Distribution 2020: The Next Big Journey for Retail Banks

Transcription

1 Distribution 2020: The Next Big Journey for Retail Banks A report by the European Finance Marketing Association (EFMA) and the Boston Consulting Group Introduction In the lingering wake of the financial crisis, profitability pressures and changing consumer behaviors are prompting a fundamental review of retail banks distribution processes. Return on equity (RoE) has dropped sharply, from roughly 20 percent in the years leading up to the crisis to about 10 percent in developed markets currently. With distribution representing approximately 50 percent of total costs in developed markets, it is clear that retail banks must broadly rethink their distribution processes on all fronts in order to adapt to evolving market conditions and changing customer needs. And customer needs as well as banking habits are indeed changing. First, interactions with banks are increasingly reflecting the broad global trend toward more online and mobile communication. Customer contacts with branches are decreasing at a rate of about 3 percent per year in most developed markets. Second, customers continue to become more sophisticated and demanding, comparing service levels in banks with those in different retail sectors. Not only do people expect alignment between the price they pay and the value they receive (which raises customer-value and pricing issues for banks), they also want a voice in developing service features and new products. Third, customers are happy to talk about all aspects of their banking experiences especially the negative ones through social media such as Facebook and Twitter. It is against this backdrop that The Boston Consulting Group (BCG) and Efma conducted a joint study on the challenges and opportunities confronting retail banks in improving their distribution processes. The study, aimed at identifying what best-practice distribution methods will look like by 2020, was based on an online survey of more than

2 participants from 70 banks worldwide conducted during the summer of In addition, a group of approximately 120 Efma members participated in a series of four Think Tank webinars, discussions that were complemented by detailed interviews with a number of banking executives across Europe. The findings of these research streams, supplemented by BCG s hands-on experience advising leading banks, provided an up-to-date view on retail banking distribution. These results, which showed that Distribution 2020 is a top-three topic for European banks, particularly in response to changing client behavior and with highest priority in developed markets were most recently presented at an Efma conference in Barcelona in October We hope that our findings will provide readers with insightful and thought-provoking perspectives on what 2020 will look like in retail banking, and on how to navigate their way toward a better distribution model. Making a new pledge to customers Best-practice distribution in 2020 will be broadly characterized by higher-quality, more-frequent interactions between customers and their retail banks. The trend will be enabled by evolving direct-channel technology, more-highly tailored (de-averaged) offerings linked to customer preferences and value, and the increasing integration of multiple bank channels. A key development will be the gradual convergence of online and mobile channels as the functionality of mobile devices improves, essentially ending the trade-off between reach and richness of content that has plagued distribution in the past. Between 2004 and 2012, customer contacts through the online channel increased dramatically while contacts with branches eroded, a trend that is expected to continue. (See chart below). Going forward, overall customer access will be enhanced, including remote contact with relationship managers and other experts, more user-friendly interfaces, and longer opening hours in branches. These and other developments will contribute to the ability of retail banks to make highly targeted offerings based both on evolving customer preferences and the type of relationship that 33

3 each customer (or customer segment) has with the bank. Some leading institutions are already demonstrating this capability. In our research, for example, we observed one leading bank (with a highly differentiated branch network) that clusters customers into four diverse segments according to the clients preferred relationship with the bank primarily face-to-face or remote and the sophistication of their banking needs. This bank has also developed a hub and spoke service model for the clusters featuring advisory branches (hubs) for high-value customers with complex service needs and service and transaction A further element of evolving best-practice distribution is a higher level of integration among channels branch, call center, online, mobile, and ATM that leads to a richer, seamless customer experience. Of course, multi-channel excellence has many facets. Banks need to focus on innovation across channels in order to push new functionalities and reduce operating costs. They need to place strong emphasis on governance, and create an incentive system that enhances cooperation between direct channels and the branch staff. Above all, multi-channel excellence is about providing clear value both for the customer and the bank. By guaranteeing natural pathways to customers and letting them choose their preferred channel for each step in the sales cycle, the bank can reduce revenue leakage and increase retention. The goal is to make interactions across multiple channels simple not 34

4 disjointed or constrained by internal organizational boundaries in a way that leads customers to dead ends. Also, channels should support each other, not compete. As such, not every function for every product in every channel needs to be available The key, given the huge cost and complexity of integrating multiple channels, is to find a smart balance of availability and functionality that maximizes each channel s value for each product and customer segment. Some banks, in their quests to fully achieve seamless channel integration, are pushing the operating model from channel-centric to customer-centric, resulting in more of a matrix organization in which frontline staff, commercial processes, and customer intelligence are managed horizontally instead of separately by channel. Meanwhile, it is worth noting that online banking is rapidly increasing and that direct players are gaining market share with CAGRs varying from around 10 percent to around 30 percent in Western markets over the past few years. An interesting twist is that some pure direct banks are beginning to develop limited branch networks in major European markets in order to broaden their offerings. Optimizing branch footprints and formats Branches will still be a critical element of distribution in But their roles, density, and formats will evolve in order to adapt to what we call the new new normal which encompasses the need for greater customer centricity, the shifting roles of products and channels, the necessary revamping of end-to-end operating models, and, of course, the need for improved sales force effectiveness. 1 The branch, and the face-to-face contact it provides, will remain the primary channel for acquiring and deepening customer relationships, as well as for interactions perceived by customers as complex and difficult to comprehend without guidance. But there is a significant opportunity to optimize branch footprints which in high-density markets implies 1 See the BCG publication The New Normal in Retail Banking. 35

5 reducing footprints as well as relocating branches in line with branch performance and the shift toward more online and mobile banking. In many local and regional markets, it is not uncommon for 80 to 90 percent of revenues to be generated by 50 to 65 percent of the branches. Leading banks in most developed markets have already begun optimizing their physical networks. Branch density is decreasing in Western Europe, and is roughly flat in most other regions. (See chart below). Indeed, with the role of branches increasingly centered on sales of sophisticated products and highly-customized advice, providing a winning customer experience being truly customer centric will be crucial. 2 Branches will also remain important for serving small-business clients, whose need for cash and check handling (in some markets) is less impacted by the push toward online and mobile banking. Branch excellence will be a matter of superb execution in a handful of critical service interactions those moments of truth that determine whether a customer will buy a certain product or, at the other extreme, switch banks. Still, the percentage of service 2 See the BCG publication Customer Centricity in Retail Banking. 36

6 interactions and transactions conducted in branches is expected to drop to below 5 percent by 2020, compared with roughly 30 percent today. So far, permanent closures have been limited, with banks concentrating more on branch relocation and format changes. About 30 percent of customer acquisitions are still related to branch proximity. (See chart below). Going forward, we expect to see much greater variety in branch formats such as transaction-only, advisory, lite, full-service, and flagship and greater variation in both hours of operation and staffing profiles. We will also likely see redesign initiatives aimed at making branches more informal and customer friendly. Some branches may be highly specialized in certain products, such as automobile financing or mortgages, for example. Also, more banks will tend to adopt the hub and spoke model in which large, full-service, advisory hubs support smaller, specialized spokes. A higher level of differentiation in the spokes will be enabled though such means as digital signatures, paperless services, remote support from specialists via video conferences, and mobile interfaces. Branches will take on an increasingly modular design in order to maintain flexibility and help keep operating costs to a minimum. 37

7 Yet a key point remains: Closing branches without a sales-force effectiveness (SFE) program will not provide a solution to the ROE challenge that banks face today. Branch closure must go hand in hand with SFE. And SFE itself must be tackled before any branches are actually phased out or moved in order to help fund the journey toward more efficient and effective overall distribution. According to BCG case experience, even closing as much as 10 percent of branches in a given network provides close to zero improvement to ROE. By contrast, in our survey, one leading bank had more than twice the sales productivity as those at the median level. (See chart below). It is therefore crucial for banks to benchmark their SFE performance against competitors and launch improvement programs for the most important SFE levers. Improving sales force effectiveness To thrive in the new normal, banks will need to begin by carrying out an in-depth review of the sales force s role, level of expertise, and way of working. The goal will be to dramatically improve both efficiency and productivity in a world where traditional banking paradigms will be shifting significantly. Despite a sharp drop in the importance of branch interaction for customers in their 20s and 30s, a physical sales 38

8 force will continue to be needed by a large percentage of banking customers, even though most will interact via online and mobile channels as well. Access to an experienced RM will be critical, particularly when it comes to dealing with sophisticated products and financial planning that requires customized advice. The problem is that the sales forces of most banks today do not reach their potential, as evidenced by our study, which revealed ample room for improvement in overall sales force effectiveness. The banks in our study averaged roughly three customer meetings per day for each RM, compared with the best-practice level of six. Successful lead conversion varied widely among institutions. Looking ahead, we expect even more RM time to be freed up as a result of fewer client meetings for transactions and sales of simple products activities that will increasingly shift to direct channels. These dynamics lead to a fundamental question: Should banks reduce their physical sales forces in line with the growth of direct channels, or identify new activities for current RMs in order to fully exploit their expertise and experience? The likely answer is some of both. Obviously, the evolution of the sales force s role needs to be carefully managed by HR over a long time horizon, as highly-specialized capabilities will increasingly be required, especially concerning new and innovative products. More mobility will also be needed as specialists move between branches for customer appointments. Many banks will stay open longer hours and have a corresponding need for RMs and other staff willing to work flexible shifts. Moreover, changes such as these along with the channel integration necessary to delivering the new customer pledge may well result in a decoupling of sales force management from branches. Some banks may also consider a partial externalization of the sales force, using dedicated agents. So far, most banks are keeping a critical mass of sales force personnel as they rationalize their branch networks. Of course, the above trends are primarily true for developed markets, as in emerging markets we have seen (and will likely continue to see) measurable growth both in branches and in sales force personnel. 39

9 The fundamentals of overall sales force excellence will remain constant through 2020 and likely beyond. A solid program zeroes in on specific measures such as booking appointments electronically, capturing customer data early, creating more effective sales scripts, and carefully managing customers early tenure. Banks that take these actions create a self-reinforcing sales and service culture. Such a culture includes a recruiting and talent model, clearly defined practices and norms for key roles, product training and certification, coaching programs, and performance recognition as well as mystery shopping, customer polling, and surveys that capture the voices of customers and bank employees. This model is reinforced by targets and incentive schemes that focus on driving the frontline to meet customer needs. Winning banks also develop customer relationship management systems that facilitate workflow. Offer management systems identify the next logical product, and leads are embedded in processes at the teller counter and elsewhere. In best-practice banks, a can-do sales culture permeates the air. Sales and service colleagues are energized by the knowledge that they are providing value to customers, that each day s calendar is full of promising appointments, and that the more they do for customers the more they do for themselves. Indeed, banks can create a virtuous circle. Excellent customer service creates positive word-of-mouth referrals, which, along with clear marketing messages, drive consumer traffic to branches, to the website, and to the call center. This traffic drives leads, sales, cross-selling, and customer loyalty, which in turn feed back into more positive customer reviews and higher traffic. Managing the journey Of the many insights into today s retail-banking industry revealed by our study, one of the most important is the clear need for banks to actively manage their journey toward Distribution 2020 providing sufficient resources, setting clear goals, closely monitoring progress, and ensuring that top management is fully involved and supportive at every stage of the process. 40

10 The winning banks will do the following: Develop a clearly-defined target that is shared across the entire organization. Formulate a comprehensive, far-reaching distribution strategy for 2020, and tackle each element of that strategy in parallel with energy and dedication. Achieve consistent and diligent governance and steering, starting at the top and cascading down through the bank. Launch a series of no regrets initiatives such as retraining the sales force to adjust to the increase in online and mobile banking, or addressing end-to-end process optimization issues to kick the program off and get the momentum going. Target already existing inefficiency pools to extract additional profitability from the branch network. Apply a test and learn approach to distribution innovations for example, through pilot programs aimed at specific regions or client segments. Use traditional levers, such as creating a leaner overall organization, to fund part of the journey. Build flexibility into the organization both to prepare for potential market scenarios that could develop between now and 2020, and to leave options open for future strategic distribution choices. Clearly and candidly assess the strong and weak points of the organization, draw a detailed roadmap of how to shore up weaknesses, and set realistic goals and milestones to follow on the path toward Distribution In our experience, a disciplined program to enhance distribution capabilities can improve RoE by up to 6 to 8 percentage points. But a wide range of levers must be used. Solely reducing the branch footprint is not the solution (although a reduced footprint might be the ultimate consequence of a fundamental change in the bank s value proposition). Strong improvements in sales force effectiveness, including 41

11 both greater efficiency and productivity, as well as developing leaner end-to-end processes will provide the most significant impact in the area of 3 to 4 percentage points of RoE restoration. Lifting revenues through the enhancement of channel functionality and a higher degree of channel integration providing natural pathways that deliver true customer satisfaction will also bring a sizable RoE lift of 2 to 3 percentage points. The partial conversion of branches to low-cost formats could add an additional percentage point of RoE growth (in a scenario of 30 percent of branches being converted). Ultimately, the winners in the race to Distribution 2020 will be those banks that manage the journey rigorously keeping their focus, anticipating barriers before they become apparent, and finding their way around them without losing stride. The program must be a comprehensive one not a piecemeal effort that addresses just one or two issues. In an industry that is changing rapidly, and in which the rate of change will certainly accelerate, retail banks should realize that the best way to deal with market uncertainty is to take a proactive approach. If they do not take the first steps toward achieving distribution excellence now, 2020 may come and go with little import because they will already be out of the race. 42

12 About EFMA and BCG Efma As a global not-for-profit organisation, Efma brings together more than 3,300 retail financial services companies from over 130 countries. With a membership base consisting of almost a third of all large retail banks worldwide, Efma has proven to be a valuable resource for the global industry, offering members exclusive access to a multitude of resources, databases, studies, articles, news feeds and publications. Efma also provides numerous networking opportunities through working groups, online communities and international meetings. For more information: The Boston Consulting Group The Boston Consulting Group (BCG) is a global management consulting firm and the world s leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 74 offices in 42 countries. For more information: bcg.com 43

13 About the authors Jean-Werner de T Serclaes is a partner and managing director at The Boston Consulting Group, and the global topic leader for retail banking distribution. Stefano Bison is a project leader. Nicole Mönter is also a project leader, as well as manager of BCG s global retail banking segment. You may contact the authors by at: jwts@bcg.com bison.stefano@bcg.com monter.nicole@bcg.com 44