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How regulation, client expectations and technology are transforming retail banking

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The future of Retail Banking - Special report

The Economist Intelligence Unit, on behalf of Temenos, surveyed 242 global banking executives to investigate the views of retail banks on the challenges and changes they face in the years to 2020 and how they are responding. 

Respondents were C-suite or board level and senior executives, drawn from across the world. With 13 of the respondents, the EIU carried out in-depth interviews, some global, some regional, some small and tightly focused banks. 

The results have been brought together in a thought provoking paper which captures the issues facing retail banks around the world, from their own unique perspective. 

The paper explores the major changes that need to happen such as regulatory changes – at the forefront of most retail banks’ imminent plans, along with the reality of Return on Equity and the effort to increase customer service and invest in technology at the same time as increase RoE. 

  • What do 70% of respondents agree is the best way to boost revenues?
  • How are banks responding to regulatory change?
  • What are the priorities for digital investment?
  • Are banks worried about competition?
  • What is the future of the branch?

Find out the answers to these questions and more in a unique research paper that captures the issues facing retail banks around the world from their own unique perspective.


 

Executive Summary

Regulation will be at the forefront of the minds of many executives at global retail banks in the years to 2020. Banks must implement key structural changes, such as ring-fencing retail and business deposit-taking from other, riskier parts of their businesses, particularly investment banking. 

At the same time, they face seismic shifts in customer demands and expectations. Modern, post-crisis retail banking customers are more aware of financial products and choice, and more dubious that their own banks always work in their best interests. That requires greater attention to detail and changes to sales practices—simpler, more transparent products and a less conflicted sales channel.

The digital age is turning banking on its head. Investors want to apply for savings, investment and loan products online or via smartphones and tablets, at a time that suits them, not just during working hours. They also expect transactional processes—cheque clearing, direct debits and standing orders, as well as online payments to electronic retailers—to be easy, real-time and low-cost or free of charge. 

Getting there will require innovation and significant investment in architecture and systems, something that many banks can ill afford right now as they rebuild their capital bases. However, those that do not keep up with “new” banking may lose out to new competitors, both banks and non-traditional players. 

In this environment, The Economist Intelligence Unit surveyed 242 senior executives at retail banks around the world to learn how they are adapting to regulatory, customer and technology changes. The key findings of the research are as follows.

  • Regulation is the priority. About half of survey respondents (51%) say regulation will have the biggest impact on their industry in the years to 2020. That feeling is more acute in Europe, but less so in North America - despite the complexity of new US rules.
  • Clients and technology converge. Customers’ expectations are rising, particularly in Europe. Banks are having to adapt to enhance customer engagement. But unlike Google, Amazon or Facebook, which have built global businesses on data-mining their users, banks are using digital channels and technology for different purposes. Digital investment is about attracting new customers (31%), with customer insight far less important (11%). Attrition reduction (not losing customers) is the trailing priority (8%) for technology. 
  • Operational changes are underway. According to two-thirds of respondents, banks are implementing significant operational changes solely in response to new regulation. Contrary to many perceptions, the need to change is being felt more heavily by bigger banks (those with revenue over US$500m, 70%) than by their smaller competitors (those with revenue under US$500m, 63%). C-suite executives seem less aware of the need for change than their non-C-suite employees (C-suite, 62%; non-C-suite, 70%).
  • A new plan is needed for branch networks. Management priorities are changing. Improving customer segmentation and considering its impact on product design and distribution are cited as most important by 41% of respondents. Banks need to rethink what all those expensive branch networks are for, even though 38% say they have increased the size of their networks of late. Just 18% of respondents think that simplifying their businesses might help in the years ahead.
  • Retail revenue remains squeezed. Retail and small and medium-sized enterprise (SME) banking, the bread-and-butter activities that regulators and politicians want to protect, will still be the biggest source of revenue in 2020, but on a reduced scale, falling to 45% as primary source from 61% today. Regulators may think that new rules will lead to smaller corporate and institutional banking units; however, about one-third (32%) of retail bankers expect it to be their primary source of revenue by 2020, up from 23% today. Wealth and asset management shows promise as well, with 17% of respondents citing this as the future primary revenue source (from currently 14%).
  • Unexpected competition? Regulators and governments are keen to foster competition. Yet rare is the banking start-up that has taken on and beaten the incumbents. Competition is more likely to come from non-financials (46%), such as retailers and telecommunications companies, than from shiny new banks (28%). And despite their disruptive potential, “payment players”, such as PayPal, are seen as a lesser source of future competitive pressure (22%).
  • Banking is not charity. Almost half (45%) of respondents say their return on equity (RoE) has not recovered to pre-financial crisis levels; only 21% say it is higher. Around 4% of respondents say their current RoE is zero or below, with a similar number reporting RoE above 20%. The top way to improve returns is to improve customer service to boost revenue or to cut costs, selected by 70% and 69% of respondents respectively. All that operational change should be worth it, however. Most respondents expect their RoE to rise.

 

About this report

In December 2013 and January 2014 The Economist Intelligence Unit, on behalf of Temenos, surveyed 242 global banking executives to investigate the views of retail banks on the challenges and changes they face in the years to 2020 and how they are responding.

Respondents were drawn from across the world, with 76 from Asia-Pacific, 91 from Europe, 66 from North America and nine from the rest of the world. Of these, 95 are from banks with annual revenue of less than US$500m; 45 from banks with US$500m-1bn; 44 from banks with US$1bn-5bn; and 50 from banks with revenue of US$5bn and more. All are senior, with 100 at C-suite or board level and the remainder senior executives. 

In addition, in-depth interviews were conducted... 

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