BCG – Retail Banks Need to Become More Bionic

New Report by The Boston Consulting Group says Institutions Must Efficiently and Effectively Fuse Digital Technology with Personalized Human Interaction to Raise Service Levels, Profitability, and Competitiveness,

Despite concerted efforts to stabilize performance in the decade following the financial crisis, retail banks are still plagued by long process times, inconsistent online and offline capabilities, and generic customer propositions that will require bold action to transform, according to a new report by The Boston Consulting Group (BCG). The report, Global Retail Banking 2017: Accelerating Bionic Transformation was released back in July.

This annual study by BCG, drawing on extensive research that includes findings from the firm’s Retail Banking Excellence (REBEX) benchmarking of institutions worldwide, as well as from a comprehensive survey of retail banking customers, outlines the current state of the industry. The report also details the steps that retail banks must take in order to accelerate bionic transformation and build more prosperous futures. According to the report, a bionic transformation has the potential to generate a 30% increase in net operating profit by 2020 for retail banks.

“A bionic transformation essentially consists of three interrelated elements,” said Ian Walsh, a BCG senior partner, the leader of the firm’s global retail banking segment, and a coauthor of the report. “First is the blending of digital and personal interactions to create a more responsive and cost-effective distribution model; second is the articulation of a value proposition that combines human judgment with data power; and third is the adoption of a customer journey mindset, with end-to-end processes that are supported by robotics and machine learning. Banks must combine all three in order to blaze a positive path forward.”

State of the Retail Banking Industry 
According to the report, retail banking remains an essential part of the financial services industry, representing 45% of all banking revenues. Moreover, a stabilizing macroeconomic environment has put global retail banking revenues on track to expand at a compound annual growth rate (CAGR) of 4.6% between 2016 and 2020, a rate nearly 2 percentage points higher than before the crisis. Yet a closer look at regional performances reveals a more nuanced growth picture. In the Middle East, Africa, and Latin America, BCG expects retail banks to post a five-year revenue CAGR of 9% to 10% from 2016 through 2020, with Asia-Pacific banks projected to post about 6% and Central and Eastern European banks expected to achieve 5%. By contrast, the United States and Western Europe are projected to post CAGRs of roughly 2.5% over the same period.  In terms of products, savings offerings are expected to account for 30% of global revenue growth, compared with 20% from 2010 through 2015. The report adds that the gap between top-performing banks and the rest of the field is widening. BCG’s REBEX benchmarking shows that the cost-to-income ratio for top-quartile banks is 38% lower than for bottom-quartile players, and operating profit per customer is more than 136% higher, with most of the differential stemming from traditional cost-saving moves such as trimming head count and closing branches.

Blending Digital and Personal Interactions to Reshape Distribution 
The report says that one of the most important challenges in the move toward bionic distribution is reforming the branch network, which accounts for roughly 30% of total operating costs. Instead of a uniform branch model, banks need to create multiple branch formats, embedded within a well-rounded multichannel experience. Banks can also use data-enabled location models to forecast expected changes in customer behavior, product mix, and profitability in order to optimize their footprint, serve more customers per branch, and achieve higher margins. BCG says banks that move to this type of bionic network can see revenue gains of 5% to 15%, network cost reductions of 15% to 35%, and increases in customer satisfaction of 10% to 15%.

Value Propositions That Combine Human Judgment with Data Power  
According to the report, retail banking customers expect high-quality, easy-to-understand products at a fair price from a bank that knows and understands them. But accustomed to the ease and immediacy of digital channels, they also expect a high degree of personalization, differentiation, and localization from their retail banking providers across online and offline channels. To meet that demand, banks need to ratchet up product and service innovation and enrich the quality of banking interactions. In the near term, more-effective, value-based pricing practices could allow banks to add as much as 15% in revenue over 6 to 12 months—money that goes directly to the bottom line and can help fund the rest of the bank’s strategic agenda—while at the same time improving customer impact.

Adopting a Customer Journey Mindset
BCG says that retail banks need to approach process design in a fundamentally different way, identifying the customer journeys that matter most and redesigning them end to end, as well as leveraging artificial intelligence, robotics, and other service enablers to improve both speed and decision making. BCG data shows that retail banks that digitize their most important customer journeys can see a 5% to 20% boost in revenues from improved service, increased relationship manager (RM) capacity, and enhanced data-enabled offerings. They can also reduce costs by 10% to 25% through improved processing times, automation, and faster and more-accurate decision making.

“The starting point for each institution will vary depending on its specific business strategy, market position, and capabilities,” said BCG’s Ian Walsh. “But taking a wait-and-see approach is no longer an option. Retail banks need to act now.”