Retail banking: underwriting the revolution

The rise of the Web, mobile technology and social media often hit the headlines as being harbingers of bullying and of falling teenage attention spans, but these technologies are revolutionising society. Within that revolution, the technologies are changing the way many consumer-facing businesses operate.

This change has already affected the retailing world, as evidenced by the past decade of online retailing. But so far the world of retail banking has been largely unaffected. That is all changing, finally, driven by changing consumer habits and the rise of the ‘always-on’ shopper.

“The notion of retail banking is changing because the way consumers look at financial services is no longer centred on visiting a branch,” says Chris Pickles, head of industry initiatives, global banking and financial markets at UK teleco BT. “Mostly, people under the age of 60 are not looking to visit bank branches. Also they are looking to interact with other brands outside of banks to do lots of things: the future of retail banking could well centre on banks working behind service providers with whom consumers interact.”

Pickles believes that the likes of Apple, Google, PayPal and other brands that attract consumers are in a prime position to create communities that can then be offered banking services alongside the other services they offer. These will be the brands with which consumers will interact.

And indeed, non-traditional players are already affecting the banking industry. Currently there are three broad types of non-traditional player in retail banking. First, retailers and brands are starting to leverage their customer relationships. US retailer Wal-mart is a great example. It has opened a bank in Mexico and is looking to expand this into the US. In the UK, supermarkets Sainsbury’s and Tesco also now run banking services, attempting to link together customer loyalty, payments and banking.

Second, there is a raft of up and coming innovators such as PayPal, Amex, The Lending Club and Stripe, Square and even Paddle. All of these companies are very innovative and are looking to take a slice of the transaction market.

Finally, there are the companies that are really reshaping how people think about banking, the best example being coffee chain Starbucks. In the first quarter of 2013 $1billion was deposited on its pre-pay loyalty card. That’s $1billion that would normally have been in bank accounts. And no one is going to put money on to something like that unless they really trust the brand. This is the kind of initiative that is reshaping the retail banking industry; brands outside banking that consumers trust enough to hand over money to and to use.

“Only time will tell how successful they will be, but they do create brand loyalty and trust,” explains Rick Woodham, head FSG BSG Group, Asia J&K at financial technology provider FIS. “Personally I believe that most of these companies will become front end players that consumers use to manage their bank accounts to make payments. People really trust their banks. They know that essentially banks have the security and set up to make it as secure as possible and that their money is safe.”

BT’s Pickles agrees: “Trust is the key and trust management is crucial and this, along with the developing discipline of identity management, is something that banks are very good at.”

But these new players and new technologies are going to have a far reaching impact on banking as we know it, believe both Pickles and Woodham. “The influence these new players will have on banking is that it will focus banks on customer service, interaction and experience,” says Woodham. “What PayPal and Starbucks have done successfully is offer a great and simple customer experience. Banks traditionally have been very rigid in their services and systems and customer experience has perhaps suffered. Banks now realise that they have to improve how they interact and service their customers and this entails going omni-channel.”

It is hard to read anything about retail without having to understand the idea of ‘omni-channel’ and this is one of the fundamental shifts in consumer habits that is changing retail banking. Omni-channel is not about ‘anytime anyplace’ it is about understanding customer intent and it is not a one size fits all offering; retailers have to tailor channel experience to the customers.

“You need to be able to offer the customer the channels and services they want. Amazon has been extremely successful because it offers the users what they want, where they want, across platforms,” says Woodham. “It’s not about whizz-bang technology but about looking at the customer as the channel.”

One of the key technologies that is creating the consumer hunger for an omni-channel approach – and one of the key technologies that make it possible – is of course mobile.

According to research by ING, more than one third (37 per cent) of almost 12,000 internet users surveyed in 12 European countries are already using mobile banking. Many of them credit the technology with providing more control over their money.

“People who use mobile banking feel more in control of their money,” says ING senior economist Ian Bright, lead author of the ING report. “Most of them say they pay their bills on time more often and are overdrawn less often. This is perhaps because 84 per cent of mobile banking users check their balances more regularly since using mobile banking.”

But this is just the tip of the iceberg for mobile. Where mobile really fits in to the modern world of banking lies in banks using it more assiduously to offer a much more segmented customer experience and advanced digital wallets.

According to a study in the US by IT consulting firm Cognizant and mobile banking and payments services company Monitise, consumers are increasingly expecting banks to help improve their mobile lifestyles by providing anytime, anywhere capabilities, customised user experiences, shopping and social features and value-added services. This, the study states, represents a new opportunity for retail banks to drive customer loyalty, attract new business and generate more revenue.

“Amid the growing proliferation of digital channels and rapidly evolving consumer behaviour, retail banks can no longer afford to adopt a one size fits all approach in devising and enhancing their mobile strategies,” says Vin Malhotra, consulting partner for banking and financial services with Cognizant Business Consulting (CBC), Cognizant’s consulting practice. “Providing innovative and personalised mobile services based on consumer segmentation will enable banks to not only run better by maximising their investments, but also run differently by strengthening customer engagement and driving greater adoption of mobile banking for competitive differentiation.”

Lisa Stanton, president of Americas at Monitise adds: “Smartphones and tablets are quickly becoming the main contact point between consumers and financial institutions. Integrating value-added services such as mobile payments directly into a bank’s mobile application doesn’t just build customer loyalty, but it also grows revenue and fights the growing threat of disintermediation.”

But mobile isn’t the only game in town when it comes to the technological shake-up of retail banking. Often, changes can come from looking at how to adapt existing technology to do other activities to meet the demands of consumers.

Contactless payments has the potential to make a profound impact on banking, either through near field communication in mobile phones, but more likely just through cards.

“Paying for goods and services is strongly governed by consumer habit, but when banks work on technology that provides convenience and added value to means of payment, behaviour can change rapidly,” says Miguel Angel Pozuelo, head of new product and service development, CaixaBank. “In Spain, this has been amply demonstrated by the progress that has been achieved by boosting innovation on new payment methods.”

According to Pozuelo: “Contactless technology is a prime example of how technology can make things easier for merchants and customers, as it combines two key benefits: efficiency and security. Contactless is considered the fastest card payment system available and it is useful for all kinds of payments. As a result, contactless payment technology is swiftly catching up with the use of physical cash in Spain, edging out notes and coins where they might have been used to pay for smaller items. Both merchants and consumers have come to realise the tangible difference that it can make to the efficiency and revenues of their business.”

This process of rethinking how existing technology can be repurposed to meet the demands of the omni-channel consumer is also extending to some unexpected areas too.

“Banks still have much to learn: they have a vast amount of technology already in place and a huge amount of information about customers that they aren’t leveraging,” says FIS’ Woodham. “For example ATMs don’t tell you anything. They could give you a much more personal experience and allow you to do a lot more. I think one of the greatest banking innovations of recent times doesn’t involve the Web or mobile, but ATMs. In Japan you can now use an ATM to apply for a loan, get the loan approved and take out the money. This is clever, customer centric use of existing technology.”

So where does this all leave banks: are they slowly being cut out of the loop? Will the future of banking be something centred on technology brands such as Apple and Google, Vodafone and Amazon?

There is one big barrier to new entrants ‘taking over’ retail banking: underwriting. In the world of payments, all transactions need to be underwritten and guaranteed, says Shane Fitzpatrick, president and managing director at Chase Paymentech Europe. Any new entrants who want to offer mobile payments without a bank will need to be able to underwrite what they offer – and that is hard to do, he believes. This is why most payment services offered by ‘new entrants’ will be just a front-end for banking services.

Woodham agrees: “It’s not a bank or no-bank option, really it is about partnering. Banks are likely to get pushed into the background a bit. They will end up handling the mundane parts of consumer banking behind these brand front-ends. Many banks recognise that and are looking more now at how they take what they do and use Google to get it out there. Banks and brands now have to work together to develop the right services for the customer. That is the biggest change of all.”