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A Look Ahead to U.S. Retail Banking in 2016

Top retail banking executives, at institutions both large and small, are expressing a mix of optimism and uncertainty as they look ahead to 2016.

Self-Service Revolution

Customers are migrating to electronic channels, making payroll reduction a necessity, but they still desire the same, or an improved, level of service.

Regaining Customer Trust
More pessimistic consumers provide a window of opportunity for banks – if the bank can provide innovative and creative solutions to their financial needs, according to a new BAI Research/Finacle study. by DANIEL HOUGH AND VIKAS GUPTA
Oct 19, 2010  |  2 Comments

Discouragement about the economy and its so far phantom recovery seems to be catching on. The normally resilient American consumer, who typically looks to the future with optimism, has adopted a more somber and pessimistic view of where the economy is headed and the likely impact on their own finances.

Yet, paradoxically, this grimmer mood may turn into a positive for the banking industry as customers search for safety in these difficult times. And bankers, meanwhile, appear to have gained a better understanding of the consumer’s mindset – and are more aligned with how their customers feel – as they work to restore the trust and confidence lost in the 2008-2009 financial crisis.

These are some of the new insights emerging from the third wave of the BAI and Finacle Research Series: Consumer Sentiment and the Innovation Imperative in Retail Banking, a comprehensive study consisting of a national survey of both retail financial services executives and banking consumers. The research, which was initiated in August 2009 and repeated again in early 2010, is intended to provide a snapshot of consumer and industry views on the economy and the financial services sector, as well as measure changes in those attitudes and opinions over time (see sidebar, “About the Survey”). The program also provides data on three key indices for the industry: BAI & Finacle Index of Bank Consumer Sentiment, the BAI and Finacle Index of Bank Executive Sentiment and the BAI and Finacle Index of Bank Innovation.

Consumer Attitudes in Flux

Of course, it is not hard to understand why the American consumer’s confidence in the economy and their financial well being has taken a hit. Day after day, news reports highlight a recovery that fails to gain traction in any measurable way, with high unemployment stubbornly persisting. So, while earlier waves of the study told a story of a surprisingly optimistic consumer in the face of difficult economic and financial circumstances, our most recent survey showed a 14% decline in confidence between February and August of this year (see chart, “Consumer Mood Darkens”). As a result of this creeping pessimism regarding the economy, consumers are reporting more concern about their personal finances and a decline in their investing confidence (see chart, “Declining Consumer Confidence”).

All this is not necessarily a negative for the financial institutions that serve these consumers. A somewhat surprising and encouraging development from the banking perspective that emerged from our study is the finding that there has been a slight rebound in the declining trust that people had in the banking industry as a whole, as well as some improvement in the trust they have in their primary banking relationship. Both indices have risen 2% since February 2010 (see chart, “Trust in Banks on the Rebound”).

As consumers move ever so slowly towards a more trusting relationship with their banks, bankers themselves seem to have evolved in their attitudes. Whereas the February results showed an industry seemingly out of touch with consumer anger and mistrust of banks, all indications suggest that the industry has come to realize the depth of consumer resentment and distrust and how much work remains to restore consumer faith. As a result, the most recent wave of the research shows a more serious perspective among bankers when asked about the level of trust consumers have in their institutions.

As a result of these changes in both the consumer and the industry perspectives regarding consumer trust and sentiment, there has been a subtle yet important narrowing of the gap that once existed between what consumers felt and what the industry thought was the consumers’ reality (see chart, “Banks and Consumers More In Synch”).

Fast Followers to Innovation

Part of the industry’s gains with consumers can be attributed to a renewed focus on the basics of banking. In other words, banks are focusing on the core products and services that people expect from their banks. Yet, this comes with a twist. As with other areas of bank/consumer interaction, customers expect that traditional products and services will be delivered through cutting-edge channels such as the Internet and mobile technology. And this is where the retail banking industry seems to have found a way to reinvigorate the customer relationship to some degree.

Back in August 2009, feedback from a wide range of bank executives revealed an industry that did not view itself as particularly “innovative.” A year later, banker responses show that they still have trouble defining themselves as  innovative in the sense that Apple or Microsoft are innovative, despite the fact that they know innovation will be an important part of the future of retail banking. Just over a fourth of respondents (27%) said that innovation was not very important to the overall future of their institution.

Therefore, given the importance of innovation and realizing that the customer/provider dynamics across nearly every consumer-related vertical are being redefined by technology, bank executives clearly understand the need to adapt quickly and decisively or risk being left behind.  To meet that challenge, bank executives say that while they may not be innovators in the strictest sense of the word, they do need to become “fast followers” to innovation that occurs either within or from outside financial services in order to keep up with the changing expectations of their customers. When asked whether their own institution was a leader or a follower in the use of Information Technology for innovation, 68% replied follower while only 32% considered themselves leaders.

A senior official of a large community bank, for example, cited the introduction of the iPhone and the next generation of Blackberrys, which helped accelerate the advent of mobile banking. While this capability had existed for several years, banks took a wait-and-see approach because no one wanted to take on the risk of being first with something that may not have had broad enough appeal to be profitable. The current research indicates that this will be the rule as new innovations like the iPad, new P2P payment options and other breakthroughs yet to be seen take place.

Now, despite getting a lot of media attention, it is clear that mobile banking as the preferred banking channel has not yet fully taken hold, with only 1% saying it is their primary mode of bank interaction compared with 56% citing the Internet/online banking.  But the good news for those banks that took the plunge into mobile, despite lackluster early returns, is that this is likely to be changing quickly over the next few years as the frequency of mobile banking usage finally started to climb in a meaningful way in 2010 compared to 2008, increasing by 5% since February 2010.

The Gen Y Factor

And fueling the uptick in mobile banking usage is a segment of consumers that are the most likely to continue to migrate to mobile banking going forward – the so-called “Gen Y” customers, or those born between the mid-1970s and early 2000s. The Gen Y bank customer has appeared to be less affected by the turmoil that roiled the financial services sector than most other consumer segments, resulting in far less negative attitudes towards banks (see chart, “Gen Y Happier with Banks”).

So with this more positive view of the bank, Gen Y customers have also been much more responsive to the efforts banks are making to deliver basic banking products and services through innovative channels. Almost by definition, Gen Y customers are more likely to use online or mobile banking compared to other consumer segments (see chart, “Gen Y Likes Remote Access”). And the foundation for this higher likelihood to use mobile or online banking comes from the higher trust levels that Gen Y bank customers have maintained towards banks; they are just more trusting that the technology-based remote banking channels being offered will be secure. If the past is any indication of the future, these same consumers will be the ones who are first adopters of any new innovations that come along. For Gen Y, the aura of innovation is actually a fairly important trait for their primary bank to have (see chart, “Gen Y Comfortable with Innovation”).

Clearly, retail banking is beginning to understand the importance of meeting emerging customer demands through fulfillment of the core customer promises of value and responsive service. The continuing challenge for banks in delivering this meaningful customer experience is the growing complexity and diversity of consumer segments. These consumers see more and more options presented for interfacing across all types of relationships, regardless of the product or service in question. As a result, bank consumers, from Gen Y to retiring baby boomers, are looking to banks for innovation. And to underscore just what it means for banks to meet that challenge, one need only look at the differences in deposit balances and share of wallet between those that regard their banks as being innovative or creative in meeting customer needs, and those who do not. Banks with an aura of innovation enjoy higher deposit balances and deeper wallet share with their customers, all of which only helps to feed the bottom line (see chart, “Innovative Banks Enjoy Deeper Wallet Share”).

Without question, if a bank customer believes their bank to be innovative or creative in their approach to serving their customers, there is much greater likelihood that the customer will hold a greater variety of products with that bank, including deposit and loan products, as well as maintaining larger balances across a range of deposit products. And as new bank regulations further squeeze bank margins and profitability, never has customer engagement and deepening of customer relationships been more important to the retail bank franchise.

Mr. Hough is director of strategic research at BAI. He can be reached at dhough@bai.org. Mr. Gupta is assistant vice president and regional manager, Americas, for Finacle. He can be reached at vikas_gupta02@infosys.com.



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11/2/2010 12:15 PM

From my vantage point the local community banks or regional groups have a strong advantage as people seek relationships and will keep a much more careful eye on their finances (post recession). The mobile technology is critical, but in the short-run smart community bankers will invest in educating their people and focus marketing/brand building on relationships/community.

jkai hsu
10/19/2010 12:23 PM

i love this article, particularly true for the Gen Y being have a far less negative view on the banking industry than the baby boomers.