Retail Banking. From Generation Z to Baby Boomers. Driving Loyalty and Innovation to Maintain Long Term Commercial Advantage

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1 Retail Banking From Generation Z to Baby Boomers Driving Loyalty and Innovation to Maintain Long Term Commercial Advantage

2 Introduction In 2016, retail banks are facing up to their biggest challenge. A combination of new market disrupters, increased regulation and the continuing pace of technology change is set to transform the industry, shifting power firmly to the consumer. Many commentators argue that customers adoption of technology creates a clear opportunity for new digital only challengers to enter the market, with a reduced need for personal interaction with customers through channels such as the branch and contact centres. However, a consumer survey Egremont Group recently undertook with YouGov shows this won t be so straightforward. The online survey highlighted that banks continue to benefit from a high level of customer loyalty across every age group and that there is still a demand for personal interaction with their bank, not just through technology platforms. This was particularly the case with the group, presenting more of a challenge than predicted not just for digital disrupters entering the market but also with established players looking to win new customers from their competitors. Banks should build a specific strategy to target this lucratively long-term age group. Our research shows that young people value the assurance provided by face-to-face interaction with their bank when applying for new financial products such as mortgages or loans. Providing customers with correct guidance and service will be vital to attracting customers at all ages and securing high levels of loyalty in a crowded market. With customer demand for personal interaction with their bank remaining high, it may be more of a challenge than predicted for digital disrupters to enter the market This report argues that with customers still seeking personal interaction, the role of the branch and the contact centre remain important facets of the omnichannel journey. In a recent presentation to Chatham House, Antony Jenkins, the former CEO at Barclays, suggested the banking industry may be facing its Uber moment. Jenkins cautioned that to achieve this scale of transformation, banks first need to be 10 times better at customer service. Our report supports this view. With the potential market disruption only escalating in the coming year with the launch of a number of digital disrupters, banks can no longer take their customers for granted. Instead they will need to drive innovation and clearly articulate its benefits to consumers. Customer centricity is essential. Jenkins argues the retail banking landscape will be transformed over the next 10 years. Technology is seen as the change enabler, but it won t win the battle for customers on its own. Technology should be seen as part of the solution, not the whole. To maintain strong consumer loyalty, banks need to develop a deeper understanding of customer wants and needs, the products they seek, and how they d like to interact across each step of the omnichannel journey. Banks should respond with relevant and innovative solutions that have genuine benefit for the customer. In this report we consider how, in an age of dramatic market disruption, banks should not be afraid of risk; instead they should recognise the need for change and approach it in an entrepreneurial manner to find new ways of engaging with customers in a manner that is positive for both sides. Customers wish to engage at a time and manner of their choosing. It is essential that banks have in place a strategy for each stage of the omnichannel plan that clearly articulates how it will innovatively deliver for each customer demographic. Approached in the right way such change represents an opportunity to drive loyalty and deliver sustainable benefits for both the banks and consumer. In a world of innovation and change, customers expect the same from their bank. In the midst of such transformation, banks cannot afford to be off the pace. We would welcome the opportunity to discuss this with you further.

3 Bank of Scotland Barclays Co-operative Bank first direct Halifax HSBC Lloyds Nationwide NatWest RBS Santander TSB Customers Remain Loyal For Now Technology has handed power to the consumer, news headlines frequently report how banks are culling their estates and regulatory changes have in theory made it easier for customers to move current accounts from one bank to another and benefit from fairer outcomes. The rise of market challengers poses a real threat to the established players dominance on the high street alongside a more informed customer Yet banks still benefit from high levels of customer loyalty, with 81% of current account holders in our survey saying they trust their bank. This doesn t vary greatly by age group: possibly suggesting that many customers remain loyal due to a perception that it is too complicated, time-consuming and risky to switch to another provider. In the face of such loyalty, both established banks and market challengers need to build strategies that clearly articulate points of brand differentiation. When the Customer Account Switch Service came into effect, whilst it did not have the impact that many predicted, it was those banks who embraced new product innovation that secured the highest number of new customers Fig 1: Customer Trust in Banks Yet the multi-factored change impacting the industry means that established banks can no longer take their customers for granted. Evidence of the impact of digital transformation on other consumer-facing industries suggests that retail banks will soon reach a digital tipping point which will have an unprecedented impact. To compete for both existing and new customers, banks need to be bold and visionary; driving customer-centric digital innovation and articulating their benefits to build consumer adoption. The norm is no longer a viable approach. Fig 2: Customer Trust in their Individual Bank Provider Digital Technology: Consumer Adoption of Mobile & Online Digital technology has increased customers expectations of a seamless journey across the omnichannel. Results from our online survey point to the ease and speed of digital access being one of the qualities valued most in their bank. 31% of customers rate ease of online access as the quality they value most in their bank provider Mobile access is a must have and an increasingly popular channel for consumers to access their account, with a report from Caci highlighting that customers checked their current account on their mobiles around 900 million times in 2015, while another report from the British Banking Association (BBA) forecasts that customers will use their mobile to manage their current account 2.3 billion times by 2020 more than desktop access, branch and telephone banking put together. Our research suggests that while customers may be comfortable with digital technology in general they are less confident when making decisions on their personal finance. The impact on mobile use is that Banks need to be bold and visionary

4 they will likely use this platform to service their account and frequently make basic transactions, but are reticent about using it for other purposes such as applying for additional financial products. Just 28% of respondents said they were likely to do so, and further analysis by age group shows that younger customers are even less likely to apply for financial products via their mobile, with 62% saying they would be unlikely to do so. 62% of year olds with a current account are unlikely to use mobile banking to apply for other financial products Unlikely Likely Banks therefore need to maintain investment to ensure customers are happy to use mobile banking for more specific financial products. Fig 3: Likelihood of using mobile when applying for financial products Advances in digital technology and capabilities build customer expectations for a seamless journey at every touchpoint. There are four key ways in which digital technology and capabilities can be used to create customer and business value: + Increases connectivity with customers, employees and suppliers + Draws on big data and advanced analytics to extend and refine decision making + Enables straight-through processing: automating and digitising a number of repetitive, low-value and low-risk processes + Provides a means of fostering innovation across products and business models The rise of omnichannel presents an opportunity for banks to expand and improve their relationship with customers, and build an ongoing dialogue. However this is only possible if the banks focus on traditional brand values and makes sure they understand their individual customers, their needs, and their preference for communication. Only then can it be a genuine point of brand differentiation. For example banks have placed much resource on social media and digital marketing in recent years but they should now review how effective this is in communicating with customers, and whether it is a credibly adopted channel. Without this focus on how to deliver the relationship for the benefit of the customer, banks instead risk merely imposing their brand on them, and placing the relationship in peril.

5 Personal Interaction How comfortable are customers with a bank that has no physical presence or human interaction? For basic transactions, customers clearly welcome the speed, ease and efficiency of online banking. But for those issues which are deemed to be more significant by customers and where the consequences are greater they still seek more guidance and reassurance, and face-to-face contact remains an important multi-generational differentiator. Banks need to go further in defining the role of the physical channel within their omnichannel strategy to digitally enhance the customer experience. It goes without saying that young people (18-24 year olds) always want to embrace the latest technology and gadgets to aid a fast-paced lifestyle. Our research shows that while 28% of customers in this age group values most the ease of online access with their bank, they still require more traditional banking communications when discussing specific issues of greater significance, such as discussing mortgages and personal bank accounts. A large number of year olds still want the reassurance of face-to-face contact with their bank, with 55% preferring to seek face-to-face personal guidance on mortgages or loans, 37% for retirement and other investments, 54% to discuss their current accounts and 37% when applying for insurance. This could be influenced by a perception that mobiles are more difficult to navigate when applying for these products compared to the ease of transferring money. People delivered channels within the omnichannel journey retain significant importance for customers in the digital age. This presents a distinct challenge for digital disrupters looking to enter an already resilient market. Building a strategy to focus on the age group will have long term commercial benefit With customer loyalty potentially under increasing threat, our analysis shows that building a strategy to focus on the age group, where people may still be seeking reassurance and confidence when applying for different financial products and opening current accounts, will have long-term commercial benefit. The 55+ age group is also a lucrative area. Not only has their technology adoption been high - our online research shows that 32% of customers in this demographic rate ease of online access as the asset they value most about their bank, higher than year olds - they have both the highest level of trust in their bank at 85%, and customer service satisfaction at 82%. This is underlined by our research looking at emerging trends through to 2025 which shows the grey glide as an increasingly important and growing life-stage with significant purchasing power, and the complexity of need which requires a blend of channels to satisfy execution only interaction and personal advice Overall customer service across omnichannel Helpfulness of staff when visiting branch Fig 4: Customer Service

6 Branch of the Future Much is made of the demise of the branch but high street banks clearly still recognise their importance. Whilst a number are closing branches, they still hold sizable estates, and made significant investment on in-branch technology in Seeking to transform and digitise their physical distribution channel, banks are following the example of retail and investing in their estates to ensure they are reflective of the brand vision, bringing the offline and online worlds together. Training staff to ensure they have the right skillset to provide guidance and educate customers on new digital platforms should be a priority More than a quarter of the UK s branches have been revamped over the past three years. The likes of Nationwide, RBS, Barclays, Lloyds and Santander have all installed innovative new technology in their branches in the past 12 months, suggesting an ongoing commitment to bricks and mortar. A transaction performed digitally as opposed to via a teller will always be more cost effective. However our research shows that with so many respondents still valuing personal interactions with their bank, the role of the branch should not be discounted. Instead, banks should be reinventing the branch for the digital age, such as implementing touch and feel layout formats, and in turn training a different type of employee. Investing in training staff to ensure they have the right skillset to provide value added guidance and expertise to educate customers in new technology should be a priority to encourage longer term adoption. Banks need to digitise the employee, not just the branch, and ensure that they remain interesting places to work. Banks should follow the clear example of the retail industry, where branches are increasingly driven by engaging design layout to convey the personality of the brand, and continue to adopt innovative technology which allow for different age demographics. RBS will be developing this approach in In 2015 RBS was projected to have spent 420 million revamping its branches. It has recently launched 3 mobile apps via NatWest, including one which supports customers throughout the process of buying a house, and the complexities of a mortgage. Branch staff have been coaching customers in how to use the app and drive long term adoption. Nationwide s view is that closing large swathes of branches may encourage customers to look for a provider elsewhere. Their research showed that 89% of their customers value face-to-face interaction in a branch and 93% said they appreciate companies who maintain the option of face-to-face in an increasingly digital world. Responding to this, Nationwide has launched a range of innovative technology into its branches. In addition to in branch video conferencing to a contact centre, the bank has launched new selfservice ATMs across 500 of its 700 branches, to automate many of the tasks that previously have been undertaken at the counter. Nationwide recognises the need to empower the customer and is redesigning its branches, with staff on-hand to provide guidance. The bank has even changed staff uniform so that the team appears more approachable to customers.

7 61% of year olds who use in-branch banking when dealing with their bank face-to-face feel their provider often or always focuses on their needs. Egremont s research showed that, with years olds who use in-branch banking when dealing with their bank face-to-face, 60% feel their provider often or always focuses on their needs when doing so. 54% of customers in this age group would prefer to discuss bank accounts face-to-face, and 55% would prefer to discuss loans face-to-face. This suggests they want the reassurance of branch staff at an early stage of their banking journey, and at a time when they lack confidence, could be a sensible focus for a bank s retail strategy. This rises to 63% for the 55+ age range who use inbranch services. Even in such time of change the branch remains a critical facet of the omnichannel journey. 77% say their banks provide good customer service in branch Only 22% of respondents said they wouldn t prefer face-to-face interaction with their bank. This is underlined by customer research undertaken by TSB, which showed that 71% of its customers use online banking to manage their everyday accounts, but nearly half are still more likely to visit a branch when making important financial decisions. This customer feedback secured by banks is developed further by respondents to Egremont s survey rating the quality of service they receive in their bank branch: 77% said their banks provide good customer service, and as branch technology brings with it new requirements of staff, banks should see the frontline teams as the key competitive advantage as technology drives commoditisation and service defines the brand. A reduction in the number of branches inevitably means fewer numbers of staff, but higher investment in skills and the team members will be required to provide them with a skillset suitable for new technology so that they are empowered to educate branch customers in the latest products. end-to-end across all channels. Whilst transactional banking is an effective way of lowering cost, people-delivered channels such as the branch are still key in conveying the brand s personality and creating emotional engagement to differentiate the customer experience, thereby driving longer-term growth. This is clearly recognised by banks as they create innovative branch formats to engage with the customer and look to follow the example of the retail sector. The decline of the branch has been much discussed, but in reality it remains a critical facet of the omnichannel journey The Contact Centre With the rise of new digital platforms and the rollout of more innovative branch formats, the role of the contact centre is naturally brought into focus. 49% of responders to our online survey said they never use telephone banking, with a further 23% saying they use telephone banking less than once every six months. 49% never use telephone banking The survey suggests that if not accessing their bank through digital channels, customers would prefer face-to-face contact, avoiding the option of the contact centre. Banks need to articulate more clearly the purpose of the contact centre s role to enable greater customer understanding: whilst consumers do not currently perceive the channel as an important part of the customer journey, it remains an integral component of the omnichannel experience, providing people delivered advice in an economically efficient manner. Customers want the ability to reach their bank at a time and place of their choosing and businesses need to design journeys that successfully deliver

8 An omnichannel strategy needs to reflect how the contact centre sits as part of a cohesive customer journey. This will mean a reconfiguration of the contact centre s role, moving instead to a customer engagement hub provider. As consumers increasingly self-serve via digital channels, they will use the contact centre less frequently and for different reasons. Not only could this include specific telephone enquiries, but also the link for the video conferencing function being launched in branch, voice related support to online channels, video-based advice and guidance for online and quick responses to social media enquiries. An omnichannel strategy will likely mean a fundamental reconfiguration of the contact centre s role Banks need to ensure the contact centre is appropriate for customer need. This may require significant people change and investment in new skill sets. The contact centre will continue to play a key role supporting the other channels in the customer journey, such as providing guidance to drive further adoption of online technology advancements, and supporting the branch where the requirements for complex economic services would not be economically viable to roll out within the network. Market Challengers: Their Market Challenge 2016 sees the launch of a number of new market entrants set to challenge the established high street players, often targeting particular audience segments, and interestingly with several still providing a role for the contact centre. Atom, which has recently had investment from BBVA, is due to launch in April, initially only on a mobile platform, before expanding to online. Meanwhile Tandem has recently received its licence from the Bank of England and will have a similar mobile offering. Both will offer the services of a contact centre for specific priority enquiries. Aldermore, one of Britain's leading challenger banks for SMEs, secured double profit for the first six months of Aldermore does not have any branches, and instead has regional offices across the UK, serving the bulk of its clients via phone and online. Shawbrook, another challenger, offers loans to SMEs who are unable to obtain finance from the main commercial banks operate from four principle locations and six smaller offices throughout the UK. It has recently made a number of board-level appointments from established banks, underlining its intention to further its challenge to the market. The German challenger Number26 is to launch into France, Greece, Ireland, Italy, Slovakia and Spain, with the UK to follow. Customers can open a bank account in eight minutes by downloading an app and making a video phone call to show their passport to a representative. There is no travelling to a branch, no queues and no filling out forms. Another German challenger, Fidor, is also looking to launch into the UK. Alongside these, the likes of Mondo, Monese and Starling are attracting market attention with their focus on joined-up service design and user experience. By comparison, a number of challengers that have already achieved notable success in the UK have placed the role of the branch at the heart of their strategy. A number of challengers that have already achieved success in the UK have placed the role of the branch at the heart of their strategy Virgin Money and TSB are both revamping their branch network, while Metro has placed an innovative branch format at the centre of its strategy.

9 Handelsbanken, the Swedish bank now steadily expanding in the UK, now has 200 branches operating under a hub and spoke model. Its success was recognised by achieving second place in Management Today s most admired financial brands in 2015, behind Santander. A further comparison comes from Poland, where mbank is to spend 17million over the next two years to open a network of 40 compact bank branches comprising multi-touch screens, motion sensing and face-recognition technologies across the country. Designed like a retail outlet and situated in locations attracting high consumer footfall, the nine branches have already tripled the sales of banking products, attracting around 200 customers per day. The bank says the approach is designed to provide a space that is more in line with modern consumer lifestyles. All this activity points to dramatic market disruption in But with such high customer loyalty, and reticence to switch provider, banking is a far tougher market to shake up than retail or transport. These challengers need to make extra effort to communicate the benefits of their product to their target audience. An innovative, bold differentiator will be key in securing customers. With customers still valuing face-to-face contact with their bank, those digital only challengers will need to ensure the consumer benefits of their model and design innovation are clearly articulated to gain traction. First Direct, renowned for its outstanding levels of customer service and experience in providing both internet and telephone banking services, secures +73. Scoring higher than Amazon and Apple, it shows that a high reputation can be achieved in the banking industry via a service driven model, recruiting people with the right skills for the role, and training them with banking knowledge where necessary. Non-banks such as big retail and consumer players are increasingly seen as credible banking services providers and are natural candidates to significantly shake up the banking market. In theory any company with a digital platform has the capability to enter this space and provide financial services products to customers. Banks need to be alive to this threat. Big Brands to Move into Financial Services? In our survey we asked consumers which brands they would like to offer financial products. The answers covered a number of mainstream retailers who have achieved significant market share and brand loyalty: Amazon, Apple, Facebook, John Lewis, Google. Reviewing Net Promoter Scores throws up an interesting comparison: Amazon and Apple sit at 69 and 63 respectively, whereas the majority of the banking players are lower: Nationwide: 43; Santander: 27; RBS: -19 and HSBC: -24.

10 The Consultant View As the industry embraces digital and looks to strengthen relationships with consumers, customer centricity has become a vital driver of success. Ultimately the way banks respond to the fast paced landscape will dictate how they maintain commercial advantage in the long term. Customers have greater insight and are in a position of power, but remain loyal to their banks for now. However, lethargy is no longer an option, and as competitors drive innovation and new entrants position themselves as exciting alternatives to established players, banks need to ensure their digital products are creative and firmly focused on outcomes that deliver benefit for the consumer, and that this is clearly articulated. Digital holds huge benefits for both bank and consumer. It enables a high volume of transactions to be fulfilled more cost effectively, freeing up resource to provide value added services for the customer, in the age of an always on culture when they can interact with a bank at a time and place of their choosing. A cohesive approach to omnichannel is now essential, and each individual channel has a key role to play. Banks need to have a clearly articulated definition and strategy for each channel, how it will deliver for each type of customer, its implications for the digital strategy as a whole and the different capabilities subsequently required from the workforce. Each channel definition should be based on sound insight on what customers actually want from their bank provider. Banks should then invest in the required capabilities to meet this need, in turn minimising the cost of unnecessary and more expensive expenditure by only deploying budget where it is clearly needed. What You Need To Do Now 1. Build an individual strategy for each channel within the context of a wider omnichannel relationship between the customer and the bank 2. Understand what customer-centricity really means and how to get there, comfortable with the changes required both operationally and culturally 3. One size doesn t fit all. Understand your customers, their aspirations, how they want to interact with you and for what reason 4. Don t impose your brand on the customer. Instead clearly articulate points of brand differentiation that benefit the customer 5. Recognise the power of personal interaction. Make the investment to ensure staff have the right skillset to deliver outstanding customer service 6. Ensure your strategy has the flexibility to allow for each individual customer need 7. Build clear strategies to target the lucrative younger and older age demographics 8. Be bold and don t maintain the status quo. Be innovative and move at pace. Be entrepreneurial and embrace risk. It is critical to adopt all of these changes to enable customer-centricity in a time efficient manner. Banks that know their customers and can tailor their offers accordingly will have a clear differentiator and win market share accordingly. This is essential for immediate commercial advantage and long-term growth. Established banks face an unprecedented challenge to their stability, and innovation, transformation and consumer education will be the key to brand differentiation. These are initiatives that cannot afford to fail, and in striving for successful delivery, the power of personal interaction is key.

11 Sue Grist, Director and Co-founder of Egremont said: Banks are dealing with an unprecedented era of change, with established players required to address the combined demands of regulatory, technological and market disruption. Faced with a multi-faceted change agenda, banks need to meet this challenge head on to maintain commercial advantage. Most importantly, they will need to change the way they change. They won t have time to construct large-scale programmes that take years to land across the whole system. They will need to adopt digital norms for change as this needs to be approached holistically and address all levers of the process, technology and people at once. It needs to continue at pace, meaning banks need to develop test and learn fast-fail cultures and techniques the agile approach. e: suegrist@egremontgroup.com Sarah Wilson, Director of Consulting Services at Egremont said: Banks need to follow the example of retailers and focus efforts on the needs of the customer and develop products and solutions specific for their needs. Up to now banks have been able to rely on high levels of customer loyalty; that will be far less of a certainty as innovation continues apace. Like the retailers, the banks will also need to face up to the need to for radical organisation redesign to remove the silos and barriers to this new age delivery of their transformation agenda. e: sarahwilson@egremontgroup.com. Natalie McLellan, Director in Financial Services at Egremont said: Digital has shifted power to the consumer, and personalisation and omnichannel services have become strategically critical in building brand differentiation. Yet the reality of the customer experience often fails to deliver on the aspiration of the leadership s vision to focus on radical cost reduction, customer centricity and service orientation. Banks need to understand customers better than ever before and use this insight to engage with them and develop lasting relationships. They need to be joined up for the customer across organisational silos, across channels and across partner-delivered capabilities to deliver a seamless consumer experience at every touch-point, underpinned by an omnichannel architecture. Banks need to differentiate to stand out and engage the connected consumer, proactively managing the relationship throughout the lifecycle. As such, successfully delivering transformation initiatives to build customer-centric, omnichannel organisations which can satisfy increasingly demanding and selfdirected consumers is now business critical. e: nataliemclellan@egremontgroup.com All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 2,036 adults, of which 1,803 held a current account. Fieldwork was undertaken between 19th November - 20th November The survey was carried out online the figures have been weighted and are representative of all GB adults (aged 18+). Net Promoter Score is a metric that was launched in an article in HBR in and is a customer loyalty gauge used by many major brands. Contact Us: Egremont Group, 11 London Mews, London, W2 1HY I +44 (0) I