In the face of competitive and regulatory pressures, retail banks will need to make critical strategic decisions about their future. Gary Turner, a partner with Bain’s Financial Services practice, discusses five strategic options that banks have and how to choose among those options. Self-assessment can help executives make the right choice, based on their organization's strengths.
Read the Bain Brief: Retail Banks—Manage for Glory or Cash?
Read the transcript below.
GARY TURNER: Retail banks are facing a critical set of decisions over the course of the next decade. They're at an unprecedented point in their evolution. We're all very familiar with the competitive and regulatory pressures that they're facing, but the impact of technology, and the compounding of these pressures, is quite significant. They're going to have to make some very serious choices about where to play and how to win going forward in order to deal with these challenges to their business models and, ultimately, their strategies.
These technology pressures are really having an impact on the margins, all the way through to wholesale substitution and disruption. On the margin, we're all quite...knowledgeable around the fintechs. And at the last count, there are well over 3,500 fintechs around the world nibbling at the banks and participating in various elements of their activities.
They can migrate and become whole ecosystems that offer full-service propositions around segments, or products, or a particular need. They can also evolve into disintermediators of the banks, where they separate the customer from the bank itself. And the relationship management actually resides with someone else. At that point, banks are left with the back-end processing operations and balance sheet management, if you like.
Finally, they could ultimately look to substitute banks in entirety. We've got some emerging examples—for example, in China, around Ant Financial, who, across the four fundamental needs of banking, have put together propositions outside of the regulated banking environment that meet customer needs extraordinarily well.
So how do banks respond to these challenges? We think there are five fundamental options that the banks really have. The first is to think about being a relationship-master—to understand deeply the customer requirements, to understand the experiences that they're looking for, and to own that space, acting on behalf of their customers with a digital and physical proposition—always one step ahead of where their customer's looking to be.
The second is to focus on being a back-end utility. If you are a large player with scale, and you have the fixed costs that you can leverage and amortize over many, many units of activity, then the opportunity to participate in this chain as a provider of services to companies that are playing at the customer-relationship end of the game is a very viable proposition.
The third one is to think about being a digital category killer. You could actually take a segment, a product, a group of channels, a geography and elect to play in entirety, end to end, around the digital space and offer a complete alternative proposition to a group of customers.
And the fourth—and most challenging, arguably—is to be a digital scale insurgent. What that really means is taking the entire business—transforming it, reinventing it, and essentially shortening the value chain between customers and capital—such that through better cycle times, lower costs, much more responsive activity, and indeed, a self-service proposition embedded with your own assistance to the customer, you offer a holistic option to customers in this environment.
And the final one is to think about managing for cash or exit. And that's probably one of the toughest ones in terms of a decision to make for a chief executive and their executive team. In this case, you're operating in an environment where you can cut back on capital expenditure. You can cut back on investment in brand. You can live behind a regulatory wall.
And for quite a few years, [you can] generate a significant amount of cash, providing a great yield for shareholders in the form of dividends, special dividend distributions, or even share buybacks. It's a very viable option. And for many organizations faced with the challenges that we're talking about, it could well be the value-maximizing strategy.
So how does a bank choose between those five options that are out there, in the face of this competitive pressure? Well, you can take the traditional view of the world, and look at the external marketplace, the competitive structure, the profit pools, and how they're evolving, and the rate of decline or otherwise. Probably the most difficult element—and arguably the most important—is to take a very honest [look at yourself] and assess your competitive position.
We think that's along four different levers. The first one is around the customer: How close are you to your customers? What degree of advocacy do you have among your customers? How supportive are they of you? What share of wallet do you have? If you have a relatively low advocacy level in the industry, then looking to be a relationship master is probably not a viable proposition.
The second thing to think about is your own omnichannel capabilities: Are you able to work seamlessly across physical and digital propositions? Can you make data work for you and your customers, to give them that experience that they're looking for?
The third lever we should we should consider is efficiency: Basically, do you have a cost-income ratio and a set of operations that are able to continuously drive down the experience curve and continually reduce that unit cost of provision?
And then, finally, you probably want to think about innovation: How innovative as an organization have you been in terms of offerings, in terms of customer service and in terms of being abreast of the latest developments? And in ensuring that you're delivering against those fundamental needs that customers have in a different way?
It's extremely unusual for a bank to be very good at all four of those. There's usually just one or two that an organization will spike on. And it's those spikes that'll determine the degrees of optionality that you've got, as you think about those five options for your organization in this environment.
Read the Bain Brief: Retail Banks—Manage for Glory or Cash?