For many banks, retail is in danger of becoming a zombie business.
The challenges are well known, the trends unmistakable:
- A decade of historically low interest rates, vanishing fee income and stubborn legacy costs have diminished business line profitability.
- Rapid technology innovation has presented retail banking executives with a wide array of confusing, costly and unproven investment options.
- Demographic changes have created a new generation of consumers who question the very relevancy of banks.
Most bank CEOs appreciate that significant changes are needed to assure the long-term viability of their retail franchises. And so increasingly they ask, “Is it worth it?”
For most banks, their retail franchise represents the company’s most valuable portion. Our research shows that banks with large branch networks, low funds costs and high core deposit ratios, relative to peers, trade at higher market multiples and command higher acquisition premiums: by 15 percent on average. But for most banks, retail amounts to the least profitable business line: You could even argue that most banks would make little or no money without it.
Still, retail in many cases also represents the company brand. Therefore, if exiting the retail business is not a viable option then banks must create new, transformational strategies and programs to revitalize and grow the business.
Define line: The scope and nature of your business
The first step is to define the scope and nature of the retail business. While crucial to any business strategy, this task proves particularly critical for retail banking executives. The reason is straightforward: Retail banking is highly complex and diverse. This diversity creates significant financial, strategic and management challenges for executives who must choose among a broad range of options to deploy their increasingly scarce resources—and achieve optimum results. A comprehensive strategy does the following:
- defines the role of the business
- identifies where and how it will compete
- develops actionable value propositions
- creates a laser-like focus on value-added activities, and
- establishes clear performance metrics. These will help create the needed focus to target investments, resources and activities on issues and capabilities that enhance market and financial performance.
Differentiate with distribution
Retail banking is first, foremost and, one could argue, exclusively a distribution business. To be certain, most banks develop and offer a broad array of too many “products.” Yet these products have little tangible value in and of themselves. Rather, the value lies in how they can be used. Distribution creates that value.
At its core, distribution determines how, where, and when customers interact with the bank and, importantly, their money. For many banks, retail delivery systems amount to both their greatest strength and weakness. They have invested heavily in multi-channel physical/digital networks that provide consumers and businesses with convenient, secure access to a full range of financial transactions, service and advice—again, how, where and when they choose. Our research clearly shows that small businesses and consumers across all segments value the convenience, choice and access provided by multi-channel delivery networks.
But it’s also clear that they don’t value all channels equally for all transactions and interactions. Understanding the role and importance of each channel is essential in configuring cost-effective, multi-channel distribution networks that create true market differentiation.
Customer experience, from promise to process
Ask any bank CEO or retail banking executive what lifts their institution over the competition and often, they will answer with some variation on the “customer service” theme. Essentially, customer service is the experience individual customers have when they interact with the bank—every time—through their delivery channel of choice. Consequently, this broad concept is difficult to define and even more difficult to manage consistently. But to turn customer service into a competitive weapon, banks must define it from the customer’s viewpoint. This means transitioning from abstract principle to a concrete, daily process of operations and management.
This requires identifying the service elements that different customers value most (e.g. speed, accuracy, reliability, flexibility, intimacy, etc.). Next comes a thorough assessment of operating processes, systems capabilities and management policies to assure alignment. Conducting this assessment can be highly detailed and time consuming, but assures that we define customer experience in alignment with how we deliver it.
Rigorous retail management
The diversity, breadth, and complexity of retail banking requires unique management skills. No other area of banking deals with the sheer number and type of management challenges. Arguably, running a large, successful retail banking operation represents the hardest job in banking. If execution drives excellence, then management drives execution—particularly for retail. Consequently, management systems, structures and processes must:
- identify issues and opportunities quickly
- report performance and results consistently
- focus management talent and resources on value-added activities, and
- free up executive management time to get out of the office and into the field.
No Simple Answers
Financial, competitive and market pressures threaten not only business performance but also viability. That noted, we believe the business can and should be saved. No simple solution or one strategy will work for all banks; rather, success requires each to:
- define the role of retail within their overall business mix,
- create highly focused strategies to target and guide investments and allocate resources,
- build value-added distribution systems,
- make customer experience an operating principle, and
- develop management structures and processes that ensure all activities and behaviors focus on delivering results.
Granted, all of this requires diligence, patience and unflinching focus—with no foolproof guarantee of success. But none of this needs to amount to giving up the retail banking cause before any concentrated effort begins. Viewed from a different angle, perhaps that zombie is in fact a sleeping giant.
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Rolland D. Johannsen is a senior consulting associate at Capital Performance Group in Omaha, Nebraska. He has close to 40 years’ experience in the financial services industry as a senior executive and consultant.
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