By Chris de Wit*
A recent Ernst & Young conference asked a group of 250 senior consulting advisers what they wanted from their retail bank, the implications for their bank and how their bank might achieve these outcomes.
The key learning from this exercise is that despite the similar professional backgrounds of this group, very different expectations emerged.
• The ‘go getter’ wanted simplicity in their banking. Products must be simple, reliable and fast. Services that are transparent and do not create unwanted surprises when we rely on them.
• The ‘tech-lover’ wanted funky new methods of transacting and interacting through multiple mediums.
• The ‘dependent’ wanted step-by-step support throughout the various interactions.
• The ‘cost-conscious’ just wanted value for money.
All groups expressed a need for 24- hour access, were happy to consolidate their banking with one provider so long as their needs could be met and none was terribly interested in visiting their nearest branch. This exercise highlighted that consumers have different expectations of their bank.
Banks have historically built utility systems to deliver largely similar products and services to customers in the same way. The ’we’ve built, you use it’ philosophy will not meet different customer desires. The options for customer choice arising through the digital revolution are impacting all industries that interact with consumers and banking is not immune from this.
What does the digital revolution mean for banks and their customers?
For banks this has two primary impacts:
1. Enabling fast, efficient and relevant digital transacting methods.
2. Customer communication and interaction through a wider network of mediums and channels in a more meaningful way.
Digital transacting methods are specific to banking and present banks with considerable challenges and opportunities. We can see that consumption behaviours are changing with more day-to-day purchases occurring through digital media. The largest volume of transaction growth is occurring through virtual environments. Bank customers no longer need to physically present a card to a shop assistant who can use a black box on the counter to validate the customer and their ability to pay. Bank customers are appearing electronically and using similar devices to transact.
How effective are these traditional devices in a virtual world where it is harder to authenticate who is transacting? IT security is becoming a huge issue, especially as the speed of transacting increases and becomes more real-time. Stolen card data is a significant potential problem as are virtual wallets and IDs. As consumers we do not want to know until something goes wrong. Inevitably we want to blame our banks but they also do not have full control as the transaction invariably originates from outside the bank, such as an online retailer.
It is no longer a case of banks backing the right horse in terms of services or products for the mass market. It’s about understanding customer needs and having the ability to tailor a broad range of products and services to meet these needs. This will require considerable technology, business models, people and cultural agility among banks.
For example, the services, transaction limits and use of data from within online banking packages will be different for each customer. Banks will need the capability to provide these variations for customer wanting it. Each of us could end up with different mobile or online banking packages. Banks will go through the same revolution as the airline industry with first ticket sales and, later, customer service. Banks however are more complex due to the multi product and multi channel variations.
Our New Zealand banks face challenges addressing this.
This sits with our five large banks (ANZ, ASB, BNZ, Kiwibank and Westpac) which are, in most cases, providing transactional support to smaller banks that access their facilities. They must make huge technology investments and embrace considerable cultural and operational changes. While banks examine their customers regularly, it is generally for specific purposes linked to managing the bank’s exposure to that customer.
As customers we probably accept this as prudent and acceptable. Few banks take the time to understand who we are and what that might mean in terms of the products and services we might want or need. As the above Ernst & Young exercise highlighted, some of us will feel uncomfortable with banks routinely intruding in our lives, whereas others would embrace it.
Take the issue of financial wellbeing. Some customers would welcome their banks coaching them on savings by monitoring spending behaviours. Others clearly would not want that.
As banks build new transacting methods they will need to consider consumer trends, disintermediation of legacy payment channels and methods and the probable short-life span of whatever they develop. Internet banking has in some parts of the world been replaced by mobile banking within a two-year timeframe as the customers preferred channel.
This has a significant impact on the investment profile for both channels. The uncertainty also creates enormous risk around any investment. The most effective way for banks to address this problem is to link customer insight, and product and service capability. The modularisation of bank services and products will provide a low-cost method for banks to vary services based on customer requirements – and ultimately an effective method for charging the customer for specific service.
This already happens in the insurance and airline industries where core products have several add-ons which come with a charge. Banks must organise themselves operationally and architecturally to achieve modularisation and provide this level of choice. There are several examples globally where payment providers, some of which are not banks, have invested in this capability already. The risk of niche operators entering the market increases as the digital revolution breaks down traditional barriers such as geography and distribution networks. However our banks are trusted, putting them in pole position to win this race.
The decision to not shut down payment methods such as cheques in this country will mean each new development in payments capability by banks will fragment payments and add cost to banks. While the industry has traditionally found ways to manage cost, such as joint cheque and EFTPOS processing, the thorny issue of transaction fees for customers will inevitably become an issue.
Banks must at some point start charging customers who use inefficient and costly transaction methods such as cheques and ATMs. Customers not using cheques, branches and ATMs are probably subsidising these services. Ultimately, we will all win from the reintroduction of transaction fees. If we want more control and want to interact in different ways, we must to be prepared to pay for this choice.
Customer insight and interaction
Digital transaction methods create an electronic record of what we did, where, with whom and at what time. This information will provide considerable opportunities to banks, customers and merchants. Banks will be in a position to provide fuller insight into our transactional behaviours and possibly our wider financial services needs and preferences such as insurance, investments and advice.
Banks need to develop their capability to use this information effectively. Customers can use it to better manage their financial wellbeing. Merchants can use it to better target products and services to specific customers. Customers need to decide from a privacy perspective how they want this information used and shared.
Why can’t we start and stop a banking relationship through the phone or internet, as we can for travel insurance? Is Skype acceptable for face-to-face interaction? What will the role of the branch be – and will this be different for each location? Will banks become more segment-focused rather than trying to be all things to everyone?
Banks are not the only organisations facing this particular challenge. Why can’t we connect and disconnect our power through the internet?
This year will see another year of change and more pressure on the way consumers, regulators, banks and merchants look at traditional banking services and products. New Zealand is fortunate to have strong banks which have shown the capability and courage in the past to innovate.
Our EFTPOS system has been the envy of the developed world. This low-cost model was embraced by banks, merchants and customers. Making such bold steps today is more difficult due to the role of regulation but not impossible. 2013 will see banks move closer towards major technology architecture decisions that will open the way to modularised products and services.
Banks are also likely to consider more closely what it means to be customer centric. They will start asking questions about the relevant information sets and how they can be used to tailor services. While 2013 may not see transformational change, many banks are moving to make this possible. We need to start thinking about what kind of customer we want to be, what that means for our bank and the way we think about our bank.
*Chris de Wit is a partner at Ernst & Young who leads the firm's financial services advisory team.