Reinventing retail banking


April 2017

The question about digital’s impact on industries no longer needs to be debated. Without doubt, digital is one of the few top-line growth tools executives still have in their arsenals. The exponential rise of companies such as Airbnb, Spotify, Netflix, Uber, and Alibaba demonstrates how, when done right, digital redefines business models and entire industries. When digital hits, it hits fast.

This is also true for retail banking, which has seen unprecedented developments in recent years. The rise of fintech, ever-changing consumer demands, and tougher regulatory requirements have all contributed to reshaping a centuries-old product-led industry in fewer than five years. The opportunities from more than 4,500 fintech companies are reinforced by venture capital investments in financial services that have driven their growth—rising from $4.1 billion in 2012 to an unprecedented $27 billion by 2016. New technologies combined with greater adoption of smartphones, growth of banking by Millennials, and lost trust in big banks in the wake of the global financial crisis have all boosted the demand for new solutions and alternative ways of banking. In addition, consumers have become less loyal, and the market has become more competitive.

For retail banks, the days of contemplation are over. All banks are driving digital; however, not all digital efforts are creating sustainable value. We believe banks that can embed digital into the core of their corporate strategies while keeping customers as the focal point for the whole bank could achieve a double-digit revenue uplift, 20-30 percent cost reduction, and a double-digit return on equity (ROE) in mature markets.

However, there is more to it than ROE: brand equity, customer advocacy, and competitive differentiation are a few significant benefits that come with digital. Every major bank is now working with external firms and fintechs—with varying levels of success—to expand their capabilities through collaboration. But truth be told, the needle has barely moved in terms of commercial returns on digital or new behaviors around customers. Even with serious investments in digital since 2011, ROEs for major retail banks have stagnated at a single-digit figure.

Why are most banks struggling to capture commercial value from digital? How should they undertake a digital transformation that will create sustainable value? The bigger question: can legacy retail banking institutions reinvent themselves to become truly digital?

In this paper, based on a joint study undertaken by Efma and A.T. Kearney, we combine the study’s findings and interviews with our point of view about how banks can reinvent themselves and embrace digital to create commercial value.

Keywords : Operational excellence/Cost efficiency