Building the retail bank of the future

Dirk Vater, co-author of the study, speaking on digital change in the financial business. This interview was broadcast on SRF (Swiss Radio and Television, www.srf.ch).

Please note: This study is also available in English. Visit www.bain.com for more details.

Retail banking has already become a digital business, spurred by the rapid spread of broadband access and affordable smart mobile devices. Globally, an average of more than half of consumers’ banking interactions took place through online or mobile channels, with an even greater share in digitally advanced markets like the Nordic countries and Australia, according to Bain & Company’s 2013 customer survey, executed through Research Now. Add the use of ATMs, which increasingly connect to the Internet, and the share of digital interactions exceeds 85% for the most advanced countries today and is heading to more than 95% in the near future.

Yet many banks are still in the early stages, with a long way to go. Fewer than half of consumers in developing countries and just over a third of those in developed countries used smartphones or tablets for their banking. That’s not for lack of trying, as consumers expect to be able to use the channel of their choice when and where it suits them, as they already do in music retailing, consumer electronics, airlines and hotels.

To date, many banks have focused their digital investments on improving their ability to do simple transactions through online or mobile channels, thereby reducing brick-and-mortar branch costs. They haven’t devoted as much attention to making customers’ banking lives more convenient, easy and engaging, by creating a differentiated customer experience featuring truly innovative, useful digital applications and a seamless integration of all channels. Customers often cite certain digital interactions as “wow” experiences that exceed their expectations—moments like remote deposit capture, remote bill pay or even well-delivered basic transactions through a mobile app. Winning in the digital realm, therefore, is critical for improving the overall customer experience.

Lagging banks should be concerned, because digital usage correlates closely with customers’ loyalty. Mobile banking users, for instance, give a higher Net Promoter Score® (NPS®), a key measure of loyalty, than people who don’t use mobile devices— on average, 25 points higher. And the payoff: Loyalty has a powerful influence on a bank’s economics, because customers who become promoters stay longer with their primary bank, buy more products, often cost less to serve and recommend the bank to other people.

Digital usage will increase over the next few years, according to our survey, but digital channels will not fully replace physical channels. Branches, for example, will not disappear, but their role will change: Branch networks in many countries are organizing around “hub” flagship branches that serve as showrooms for complex product sales and venues for providing expert advice. These hubs are surrounded by “spoke” branches with a smaller footprint and limited functionality, supplemented by video call center technology that links customers with experts in a flagship branch or a call center. In-person sales and service interactions continue to appeal to consumers with more complex needs, while follow-up communications and ongoing relationship management can be done remotely through video calls or email.

Some leading banks have begun to marry digital and physical assets into a hybrid combination that customers now demand—what we call a Digical^SM transformation. These banks are fundamentally transforming their core business—including offerings, channels, technology infrastructure and organization—funded by aggressively decommissioning legacy costs and systems.

The Digical transformation often starts with moving current functionalities online to make banking more convenient. The most forward-looking banks have gone farther to reinvent the customer experience and provide new ways to engage and add value to customers, sometimes partnering with technology start-ups to accelerate innovation and create new propositions.

This brief focuses on the Digical transformation. In a future brief, we will discuss the discipline of corporate venturing to support new propositions and, more broadly, explore the reinvention of the industry. Both briefs are informed by Bain’s extensive work with banks worldwide; our annual global survey about loyalty in banking, which looks at customers’ banking behaviors and their perceptions of their providers; and our Retail Bank of the Future benchmarking panel of 78 major banks around the world.