I have been working in retail banking recently and I thought I would write my high-level thoughts on the industry and some ideas for the future.
Drivers of retail banking issues
Firstly what are the drivers of the problems in retail banking at the moment? In my view there are four main areas that have led to pressure on banking profits:
- The economic downturn in 2008 caused a lot more than structural issues at banks, rising unemployment and low interest rates means there is less money being held in banks. When interest rates are low consumers are more inclined to spend their money rather than save it. The depressed housing market also menas that less mortgages are being taken out.
- Consumers are taking on less debt (due to the depressed housing market), saving less on deposit and where possible even paying down debt.
- Regulators are putting more strict requirements on banks, Basel III means high capital requirements, and introduces new regulatory requirements on bank liquidity and bank leverage. This extra regulation adds extra costs to implement and comply.
- Technology is so available and affordable that it is enabling non-traditional, low-priced competitors in areas such as payments which is eroding banks core markets.
Growth areas and future trends
So with this in mind what are some of the growth areas and innovative ideas that we might see over the next few years?
The idea of using your mobile phone as a payment device has taken a big step forward in the last year. Google Wallet has launched in the USA and is offering a smart, virtual wallet that stores your payment cards, offers and store cards. You can also use your wallet online very much like PayPal. I would expect the next step to be digital receipts.
While Barclays have introduced Visa PayWave for touchless payments there is still not widespread adoption. PayWave allows you pay for for items less than £15 without entering your pin, very much like swiping your Oyster card on a reader.
The trend in the west is more a higher volume of lower value transactions and this looks set to continue. I would guess that peer-to-peer micropayment will be the next evolution for friend or colleagues to be able to pay each other for low value payments at the push of a button.
Companies like mint.com have been around for a few years and they allow you to automatically pulls in all your bank statements, credit cards and financial information and categorise your transactions. They then analyse your money and offer suggestions on the best banking and financial products. Banks have been slow to adopt this technology and this could prove a great channel to up-sell more profitable financial products.
Evolution of Branches
With the rise of the digitally-savvy consumer more people are using Internet banking and transacting online. However a branch network is still important as customers require a branch for complicated or more sophisticated financial products. In order to get customers into the branch when they are transacting more on the Internet requires a re-think of the branch environment. Research suggests that branches should adopt a more coffee shop feel with sofas, coffee and computer terminals for customers. Once the customers are in the branch then sales people have a much better chance of up-selling products.
Evolved Online Payments
Ideal in The Netherlands is providing a service (which is backed by the banks) that allows customers to use Internet banking when making payments on online shops. When you checkout on an online shop you are presented with your online banking login and make a payment directly into the shops bank account.
This benefits the customer as they are using a familiar interface and do not need their credit card, it benefits the shop as they have reduced fraud and the customer is more likely to complete their transaction and it benefits the banks as they cut our the payment service provider and take a better margin on the transaction.
A lot of people think retail banking is boring but I think there will be a lot of very exciting advances in the next few years. With the continued downturn in the economy retail banking with its stable and reliable low margin profits will provide the foundation for banks to grow again in the future.