Banking: Service innovation is up!

Do you trust your bank? According to Capgemini’s 2012 World Retail Banking report, most people don’t: Twice as many customers around the globe (31%) say they have little or no trust in the banking system, compared to the 15.3% who say that they do. Yet, satisfaction is quite high – despite the fact that banks are struggling to cut cost and optimise earnings following the financial crisis.

Banks are rapidly cutting expenses. And, as The Economist points out, there’s a huge opportunity for this in closing branches. Renting, equipping and staffing branches can easily account for 40-60% of any big retail bank’s total operating costs, with computer systems making up most of the rest. So, we won’t be too surprised to witness the digital channels becoming more and more crowded as more and more banks seek to leverage the obvious operating savings.

In fact, Accenture’s 2011 report Boosting Relevance and Returns: Improving the Digital Channel in Banking quotes a Forrester forecast that predicts spending on the digital channel to rise from 12 percent in 2009 to 21 percent in 2014 (as a percentage of overall ad spending).

Branch revenues are falling, while online revenues are increasing and will continue to grow. So banks are increasingly pushing turnover through the digital channels because that’s where the customers are. Focus is on finding the optimal balance between (digital) channels with self-service capabilities for day-to-day financial transactions, and advisory-based channels (such as the branches) for more complex client needs.

Global Distribution of Sales Volume by Channels (%), 2000–2010E

Global Distribution of Sales Volume by Channels (%), 2000–2010E

Service innovation

For banks to pull forward, digital service innovation would seem like a plausible road to take? After all, their regular differentiation levers – low prices and innovative products have outplayed their roles: Prices are already challenging margins due to competition, regulation and new capital standards, and as banks increasingly market similar products, this commoditized market has limiting product innovation impact (cf. 2011 World Retail Banking Report).

As Forrester has pointed out, although uptake of money management tools is relatively low in Europe, one-third of online Europeans are interested in tools that will give them more insight into their spending.

Many Europeans are interested in money management tools, according to Forrester.

Many Europeans are interested in money management tools, according to Forrester.

Many of these services are already in the market. They’re just not offered by the traditional banks, but put to market by new, agile players with less resistance to innovation. Examples like Mint (organizing spending), Movenbank (social based CREDscore), and Fidor Bank (global-local, social, mobile banking concept) spring to mind.

Interestingly, in the 2011 World Retail Banking Report, Capgemini found that of the six most important factors affecting why customers leave a bank, only two were tied to economical considerations, the remaining four were all about customer experience. And the same goes for the reasons affecting why customers choose a bank.

The 6 top reasons that affect why customers leave a bank.

The 6 top reasons that affect why customers leave a bank.

This pattern has changed only slightly in the 12 months between the 2011 and the 2012 World Retail Banking report, with Fees and Interest rates moving up to 2nd and 3rd place respectively, but the overall picture remains the same: There is a huge upside for creating great customer experiences for banks!

“Positive customer experiences generate loyalty, but few banks consistently deliver them. Less than 50% of customers are having positive experiences through most channels today. Banks need to work harder to ‘wow’ customers as a way to strengthen relationships, as well as to improve loyalty and profitability.”

Digital channels are preferred for by customers for most banking activities: Information, service and day-to-day account history. But when complexity increases, branches are (still) preferred.

The branch is the preferred channel for purchasing complex financial products

The branch is the preferred channel for purchasing complex financial products

The key challenge for banks is to enhance the service in the digital channels. To lead customers towards the digital – not only for simple day-to-day transactions, but also for those high-profits interactions including advice and mortgages.

If traditional banks aren’t moving soon, other players will. They already have, and may well end up owning the relation to the customer.

What do you think? Can digital compete with branches? How can banks strengthen advice through the digital channels?

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