The financial services industry has shifted its major concern from regulation to customer retention, according to the latest annual survey done by Temenos, a financial software company and Deloitte, the consultancy.
In a survey of 205 senior financial managers from around the world who participated in the Temenos annual meeting, 29 percent said their biggest challenge is retaining the loyalty of their demanding, better informed and less loyal customers. (see my story today on social media and how firms, including Charles Schwab use it to improve customer relations.)
“This marks the end of the bow wave of all this regulatory work,” said Tim Walker, a Deloitte partner who leads the firm’s global work in core banking system transformation. Banks have spent the last three years meeting regulatory requirements and now are shifting budgets to customers service, especially around online and mobile. He sees big opportunity in developing banking applications for tablets.
“Everyone has an app that will work on a smartphone, but the methods of selling and servicing are different on tablets which are used for browsing, often in front of the television.”
Financial firms also see competition from outside firms as a competitive threat — with PayPal the leading threat but also including supermarkets and peer-to-peer intermediaries.
“Risk management remains a higher priority in North America compared to the other regions, reflecting the continued drag from Dodd-Frank regulations (where only around half of the new rules are finalized and being actively implemented, and a higher priority in the Private Wealth Management sector, as these firms cope with FATCA and other new industry-specific legislation.”
Branches got more attention than last year, up to 12 percent from 9 percent, although when combined with channels, it reach 31 percent, reflecting, perhaps, the growing importance of smartphones in banking. Private wealth management had less of a focus on smartphones, which the report said could be a mistaken, citing an Accenture study that the digital generation has more than $27 billion in net worth.
Innovation remained high on the agenda, mentioned as a priority by 23 percent, although with the dearth of new products it’s a little hard to see any concrete results of this concern. Oe the evidence it’s hard to argue with Paul Volcker’s quip that the last useful innovation in banking was the ATM — apparently he didn’t think naked default swaps counted as useful. Other than Bank of America’s Keep the Change debit card program it is hard to think of much innovation in the field — nominations for financial innovation are welcome – enter them into the comment section below.
M&A is down the list, cited by only 3 percent. (In Wisconsin, where I recently did a story for Insight on Business, regional and community bankers expect a fair amount of M&A spurred by low interest rates, a challenging business environment and aging community bankers who want to sell and retire. But it might not start until 2014 because bankers have to face reality on the value of their banks, one banker told me.)
The Deloitte-Temenos survey found that banks were more worried about competition from large banks (22 percent) than small banks (4 percent globally although 9 percent in North America).
Banks are also worried about disintermediation in corporate banking and in private banking, and this is sharply different in Europe and North America. In Europe, 26 percent see a threat from direct access to capital markets where it is a concern of only 8 percent in North America. American corporations commonly use capital markets and commercial lending more than in Europe where corporates use bank loans more. Only 15 percent of North Americans are invested in bank deposits compared to 35 percent in Europe.
Supermarkets were seen as a threat by 11 percent, up from 7 percent last year.
“Given the ability of supermarkets to leverage their distribution channels and strong customer analytical capabilities to cross-sell financial services into their customer base, it is not surprising that the threat is felt most acutely by retail banks, 20% of whom regard supermarkets as their biggest competitor.”
Unlike banks which can only compete on money — usually interest rates, sometimes cash, not so much toasters any more — supermarkets could presumably tie banking transactions to their loyalty programs for discounts on food or add banking points to existing rewards. Supermarkets also benefit from repeated customer traffic, while banks struggle to find any reason that customers would want to enter a branch, especially customers under 50 years old.
The Temenos-Deloitte study expressed surprise that no corporate or private wealth bankers saw supermarkets as a threat “…potentially underestimating the possibility of supermarkets and other retailers to land and expand their services to SMEs and the mass affluent, especially if, as often speculated, more high-end retailers launch banking services.”
Now there’s a thought — invest through Whole Foods, or in the UK, Waitrose or its parent, the respected retailer John Lewis? Maybe Whole Foods could leverage its nickname of Whole Paycheck, although it seems a dubious marketing proposition. Walker said the profits in supermarket banking would have to come from SME lending where the stores could find their extensive customer data to be very valuable.
“It is a different world for them, and a hard step to take,” he said, suggesting they would appeal to sole traders, small businesses and independent workers like taxi drivers.
Although the study suggests branch innovation is strong, examples were rare. Walker mentioned some funky design and said that branches will still be needed to serve customers with complex needs, like mortgages.
And, he added, branches have some clout within banking organizations.
“There are empires built around the branch network and undoing those branch empires is non trivial.” Branches get little love from Brett King, a banking consultant and author of books about the digital economy
He says the growing use of mobile, especially among Gen Y, will require bankers to rethink their business model, he said. Forget the branch to reach Gen Y — they don’t want to set foot inside one and expect their bank to deliver services to them on their mobile devices, and mostly in real time.
“Gen Y will turn to mobile banking first; you don’t have five or 10 years to get it right,” he added. “This is happening right now. It is the fastest growing segment in retail banking and payments today.”
By 2016 the average retail banking customer will have 300 digital interactions for every one in the branch, he added.
Mobile payments development takes 23 percent of bank IT budgets in North America and Asia Pacific, although only 12 percent in Europe, “suggesting that many banks in the region remain somewhat apathetic about the risk posed by mobile payment providers.”
Banks have been relatively relaxed about the competition in mobile payments, said Ben Robinson, director of strategy, communications and marketing at Temenos, because they figured they would still get fees.
“Now they are waking up to the idea that this is a tipping point where the payment providers have so much customer data they can recommend services and products.”
“While mobile payments is not a new phenomenon, volumes are growing fast (Gartner, for instance, predicts 44 percent growth in 2013).”