Less than two weeks ago, Toys “R” Us announced it would shutter its 875 U.S. stores—a move that shocked many in the retail industry. Suddenly, 30,000 employees lost their jobs. And the flurry of headlines raised the inevitable question, over and over: Is this another nail in the coffin for large-scale brick-and-mortar retailing?
To be sure, online retailers make it very easy to buy things without going to a store. And the stores that remain are often poised for survival: tech-enabled, smaller, convenient and frictionless.
Looking at the banking sphere, you’ll see a mixed picture. Physical stores and bank branches are closing in high-income, mature markets—yet branches continue to grow in low- and middle-income countries. And in emerging markets, as bank branches grow, there is a marked shift to online. Banks, like retailers, now grapple with shrinking margins and new challengers.
Here’s what emerging-market banks can learn from general retail trends that will help them build their own version of new retail:
1) Consumer visits to traditional stores are declining as online and mobile sales continue to grow.
In the U.S., 7,000 store closures were announced in 2017. “Store closures are a major theme in U.S. retail, as many over-spaced retailers are reacting to the migration of sales online by closing physical locations,” says FGRT's Deborah Weinswig.
Bank branches in high income countries (mature markets) are on the decline. According to an IMF survey, branches per 100,000 adults have dropped from 24 to 17.5 between 2004 to 2016. That trend is only likely to gather further momentum, as these mature markets witness flat to negative growth and more customers use online and mobile banking.
However, the global outlook is quite different: Branches increased from nine to 12.5 per 100,000 adults. For low- and middle-income countries, the number doubled from five branches to almost 10 branches per 100,000 adults as per the IMF data.
2) Traditional retailing (and retail banking) is grappling with the intense transformation of the business model.
“Traditional brick-and-mortar stores are grappling with intense transformation of their business to be more web-based and trying to reconcile their old business model with one in which profit margins are thinner.”—Mark Cohen, a former CEO of Sears Canada
The challenges faced by traditional retailers are well documented; Cohen himself said last year that we’re watching “the ongoing, seemingly endless, tortuous liquidation of Sears.” The news about Toys “R” Us was followed last week by the announcement that Claire’s Stores Inc., known for teen jewelry and ear piercing, became, as Bloomberg put it, “the latest victim of the retail apocalypse.” Gone are as many as 7,500 Claire’s locations concentrated in shopping malls where consumers spend less and less time.
Traditional banks not only face similar challenges, but also competition from new entrants. According to McKinsey, digital disruption in banking could hit its inflection point in 2018 with significant potential for revenue disruption.
3) Highly successful retail models and store formats of the past are being reinvented to stay relevant to the changing customer—and improve efficiency.
IKEA is rolling out new stores closer to customers and less than 10 percent the size of their traditional superstores. The Swedish retailer hopes to focus on ecommerce and technologies such as virtual reality to improve customer experience.
Likewise, the new Nordstrom Local is local and smaller—and offers online-to-offline convenience and advisory services. This store has just 3,000 square feet versus the normal 140,000 square feet, thus driving down brick-and-mortar costs.
Banks that digitize to the core—and transform their user experience with well-trained, digitally enabled staff—will best position themselves to deliver superior customer experience.
4) Alibaba's “new retail”: online, offline, logistics and data.
Forbes Magazine reports that Alibaba Founder and Chairman Jack Ma coined the term “new retail” in a letter to shareholders last October: “Pure e-commerce will be reduced to a traditional business and replaced by the concept of New Retail―the integration of online, offline, logistics and data across a single value chain.” We believe this is very much what next-generation commerce will resemble, with the consumer at its core.
Banks have been striving to build an effective single view of the customer, get data quality sorted out and build effective omnichannel architecture. But many banks still have channel-based processes and organizations that make it tough to deliver the seamless, data-driven, online-to-offline model that Alibaba, Amazon and other retailers are rolling out.
5) Amazon Go and the no-line, no-cashier store.
Amazon Go's concept could signal the future of grocery stores: no lines, no cashiers. Customers can check in at the store entrance with the Amazon Go app. Amazon tracks the shopping cart through computer vision and deep-learning tech: a trendy type of artificial intelligence where computers recognize patterns in large data sets. When you're finished shopping, you just leave the store as it charges your Amazon account.
Contrast that with banks where you still can’t do everything online. As with retail, bank customers want choice and convenience. Some want to do everything online, while some may prefer to visit a branch, where they want simple, friction-free interactions and staff equipped to meet their needs.
6) Banking customers (in emerging markets) increasingly do most research online.
Google's Consumer Barometer indicates that most Vietnamese customers search online for loans. However, a small percentage complete the process online. Banks must support customers in transitioning from online to offline, as simply as the best retailers do.
7) Bank: No longer a place you go, but something you do.
Customers want maximum banking convenience. In most markets, customers from very diverse segments will tell you that they don't want to visit a branch; they’re too busy running their businesses or their lives. And yet, many banks ignore this and design processes that require branch stops. That’s not only inconvenient, but also adds to the cost structure and potentially discourages great customer experience.
8) The human touch matters.
Most emerging-market customers may not choose to visit a branch but still want the option of talking to an advisor. So if they apply for a personal loan, they will very likely do online research. But if they need assistance, online collaboration tools should team with an advisor visit or branch service.
In all cases, manage the application as an online “assisted service” process, where fulfillment is digital (end to end) and enhanced by the human touch. This is no different from online check-in at airports that position staff next to kiosks. This offers the cost and time savings of digital, enhanced by the person assisting you. Japan’s Shinsei Bank was built in 2003 using this design principle and was featured in a 2006 Harvard Business Review case study:
“The bank’s services were entirely self-completed; the staff was present only to provide assistance as needed. Transactions took place online, at Internet portals in the branch.”
9) Retail banking needs its own “new retail.”
As they redesign their processes, retail banks in emerging markets need to start with the customer, working from online discovery and fulfillment technology-enabled options that include assisted service—fulfilled digitally either at the customers' location or a digitally-enabled branch. As on Alibaba or Amazon Go, the customer buying process would have online-to-offline integration with frictionless in-store fulfillment. That represents the power and potential of digital.
10) Putting it all together: What kind of retail bank do you want to be?
“There are two kinds of companies, those that work to try to charge more and those that work to charge less. We will be the second.”—Jeff Bezos of Amazon.
Non-bank competitors bring a Bezos mindset as they try to disrupt banking models. Banks will either improve value or will be forced to do so by regulatory changes in emerging and mature markets.
In almost every major emerging market, regulators encourage new players to improve financial inclusion and drive costs down—whether that means creating common standards and a unified payment platform, issuing payment bank licenses in India or enabling PromptPay in Thailand.
The same is true of mature markets such as the European Union, where regulators use the Revised Payment Service Directive (PSD2) to increase pan-European competition and payments industry participation from non-banks with innovative, low-cost solutions. According to the EU website, one aim of PSD2 is to lower charges for consumers and ban card payment surcharging.
With digitization, banks have a great opportunity to follow the Bezos approach via lower costs passed on to customers. To enable digital fulfillment, banks will need to rebuild themselves with a digital core rather than heaping added interaction layers onto a legacy core platform.
Further, banks can redesign distribution models to strategically locate branches closer to customers, staffed and operated for rapid or instant fulfillment. Staff also need authority to implement solutions that solve customer issues on the spot.
Most emerging-market banks have a significant field sales force. This creates a lot more customer convenience but works only if it’s well trained and equipped with all the digital tools to create value and speed fulfillment.
The bottom line: “New Retail” must better value for customers through a simpler, faster banking experience.
As the retailing world has discovered, digital is an incredibly powerful enabler. Yet it needs a clear sense of purpose and direction. For some, such as Toys “R” Us and Claire’s, those lessons come too late. But for banks at the crossroads, there’s still time to buy into new retail.
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Sandeep Deobhakta is the Retail Banking Head, VP Bank, Vietnam’s most profitable and fastest growing joint stock retail bank. He is also a judge representing Asia-Pacific region for the BAI Global Innovation Awards. To learn more about the eighth annual BAI Global Innovation Awards, and nominate an organization, visit bai.org/globalinnovations. Submit your nominations by April 13.
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