Asia Financial Institutions. Customer first: New expectations for Asia s retail banks

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1 Asia Financial Institutions Customer first: New expectations for Asia s retail banks March 2012

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3 Asia Financial Institutions Customer first: New expectations for Asia s retail banks 1 Customer first: New expectations for Asia s retail banks Rising prosperity has led to dramatic growth in the personal financial services opportunity across almost every Asian market over the last decade, especially in the region s emerging economies. As financial institutions rushed to respond, a successful business model quickly arose one focused on selling individual retail products, such as credit cards and deposit accounts, to mass markets. This growth both in revenues and, subsequently, in market valuations has little precedent: one measure of its impact is that banks headquartered in Asia now hold 8 of the top 20 positions on the global league table. But in our work with leading institutions in Asia, the strains of the current retail model are already becoming apparent as customer attrition rates rise, regulatory pressures intensify, cross-sales stall, and cost-to-serve continues upward. The need for a strategic rethink is one of the driving forces behind the 2011 edition of McKinsey s Personal Financial Services Survey, which evaluates the needs, attitudes, and behaviours of Asia s consumers with regard to financial services. With greater breadth and depth than ever before, the survey comprised more than 20,000 in-person interviews with consumers in 13 countries. Each 60-minute interview covered 150 questions that addressed the changing nature of banking relationships, the drivers of customer satisfaction and loyalty, and important shifts in preferences for products and channels. The results provide frank, detailed customer opinions of the top institutions in local markets. In addition, the four previous editions of the survey (which began in 1998) provide an additional 36,000 records for generating sophisticated longitudinal comparisons. The survey confirms that changes are undermining the current approach to retail banking in Asia. The first, most worrisome finding is of a major drop in loyalty since 2007, apparent at each stage of the customer relationship and affecting both developed and emerging markets. A second threat is of digital channels, such as the Internet and mobile banking, starting to eclipse the in-person branches on which banks have long relied. In parallel, customers are becoming more sophisticated and demanding in the types of services they want: debt s appeal is markedly down while interest in advisory services remains unchanged, apart from a new focus on high-quality advice. Finally, in the wake of the financial crisis, we see sharp growth across Asia in the number of respondents claiming to prefer to work with local institutions. The survey also confirms the enormous differences across Asia, both between and within individual markets. For each of the 13 countries in our review, we have identified a few critical distinguishing characteristics that will help institutions craft appealing local strategies. For retail banks across Asia, the larger goal is nothing less than to redefine what it means to put the customer first. In many cases, this will require a major transformation involving sustained effort. Nevertheless, the reward will be well worth the investment, with higher loyalty and share-of-wallet creating a more profitable franchise. THE RAPIDLY EVOLVING ASIAN CONSUMER Historically, financial institutions could largely take customer loyalty for granted. Customers only rarely changed financial services providers, so the real battle was to establish the initial relationship; the inconvenience of switching made inertia a powerful force in keeping the relationship going. Now, however, rising wealth, product proliferation, regulatory changes, and new technologies are together making customer churn a much more real threat and opportunity. Institutions now must understand the value of customer loyalty and how to build it across new channels, product offerings, and geographies.

4 2 Lost loyalty: How deep is your customer s love? At first glance the 2011 survey appears to indicate that all is well for banks in Asia: across the region, customer satisfaction averages 76 percent, ranging up to a high of 96 percent in India. A second look, however, reveals a less comforting truth: Asian consumers are shopping around and splitting their wallets more than ever before, particularly in the more-attractive upper-income segments in Developed Asia. 1 Among these sought-after customers, the number of banking relationships per person has risen by between 20 and 30 percent, reaching a high of 4.7 banking relationships for mass affluent individuals. In Emerging Asia 2 the figures are also increasing, though more slowly, to reach an average of 2.1 relationships per mass-affluent customer. Mirroring these results, the survey data also show deterioration in customers attitudes toward their primary institutions. Even in Emerging Asia, where customers are generally more loyal than their developed-market counterparts, only 60 percent are willing to recommend their bank a figure that has dropped by nine points since In Developed Asia the picture is still less encouraging: just 31 percent of customers interviewed show this type of loyalty in 2011, compared to 45 percent in 2007 (Exhibit 1). Exhibit 1 Loyalty to banks has declined significantly. I would recommend my financial institution to a friend or a colleague Percent responding strongly agree or agree China x Percentage point change in loyalty Increase Decrease Japan 2011 Thailand Korea Vietnam Taiwan Hong Kong India Indonesia N/A 44 Singapore Philippines Malaysia Australia SOURCE: McKinsey PFS Survey 2007 and 2011; McKinsey analysis Overall Developed Emerging 1 Comprises 6 of the 13 markets: Australia, Hong Kong, Japan, Korea, Singapore, and Taiwan. 2 Comprises the remaining seven markets: China, India, Indonesia, Malaysia, Philippines, Thailand, and Vietnam.

5 Asia Financial Institutions Customer first: New expectations for Asia s retail banks 3 Customers changing channels: The rise of the remote The number of institutions that consumers use is not all that is changing: the survey also shows a profound upheaval in how customers engage with their institutions. The long-awaited transition to what were once known as alternative channels is now well under way. Institutions will therefore need to reassess their whole portfolio of channels to ensure that each channel aligns with changing customer expectations. Channel usage. The numbers alone tell the story: for the first time since McKinsey started conducting the survey 13 years ago, traditional in-person branch usage has fallen substantially. Consumers across the region visited branches an average of 27 percent less frequently in 2011 than they did in Instead, consumers are quickly becoming more comfortable with other options. Internet banking has truly come of age, especially in Developed Asia, where consumers say that they now visit their banks websites more often than they queue for tellers. Mobile-banking penetration is also rising quickly, although in both emerging and developed markets its total usage remains much lower than that of Internet banking. And across all of Asia, the ATM is still critical but the trend line is now very different between markets. In developed economies, consumers report a gradual decrease in ATM usage; by contrast, Emerging Asia s consumers are using ATMs even more than in 2007, driven primarily by increased penetration (Exhibit 2). Exhibit 2 There is a fundamental shift to remote channels across Asia. Weekly usage frequency Developed Asia Emerging Asia Branch/ teller % % ATM % % Telephone % % Internet % % Mobile % % SOURCE: McKinsey PFS Survey 2007 and 2011; McKinsey analysis

6 4 Channel surfing. These basic statistics together reflect a much more significant point, in that the Asian consumer s channel usage has become more complex than it was even just a few years ago. Whereas the branch was once the primary source for product information, in most Asian markets today consumers use as many as five channels for researching new products, and about 1.8 channels for servicing needs on existing products. Similarly, Asian consumers increasingly hop between channels, with almost 83 percent of the customers moving across multiple channels between the pre-subscription and post-subscription stages. Although these switches may initially appear unpredictable, an example from Japan illustrates that different segments often follow distinct patterns that can inform a bank s strategic, marketing, and operational decisions (Exhibit 3). Exhibit 3 Japan shows increasing channel hopping. SAVINGS/LIMITED RISK INVESTMENT PRODUCT Pre-subscription Subscription Post-subscription Older, high-income Mean age: 47 More homemakers and professionals, fewer office workers High income and assets Branch/ personal ATM Web site/online banking Media/WOM/ past experience 1 Word of mouth Branch Branch Branch Media/WOM 1 Branch Branch Media/WOM Branch ATM Online Online Online Media/WOM Online Online Average consumers Mean age: 42 Mostly professionals and office workers Average income, low liquid assets Average savers Mean age: 43 Mix of homemakers, professionals, and office workers Low income, high assets High-income office workers Mean age: 43 More office workers, fewer homemakers or professionals High income and liquid assets Low-income office workers Mean age: 44 More office workers, fewer homemakers or professionals Low income and liquid assets SOURCE: Asia PFS 2011; Consumer Decision Journey/multichannel booster survey 2010 Rising sophistication: New scepticism of borrowing, sustained interest in investments and advice One of the more dramatic changes the 2011 survey records is the emergence of the newly sceptical borrower. As in 2007, we asked all of the survey respondents how they felt about the statement borrowing is always risky and I should live within my means. Whereas in 2007 only 43 percent agreed, by 2011 that figure rose to some 70 percent Asia-wide. Surprisingly, the gap between Developed and Emerging Asia was a negligible 8 points, and some of the highest increases were in markets little touched by the financial crisis. In 2007, Hong Kong showed the least aversion to borrowing, with just 27 percent agreeing it was risky; in 2011, the proportion more than doubled, reaching 69 percent. Similarly, the portion of Thais agreeing jumped from 32 percent to 86 percent, of Indonesians from 33 percent to 62 percent, and of

7 Asia Financial Institutions Customer first: New expectations for Asia s retail banks 5 mainland Chinese from 39 percent to 84 percent. While the survey did not address the underlying reasons for this pervasive shift, one possible explanation is that even though the crisis was mild in most of Asia, it nevertheless reminded consumers about risk and may have reinforced older cultural norms emphasizing savings. Yet, in a sign of increasing financial maturity, the same consumers who have abandoned their ardour for debt have nevertheless sustained their interest in investing despite any lingering effects from the crisis. Almost 50 percent of the mass-affluent customers surveyed were open to moving their savings out of traditional deposits and into stocks and mutual funds. Likewise, these same customers interest in advisory services has held steady, with 53 percent saying they would like more advice and assistance in managing their investments. The major caveat is that less than 10 percent of Asian consumers are willing to pay for financial advice. Part of the problem may be the quality of advice on offer: India saw a 25-point drop in consumer satisfaction with financial planners, and in Japan, inappropriate advice was the most widely cited negative customer experience. These findings suggest that the old, top-down model of an advisor telling the consumer where and how to invest may no longer work, particularly in Developed Asia, where the average consumer already maintains several banking relationships. Our hypothesis is that the advisory relationship is likely to become more of a dialogue, with consumers making investment choices based on open, transparent knowledge about the attractiveness of the products. Local heroes Our research suggests that across all markets, the crisis has heightened interest in banking with local institutions: almost 85 percent of the consumers in Emerging Asia and 63 percent of consumers in Developed Asia consider it important to deal with a local bank, up from 70 percent and 50 percent, respectively, in How and to what degree consumers will act on this stated preference is, nevertheless, still unclear; the leaders of several large banks in Asia have told us they see little evidence of any broader shift away from the global and regional institutions. Instead, the imperative all institutions now face is to undertake a more thorough analysis of opportunities in individual markets so that they can tailor their offerings more closely. That exercise, bolstered by new marketing capabilities and a revamped approach to the branch network, will be the critical determinant in the next era of Asia s banking competition. For each of the 13 markets the survey covered, we identified several important themes that we believe will guide local competition over the coming years (box, page 6). * * * The first decade of the new millennium saw rapid growth across Asian economies, and personal financial services businesses in Asia boomed by capturing ground in markets that were still widely underpenetrated. The basis of competition in the next decade, however, will be in understanding customer expectations and delivering a consistent experience. Those players that can meet a larger and more complex set of client needs by tailoring their offerings to individual market conditions will be best positioned to preserve and rebuild customer loyalty.

8 6 MARKET MESSAGES Developed Asia Australia Service quality is paramount Fully 63 percent of Australian respondents said that they had ended a relationship with a bank because of a negative experience. The most common reasons for switching were high fees for low-value services, inflexibility in problem solving, and negligent or unpleasant employees. Delivery on promises and individual treatment are top loyalty drivers. Hong Kong Mature market with a primary opportunity among the affluent Little room left to increase the number of relationships per customer, stable at an overall average of 3.2, or to increase the number of products per customer, which rose slightly from 7.8 in 2007 to 8.3 in Four banks HSBC, Hang Seng, Bank of China, and Standard Chartered continue to lead the market, with 92 percent of respondents doing business with at least one of the four. Affluent customers are more priceconscious, more willing to shop for better deals, and more open to remote channels, making them an attractive segment for attackers. Japan Lowest customer loyalty and greatest need for investment advice Japanese consumers satisfaction with and loyalty toward primary financial institutions is strikingly low, with only 13 percent willing to recommend their primary bank. They are also the most susceptible in Asia to negative moments of truth (MOTs), especially for inappropriate advice and delay. Low appetite for borrowing and strong appetite for investment across income bands but only 5 percent regularly consult with advisors, and only 6 percent have a formal financial plan; wealth management is a big opportunity. Singapore Low loyalty, but open to borrowing High and growing number of relationships per customer at 4.2 in 2011, compared to 2.6 in 2007 and 2.3 in the rest of Southeast Asia. High customer satisfaction, but secondlowest customer loyalty, ahead of only Japan. Only country where borrowing aversion remained stable, at 58 percent in 2011 and 59 percent in Sharp increases in aversion elsewhere means that while Singapore was the most borrowing-averse market in 2007, it is now the least in South Korea A rapidly aging society ill prepared for retirement More than half of Korean respondents say they haven t even started planning for retirement. Only 8 percent of Koreans have an explicit plan for retirement less than half Asia s average. Some 27 percent of Koreans say their primary retirement vehicle is the government pension program, but that plan s sustainability is in question. Taiwan A saturated card market with surprisingly low remote channel usage Taiwanese consumers are the most comfortable in Asia with card usage but between 2007 and 2011, transaction volumes fell across all income segments. Despite rising resistance to debt in Taiwan, the percentage of Taiwanese saying that borrowing can improve my lifestyle has barely budged, from 15 percent in 2007 to 14 percent today. Reliance on traditional channels is still high, with Internet banking usage at just 17 percent (lower than China s), due mainly to security concerns. Emerging Asia China Rapid rise in sophistication Chinese consumers are becoming more cautious with investments and are doing more long-term financial planning, outstripping even consumers in Hong Kong and Singapore. Relationships are gradually shifting away from the Big 4 (Agricultural Bank of China, Bank of China, China Construction Bank, and Industrial and Commercial Bank of China) as customers become more discerning. Joint-stock banks score higher on loyalty drivers than the Big 4.

9 Asia Financial Institutions Customer first: New expectations for Asia s retail banks 7 Usage of remote channels is substantially higher than in Asia s other emerging markets, with Internet banking usage rising from 3 percent in 2007 to 18 percent today. India Big drop in loyalty with major openings in advisory services Dramatic drop in willingness to recommend, from 91 percent in 2007 to just 71 percent in Big increase in demand for financial advice, with concerns for safety yielding to desire for greater capital growth. Many more affluent customers are using financial advisors from 14 percent in 2007 to 43 percent in 2011 but they are less happy with the quality, with satisfaction dropping from 88 percent in 2007 to 63 percent in In the advisory market, banks share has increased from 7 percent to 16 percent. This growth has come largely at the expense of insurers, whose share fell from 49 percent to 34 percent. Indonesia Traditional channels dominate, but foreign banks have a chance Hard buying factors such as price and convenience still predominate as loyalty drivers over soft factors like advisory expertise or problem-resolution quality. Customers still favour in-person channels, with nontraditional channels accounting for less than 10 percent of channel usage. The only market in Asia with no increase in preference for local institutions. Malaysia Big increase in soft buying factors Pricing, convenience, and personal recommendation all dropped in importance as factors driving customer loyalty. Customer experience and advice is now the most important determinant. Highest preference for local institutions in Southeast Asia, but, based on a small sample, it appears that foreign institutions are outperforming their local rivals on most individual loyalty drivers. Philippines Loyal customers want better service, and are open to foreign banks Highest scores in Asia for customer satisfaction and primary-bank loyalty Customer expectations are rising rapidly in a highly dynamic market where SMS banking has made a big splash. Flexibility and expertise are now the most important loyalty factors (of 20), with fees and charges dropping from the top to the bottom of the list. Despite 82 percent of respondents preferring local institutions, foreign banks still hold a major advantage for factors including product expertise, convenient mobile/internet banking, and problem resolution. Thailand Little appetite for borrowing, or willingness to pay for advice Asia s largest increase in borrowing aversion, from 32 percent in 2007 to 86 percent in Personal relationships are now the most important loyalty driver, with products, pricing, and advice all showing decreases since More interested in investment products, with the percentage preferring to hold their savings in bank deposits falling from 71 percent to 58 percent. But fewer customers want advice from 67 percent in 2007 to 58 percent in And their willingness to pay for investment advice has collapsed: just 15 percent in 2011 said they would pay, against 42 percent in Vietnam Fast-growing economy has eroded loyalty and accentuated regional differences A cash-based economy and high inflation mean that customers focus overwhelmingly on short-term products. Customer-loyalty rates have dropped the most compared to the rest of Asia, from 83 percent in 2007 to only 43 percent today. Simple products and transparent pricing mean competition is fierce: Vietnamese customers are Asia s most avid shoppers, with 76 percent saying that shopping around is worth the effort. Differences between Hanoi and Ho Chi Minh City (HCMC) are surprisingly large across many factors. Hanoi customers shop more and have more bank relationships; HCMC customers are more interested in investment advice, and less willing to listen to sales pitches by phone.

10 8 Tracy Cowap of Sydney is the Asia-Pacific Banking practice manager; Kenny Lam is a partner in the Hong Kong office; and Jatin Pant is an associate principal in the Mumbai office. The authors would like to acknowledge the contributions of their colleagues Jan Bellens, Tab Bowers, and Joydeep Sengupta. The authors would also like to thank Christian Johnson, business editor, for his support. Contact for distribution: Tracy Cowap Phone: +61 (2) tracy_cowap@mckinsey.com

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