tions barely lags behind the growth in smartphone usage. People who buy iPhones use them to bank, and in emerging economies mobile banking has leapfrogged traditional banking infrastructures. A North American retail banking executive interviewed said, “Multi-channel is a commodity for our customers; they expect us to

have it.” Again, this challenges banks’ traditional ambition to use chan-nels to reduce cost. To win the self-directed customer, multi-channel is a hygiene factor for growth, and in many customers’ view, already includes mobile. This challenges some current investment strategies and cost-based business cases for channels.

The new service: Customers identify service and experience as the dominant factor in their relationship with the bank (Figure 7). Retail bank senior executives see service provision as a winning factor, but find it difficult

Serving the self-directed customer: what they care about and why it matters


Figure 5: Emerging changes in customer behavior What do you think are the top three emerging changes in customer behavior that will impact your business over the next 1–3 years?

Adopting direct and self-service channels 63%

Seeking better, more personal service 49%

Price sensitivity, discount seeking 44%

Decreased loyalty or more propensity to switch providers

34%

Customer deleveraging 29%

Concentrating banking relationships with single provider

22%

Diversifying banking relationships amongst multiple suppliers

17%

Other 17%

Adopting non-traditional suppliers of financial services

15%

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He expects and rewards suppliers who are highly responsive to his or her particular service needs. Meeting these customer-specific service needs challenges the quality and dynamism of analytics, which are currently avail-able in banks; and the segmentations, which have been built to fit appropri-ately against the banks preferred prod-uct sets and distribution mechanisms rather than against customer–driven service propositions.

In summary, the post-crisis self-direct-ed customer wants value for money; the ability to choose independently amongst simple products; a super-responsive bank that knows when he wants advice and when he doesn’t and is proactive or absent accordingly; which is flawless in execution, offers him all access points, and stays abreast of the technology in offering him new propositions; and he wants institutions which he can respect and trust.

So, is there any way of making money out of this?

to define what those service proposi-tions might be. For some customers, it is flawless fulfilment of transactions: “My pin number will arrive the same day as my credit card”. For some cus-tomers, it is the bank’s single view of customer data, which allows him to organize complex transactions virtu-ally: “I can sell my employee share options on Nasdaq via a Swiss Bank, have them converted into sterling and deposited in savings account number 2”. For some customers, it is arranging credit or investment products in a fast, disintermediated way: “We think you need a loan, fill in this form and get immediate online approval and loan transfer within hours”. For some, it is high-touch relationship management: “I am thinking about the government’s new tax-free scheme for small sav-ers, and I want to talk to a person” or “I have lost my cash card and I want to talk to a person”. Many customers have a combination of these needs.

The self-directed customer is not satis-fied by a “one-size-fits-all” approach.


Figure 6: How customers have responded to the crisis What main trends in behavior have you observed concerning how customers responded to the global financial crisis and recession?

Decreased IncreasedStayed the same

Appetite for credit 53% 20% 28%

Savings behavior 11% 19% 70%

Account switching 5% 53% 43%

Use of branch network 27% 49% 24%

Use of direct channels 5% 13% 83%

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Figure 7: Customers identify service factors as key drivers of satisfaction What degree do the following describe what you like about the companies you do business with today? (Percentage of responses scoring more than a 7; Rating scale: 1=not at all, 10=extremely)

Easy to do business with 39%

Trustworthy 37%

High-quality customer service 34%

Broad products / services range 34%

Skilled workforce aware of needs 34%

28%Informative communications

27%High-quality products / services

26%Innovation

24%Competitive pricing

23%Good value for money

22%Engaging communications

22%Sustainable business practices

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Accenture has conducted some preliminary modeling of the finan-cial components of the profitability decline. While the analysis will vary by a bank’s business mix, the key factors driving the decline seem to be reduction in assets under manage-ment, decreased spread and reduction in fee income. This in turn gives us indicators of the financial outcomes which will help rebuild profitability.

Forty-six percent of retail banking executives interviewed described a loss of customer profitability of between 5 percent and 15 percent. A further 11 percent experienced a drop of more than 15 percent. Had we not become recently accustomed to extreme changes in the industry, and the very large numbers associated with the losses, we would find this level of profitability drop shocking.

The new economic equilibrium

Figure 8: European retail banking revenue sensitivity analysis Pre-crisis / crisis impacts and post-crisis rebuild

Note: Based on breakdown of retail banking revenues of retail banks in a European country, with impact of 10% changes in underlying KPIs; other factors such as interest rate change are excluded, as are additional revenue generation activities such as customer acquisition (CIR: Cost Income Ratio; LLR: Loan Loss Ratio).

+10%churn

€9

€750€816

€56

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€46

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€29

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€610

€75

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€56

+10%AuM

€75

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-10%CIRAssumptions

OP Margin22%

Cost Ratio (CIR+LLR)

78%

OP Margin29%

Cost Ratio (CI+LLR)

71%

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Our analysis of a peer set of European retail banks (Figure 8) shows that a significant amount of customer profit is at risk in today’s business conditions. On average, a 10 percent decrease in customers’ assets under management would impact customer revenues by €56, while a 10 percent reduction in interest margin or the average fee income generated from assets would see revenue falls on average of €46 and €29, respectively. Across the customer base, a 10 percent increase in attrition rates would lead to a fall in average customer revenue of €9. With all these headwinds in place, the average bank in the peer set would see their profit per customer fall from €160 before the crisis to just €20, or an operating margin reduction from 22 percent to just 3 percent.

However, banks have options to improve their performance—and certainly in a number of countries we are seeing improvements in operating conditions impacting asset quality, funding costs and business volumes. We looked at the impact of increasing cross-selling rates by 10 percent, restoring customer AuM by 10 percent and improving pricing across interest margin and fee income by 10 percent. Overall, this could enable a bank to find an addi-tional €206 in revenue per customer. Further, by addressing the high cost base with a reduction to operational costs of 10 percent, banks could in theory increase average customer profitability to €237 or an operating margin of 29 percent. Additional rev-enue opportunities may be available for some banks where there are still opportunities to grow market share or attract new customer segments, or for some banks to increase their product range within financial services or look to non-financial product sales. It still remains difficult to translate model answers to an uncertain environ-ment, where markets remain volatile and regulators are poised to impose

stricter rules on consumer financial products in many markets. However, it is our conclusion that to achieve the improvements required, banks cannot operate as they have done in the past, but must adapt their business to the new kinds of service and distribution model customers demand, deepen relationships through better customer understanding and address fundamental cost-to-serve issues rather than just strip out cost.

This financial analysis does not of course explain why customer profit-ability has been so deeply affected by the banking crisis. Clearly immediate economic conditions that have put a strain on funding and margins, declin-ing asset quality and volatile business volumes are major factors that should normalize as the economy recovers. However, we observe three underlying drivers concerning consumers, two of which are permanent changes to which banks must respond: • The impact of the new customer

behaviors described above—these will have a deepening effect on margin and on investment costs as banks build new analytical and channel capabilities to meet the changed needs, and on overall cost to serve in the total access world we have described. The majority of the senior bank executives Accenture interviewed view these changes as permanent.

• A long-term structural change in segment profitability in retail banking—the subprime segments that drove very high margins prior to the crisis have effectively disappeared from the market. They are too expen-sive for many banks to serve now that their risk profile has been fully recog-nized and priced in. This shrinkage in the market means that market share as the prime target, and short-term arbitrage of higher-risk customers,

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Banks that can mobilize to respond to changed customer needs have a serious opportunity to increase share of wallet. Pre-crisis cross-selling rates were and continue to be very low. Typical rela-tionship manager productivity remains stuck at one product sold per day worldwide.

Winning banks will not only increase their share of the existing wallet for financial services products, but also will grow the wallet. They will need to break through the narrowly defined “grudge-purchase” mentality of many customers, and utilize the richer eco-system in which they now compete. This includes telecoms, retailers, first-generation Internet businesses and new “i” and “e” business models.

As winning banks move from depen-dence on short-term arbitrage of high-risk segments to maximizing the value of long-term relationships with high-quality customers, they will need to make their fundamental busi-ness models attractive and ethically acceptable to those customers over longer time frames. Transparency and trust will be the underpinnings of the new contract with the cus-tomer which, ultimately, will provide the main pathway to sustainability.

The financial opportunity short- and long-term for retail banking is real, despite the shocks of recent years. The challenge is in how to take it.

will be increasingly replaced by wallet share of higher-quality customers, and the management of value over a very long-term customer relationship.

• A shorter-term conservatism on the part of consumers—those who have deleveraged and decreased their consumption as their economic confidence declined. Even in the worst-hit developed economies we expect this to be a three- to five-year phenomenon that banks will need to manage through, rather than the kind of permanent change described above.

Despite these changes, Accenture sees substantial money on the table for banks.

Those institutions that can offer a more attractive proposition to the volatile and discontented post-crisis customers have a better chance than in the past of winning increased mar-ket share of high-quality customers. Customers can no longer be relied upon to passively tolerate banking propositions they don’t like.

Transparency and trust will be the underpinnings of the new contract with the customer which, ultimately, will provide the main pathway to sustainability.

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Winning banks will not only increase their share of the existing wallet for financial services products, but also will grow the wallet.

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reposition itself as a guide through that complexity and provider of appropriate choices.

Accenture believes there are six levers a bank can use to strengthen its ability to gain a disproportionate share of the wallet of these volatile, demanding and confident customers:

• Transformed understanding of different customer behaviors and needs—and the analytics and mar-keting underpinning that, to identify more attractive customer propositions and to permit their ongoing evolution: segment marketing and redefined distribution via mobile, Internet and 21st century branch will be a domi-nant vector going forward.

• Greater personalization at radically lower cost to bank and customer—permitting banks to offer that advi-sory guidance, and that diversity of tailored offers that the customer increasingly demands, without escalation of overheads via com-plex relationship manager-based processes, exploiting technology instead; which in its turn, requires…

• Humanization of the digital—so that the bank can use its IT to square the circle of greater customer-specific tailoring of proposition and intimacy of interaction, with the increasing challenge of cost efficiency.

• Retailization—so that the bank can create a quality of experience which breaks the trend towards commoditization and “grudge pur-chasing” and builds instead the kind of experience-based loyalty that the providers of other arguably unexciting products such as food have achieved.

It is clear from our research that the banks who win the race to rebuild profitability will be those who rec-ognize that the relationship with their customer has changed, and who respond effectively to that change. In this section, we consider what an effective response might consist of. What should the banks do to win?

We have described a new economic equilibrium where the competition is for a greater share of a larger wallet of higher-quality customers over a much longer time frame. Clearly to achieve this, the relationship between the customer and the bank must be deeper and closer.

However, our research shows that customers are not moving in this direction. They are fundamentally more volatile, confident in their ability to make financial decisions for themselves, lacking trust in the authority of banking brands, price conscious and ready to punish for poor service.

They want their diversity recognized by their banks, as they expect it to be recognized by the providers of other services, and are not satisfied by a one-size-fits-all approach to their needs. They want their provider of financial services to live in the world they live in, of rapidly evolving service propositions through multiple innovative channels and provider partnerships. This is a customer who increasingly has a smartphone in their pocket.

But at the same time, they are cus-tomers who are living in a world of complexity and facing many choices where there is a real opportunity for the provider of financial services to

The emerging new horizon for the banks

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• Transformative efficiency—whereby the bank can utilize its legacy infrastructure in ways that include but go beyond applying the tradi-tional lessons of high-performance banking to reduce the unit cost of servicing its own customers, to include exploitation of opportunities to use its cost base as part of a wider ecosystem of partners and suppliers.

• Radical evolution of business and operating models—so that banks can keep pace with the communities in which its customer increasingly

lives and transacts his service needs. The silos which will need to be broken in order to achieve this will no longer be between the internal divisions of the bank, but between the bank and the other providers of services and products to its custom-ers. These new business models will align the banks more closely with their customers’ values and increase the sustainability of the primary relationship between the bank and its customer.

Used together, these levers can create a quantum leap in the bank’s ability

to serve customers and create new value in the retail banking market, and at their operational core is the “Customer Pull" model (Figure 9). This gives a route map through the adjustments necessary to the banking model to create the deeper relation-ships necessary to capture growth.

Figure 9: Golden rules for a successful “Customer Pull” model A new customer orientation is required to capture growth and deepen relationships. The “Customer Pull” model is based on four pillars and 17 “golden rules”

Source: Accenture analysis

Marketing • Customer segmentation focused on needs, reflecting emerging trends and clusters• Rule-based conversation, built on a Dialogue Management Engine• Customer choice of when / how to be approached by bank (built-in intelligence) HR • Incentives for long-term relationships• Customer-oriented culture dissemination IT / OPS • Multichannel architecture • Customer dialogue management infrastructure• Service-oriented back office (e.g. Lean Six Sigma)

Enabling Infrastructure

Marketing

HR

IT / OPS

StrongBrand

• Stimulating emotional bond with customers, inspiring trust

Easy Access andFrequent Interactions

• Consistent experience across all channels, “conversation” with customers • Branch model optimizing costs (e.g. zero paper), maximizing customer-facing time, enabling cost-effective access to best experts (Remote Assistant)• Internet banking easy to use, selling simple products in a simple way enabling access to virtual advisors• Mobile banking driving personalized conversations capturing leading-edge devices

Simple and Easy toUnderstand Offerings

• Product range organized by needs, transparent and simple to choose (”choose your product with 3 clicks”)• Selective needs-based bundles, with transparent pricing, to strengthen relationship • “The more you buy, the less you pay”• Customer education program (important to regain trust)

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previously. Improved customer insight, channel innovation and integration, and front-office efficiency were priorities (Figure 10).

In describing their strategic invest-ment priorities, global retail banking executives confirmed the impor-tance of some core elements of the transformation agenda described

Source: Accenture Customer 2012 Executive Survey, 2010

Figure 10: Retail bank investment strategies What are your top three strategic investment priorities for customer management and distribution?

Developing and improving new channels 54%

Integrating multi-channel distribution 49%

Improving customer insight capabilities 33%

Improving physical branch distribution networks 31%

Improving brand and marketing capabilities 26%

23%Reducing administration and processing costs in the front office

15%Developing new customer segmentation approaches

15%Improving credit risk management

13%Other

10%Streamlining the branch network

8%Improving pricing capabilities

5%Developing new product propositions

5%Reputation management

Banks are mobilizing…

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It is not just in their investment strategies that the banks are reflecting this Customer Pull agenda.

Accenture sees examples of banks already moving on some of these dimensions. Often, the momentum comes from an existing capability within the bank or institution, as if in answer to the question “How can we better meet the needs of these new customers given where we start from?” For start ups and new entrants, there is greater freedom to build a Customer Pull model, focused on a quantum leap in understanding the customer, personalization and humanizing the digital without the constraint of the cost and limitations of legacy infrastructure. Take for example a start-up in Italy called Che Banca!. It is a multichannel bank with a limited product range: deposit account, prepaid card with IBAN, mortgage and current account. The focus is on ease of use and a tailored customer experience. The customer can configure the product to their needs. This is supported by excellent analytics based on actual customer behavior, without traditional clunky segmentations. It provides brand reassurance and retail experi-ence through pop-up branches in other retailers’ stores, and has a proactive sales force within those stores which find and coach potential customers in the Che Banca! way. In the two years since its launch, it has acquired 310,000 customers and €9.1 billion in deposits.

But international majors are experi-menting in this space. A major US bank recently piloted a virtual branch in Japan, with touch-screens using ava tars to manage transactions and give advice. The focus was on personaliza tion through inventive use of technolo gy. When it opened, the pavement out side the branch was filled by day-long queues. Accenture sees other majors experi-menting with branch formats which integrate a wide selection of channels.

The majors are not restricting them-selves to pilots. A global UK-based bank has, for instance, systematically applied a Customer Pull agenda to its mass affluent segment. A strong direct channel, with effective cross-channel integration and attractive, automated branches offers a high-end multi-access proposition. Customers can customize the product offer by add-ons such as simple investment products, green and sustainable options. These customers increase their level of interactivity with the bank, which is increasingly working to use the data that streams in to get a better view of customer needs and behaviors. Its customer-focused, ethical brand values continue to be one of its greatest strengths, and are exempli fied by the approach described above. During the banking crisis, the bank continued with a highly visible branch refit program, demonstrating its economic health and its commitment to its customers.

Spanish major BankInter offers its customers a choice between state-of-the-art channel capabilities. The bank’s high degree of innovation around the Internet and mobile technologies allows customers to tailor their inter action with the bank, from Web-video discussions with advisors to full-service banking on mobile devices. This innova tion is underpinned again by constant evo-lution of marketing and distribution models based on high-quality data and flexible segmentations which accurately model customer behavior. Meanwhile, Australian major NAB has used the richer data its early move into analytics has given it to develop a new customer segmenta-tion, which models new generation customer behavior. We see all over the world banking leaders taking the innovation path to deliver the new Customer Pull agenda.

Banks are mobilizing around the Customer Pull agenda…

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We see some banks mobilizing in this area by exploring adjacencies, that is, the use of their banking relationships and infrastructure to sell and deliver related products in the area of infor-mation, for example.

Another area of experimentation is to share their infrastructure costs by offering the use of that infrastructure to partners. Examples could include sharing more of banks' payments infrastructure or even processing systems and banking platforms.

These explorations require a shift in operating models, as well as in current thinking on the boundaries between banks and other entities providing services and products to their customers.

Banco Santander has demonstrated that an acquisitive global mass market major can also be a super lean and efficient machine and still provide a proposition that is attractive to a large segment of the world’s mass market consumers. In some ways, Santander sets the bar for how much is possible from standardization.

This is territory that only a few players will choose or indeed be able to take as their own in the world we see emerging. However, the efficiency challenge for Customer Pull banks and institutions is intensified by the standard set globally by a bank like Santander, alongside the customers increased interest in value for money. We are not moving back to a world of traditional high-touch, high-cost service. Innovative operating models will be required to capture efficien-cies (Figure 11).

Banks are mobilizing to deliver transformative efficiency…

Figure 11: Highlighting efficient distribution best practices Best practices in distribution across the value chain and operations


Reduced cost-to-serve

• Average branch counts five resources, at most one teller Light branch

• Light headquarter and middle layer functions (regions, zones)

Simplifiedgovernance

• No back office in branches (wide use of workflow, document scanning)

Paperless,digitalization

• Encourage customer use of ATM, direct channels, cashless payments

Customerself-service

• Fewer, standardized products designed around main customer needs

Simplifiedproduct range

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We are not moving back to a world of traditional high-touch, high-cost service. Innovative operating models will be required to capture efficiencies.

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The environment in which a customer chooses his products and providers is rapidly becoming more complex (Figure 12). The new consumer is comfortable with this. It is not a given from his perspective that the bank will be the best provider of financial services to him. He might well prefer a more tech-nologically sophisticated, interactive or innovatively cheap provider from another part of his ecosystem. The battleground here is for the primary relationship with the customer, as the gateway to the provision of multiple products and services, not exclusively financial. If banks lose that battle, they could find themselves providers of white label services to providers who have won the customer relationship.

But arguably not fast enough. The senior executives Accenture inter-viewed said they believed innovation would come from the margins of the industry, from new entrants and new technologies. However, they also told us that they did not believe this would undermine the dominance of the legacy bank operating model.

We believe that the crisis, by creating the self-defining customer, has inten-sified the need for banks to adapt their business models to meet the demands of those customers, and that indeed going forward the business model will be a defining part of a customer’s decision when he or she chooses a provider of financial services.

Banks are mobilizing to respond to changes in their value chain and business model…

Figure 12: Evolving the value chain Start-ups, new entrants as well as banks are driving innovation in the digital marketplace. The goal is ubiquity, ease of use and value for money propositions


Intelligent tools to support decision

making

Facilitating contactless, mobile and online

payments

Provide complex / advisory products in

direct channels

Personalized experiences to each

target segment

Leveraging data for customer

benefit

Cutting-edge security

Digital Marketplace

Extending account management capabilities

Socializing banking and

intermediation

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It’s clear that banks understand the direction of travel and are responding. It is possible, however, that they may underestimate the speed and scale of change required, or that investment decisions being made now will define whether the bank can win in a market and with customers who in five years will be changed beyond recognition.

What is more, the retail bank executives interviewed don’t believe their banks are necessarily starting from a strong place to move in the new direction, with almost half of executives indicating their institution was weakest in those areas of cus-tomer insight, channel development and integration, which they believe are critical to future success. This increases the need for early invest-ment decisions to build the required capabilities.

It is also easy to bring some legacy misunderstandings into the invest-ment thinking, the most significant examples being:

• Multi-channel integration is about reducing cost. It is clear from our research that multi-channel is about investment for growth. It is a hygiene factor for self-directed customers, and the banks have to pay the cost of the table stakes. Furthermore, users of direct chan-nels continue to use branches, and the desire of banks to put lower-return customers onto lower-cost channels while diverting higher-return customers to advisers in branches runs exactly counter to customer behavior in many markets.

• The best service is high touch and delivered by people, and should be given to our best customers. As underscored by our research, while customers place great impor-tance on service, they have diverse definitions of it, from basic fulfilment to effective advice. Nor does there seem to be a correlation in mass market and mass affluent banking between demographic grouping or profitability to the bank, and a preference to have their banking activities, including advice, mediated by a human being. By organizing so that its most profitable customers get high-touch, people-based service, the bank is both wasting money and missing the target.

Some risks are visible in the banks’ response to the new customer and economic equilibrium

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compete for capital by raising their ROE, but if they are to win the battle for leadership of next-generation financial services, they must be able to invest. The game is changing.

2. Customers have been launched by the crisis onto an accelerated trajectory of change; banks’ investment choices now will determine their success through the next decade. The last three years have shown us how fast consumers can adopt new behaviors when a challenge or an opportunity enters the market. In that time period, customers in the developed world have lost their respect for their banks, and believe they are better equipped to decide for themselves. Banks have offered them the technolo-gies to shop around. Regulation will now transfer more power into their hands. New entrants can and will offer new alternatives. In the developing world, new generations of consumers are leapfrogging traditional banking offers and moving straight to new generation channels, services and pricing approaches. The big investment choices banks make now as part of their three- to five-year planning cycle for technological and operational capability will need to reflect a cus-tomer who is evolving at a rapid rate and will be so changed in behavior by 2020 as to be unrecognizable.

3. Banks risk losing their owner-ship of consumer relationships to other parts of the ecosystem; they urgently need to shape their strat-egies and expand their operating models to take advantage of the new consumer communities.The financial services ecosystem is already transforming fundamentally. The use of smartphones to provide financial services is growing expo-nentially. The primary owner of the

Accenture’s research with retail banking senior executives and their customers describes a new world for banking, one in which the customer has finally taken control of center stage. But Accenture research has also shown that it is a world where banks have a chance to turn what once looked like a banking collapse into an accelerated opportu-nity for creating and driving the next generation of financial services. Despite overcapacity in the industry, there will be winners as well as losers. This new opportunity will only be seized suc-cessfully by those banks that can both recognize the fundamental shift in power to the consumer and can then build a new financial and moral con-tract with their customers around it.

As banks mobilize to seize the oppor-tunities available, Accenture believes it is imperative for them to tackle the following issues:

1. Short- to medium-term revenue rebuild is both necessary and possible. There is a new economic equilibrium. Some segments have temporarily disappeared as sources of growth and revenue, leaving intensified competi-tion for higher-quality customers and for lifetime relationships with them. Share of wallet in developed markets is now crucial. Identifying and captur-ing the highest potential customers is equally critical in emerging markets. What will distinguish winners from losers in this world where customers are much more ready to punish and reward their providers of financial services is precise understanding of cus-tomer behaviors, resulting identification of the type of service they truly value, a transformed approach to segment mar-keting and faultless execution. While this is not easy, the option of accepting the recent revenue reduction, at up to 15 percent, a truly shocking statistic, does not exist. Not only must banks

customer relationship through this channel, the “gateway”, is as likely to be the telecom or the dominant provider of applications, as it is to be the bank. The risk is that banks could become commodity providers of white-label products to higher-margin relationship managers. Equally, the role of banks in the community of a consumer could be very powerful and could allow synergies with other members of the consumer’s communi-ty. Collaborative technologies between providers to the consumer could offer growth potential, as banks work with creators of new hybrid products and services to create white space in the market, as Apple has done. These collaborations could also offer cost advantages, as the banks’ infrastruc-ture is shared by ecosystem partners. Taking these opportunities will require a fundamental rethink of the tradi-tional banking operating models. The silos the banks need to cross are no longer those between its own divisions, but between the bank and its partners in the consumer ecosystem.

It is often said the future is not what it used to be. Now, one year after the financial crisis, it is an appropriate time to consider the effects of its aftershocks on the consumer as well as the banking industry. Based on our executive interviews and research, Accenture has argued that rebuilding bank profitability will depend more on a new contract between banks and their customers than on a reversion to legacy principles. The customer in 2012 will be more fickle, flex-ible and prone to flight. Banks that understand and respond to this new customer demand-driven dynamic can rebuild sustainable profitability, improve growth trajectory and return to high performance.

Where to from here?

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Noel Gordon, managing director of the Accenture Banking industry practice, has worked for and consulted with some of the world’s largest and most diverse banks for more than 30 years.His experience includes organizational transformation, strategy, merger inte-gration, back-office rationalization, and credit and risk reengineering. Noel also has worked as a banker at JP Morgan Chase & Co. and NatWest Group, where he led a range of retail and corporate banking teams. Piercarlo Gera, managing director of the Accenture Strategy service line in Financial Services, advises clients on their growth, geographic expansion, and merger and acquisition strategies. Piercarlo has more than 25 years of

experience working with clients in mergers and acquisitions, corporate transformation, sales and service transformation, and corporate strategy. He has worked extensively with banking and insurance clients on projects including transformation planning and execution, merger integration, marketing strategy planning, and new business unit launches. Dorothy Armstrong is Head of Financial Services Strategy for Accenture in the UK and Ireland. She has recently focused on the major sectoral and market changes in banking after the crisis. She has extensive international experience of corporate and retail banking, and previously worked in the Corporate Banking and Financial

Markets Division of the Royal Bank of Scotland. While there, Dorothy was part of the leadership team for the merger of RBS and NatWest corporate banks. Anton Pichler, Head of Banking Research for Accenture Research, has lead a wide range of research projects supporting Accenture’s UK and Global Banking thought leader-ship program, including studies in customer behavior, financial per-formance, banking regulation and on-going research into the evolving banking landscape and bank profit-ability. Anton previously worked at Lloyds TSB in change management and strategy roles.

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About AccentureAAccenture is a global management consulting, technology services and outsourcing company, with more than 190,000 people serving clients in more than 120 countries. Combining unpar-alleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-per-formance businesses and governments. The company generated net revenues of US$21.58 billion for the fiscal year ended Aug. 31, 2009. Its home page is www.accenture.com.

Time for new contract between banks & their customers 2012

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