Retail Banking Outlook: Consolidation and Convergence
Prediction-making has always been a terribly bad business, but now that we are nearly two quarters in to 2018, we can at least reflect on the progress so far. On what we have done, seen, thought and talked about with our colleagues and clients and try to distill a view on ‘what is going on’ and likely to keep on developing.
1. In-market consolidation: “There can be only one”
Scale at the local level in retail banking generally spurs returns, and this will remain one of the main drivers of in-market consolidation. This trend is expected to continue to play out in retail banking globally and particularly in Spain.
In spite of the massive recent restructuring effort in the Spanish financial system (shrinking from 62 to just 12 banking institutions in barely ten years), industry structures may have some scope to further rationalize. The gradual sale of the public stake in Bankia or the apparent change in the ownership of EVO Banco are just two potential milestones in that direction.
Having said that, a lot of questions on how this consolidation will play out remain open:
- Which will be the sources of synergies? In an environment where branches keep on losing relevance, corporate development specialists will have to dig deeper to unlock integration value in brand equity, the digital frontend, data assets or backend capabilities.
2. Cross-border consolidation: “The world is your market”
Retail banking has long been considered a domestic business and there has been limited cross-border consolidation in the space so far. Will the need for scale make cross-border consolidation more appealing?
The question is not so much whether it is attractive from the management or shareholder perspective as whether it is possible from the customer perspective to develop truly global value propositions in retail banking. High profile retreats from overseas markets of the likes of Citi, HSBC or Barclays are cautionary tales to those trying to conquer new regions without the bold commitment to gain significant scale and do whatever it takes to adapt the value proposition to local customs (e.g. ING accumulated €~1 bn of losses globally over more than a decade with its greenfield approach to customer acquisition).
However, 2018 may be a tipping point on this front. Neobanks are coming out of age, and we are seeing several of them trying to expand globally (Revolut, N26, Bunq or Denizen just opened shop in Spain).
Though the impact on market share is likely to be modest in the short run, this initiatives may well serve as a grand ‘beta test’ for the banking industry as a whole and shed light on long-ranging questions:
- Can global value propositions cater the interest of retail banking customers? If so, the door for fierce cross-border competition between banks, FinTechs and digital giants is wide open.
- Will re-bundling of financial services become real? Although elements of the incumbent banks have been disrupted, we have not seen one major FinTech dominate the entire financial needs of consumers. Challengers are making up the playbook as they go along.
3. Convergence across interfaces: “The human body as interface”
The real problem with interfaces (devices and channels) is that, well, they are interfaces, and interfaces get in the way. The AI revolution is forcing us to reset our presumption on what it means to design for interaction. Eventually, as Google [X]’s Astro Teller would say “great technology becomes invisible”, and so should great banking (or at least the utility bit of it).
The new paradigm calls for design of environments that respond to our voices, movements, glances and thoughts. BBVA developing ‘invisible payments’ based on facial recognition or EVO Banco announcing a strategic shift towards ‘voice banking’ are just a couple of examples of how banks are hurrying to rethink the interfaces we use.
The next frontier in customer experience will be the human body itself. Fascinating challenges lie ahead:
- Which will be the next customer engagement platform? A myriad of solutions are being developed and tested, and it is still unclear which one will drive customer adoption. However, waiting to learn about, and experiment with, these interfaces (voice assistants, chatbots, video, VR/AR, etc.) until the market has fully adopted them may put you too far behind to catch up with the pace of adoption by consumers.
- How to build rapport and convey brand identity through the new interfaces? When and how to provide human support, voice (tone, tempo, timbre and volume), facial expressions, hand gestures, eye movements or body posture are all key variables to be carefully analysed and managed by marketers in this new era.
4. Cross-industry convergence: “Your bank is not a bank”
In the age of digital disruption, the barriers between long-standing sectors are becoming more and more blurred. There is the customer need and there is the solution to that need. Industry structures (product lines, business units or even companies at large) that do not serve the customer are bound to radically change.
Brands are encroaching on each other’s territories to offer contextualised solutions and better meet user needs. EVO Banco experimenting with travel, BBVA developing family planning or real estate appraisal solutions, Santander entering into car dealership, Coinc offering wedding planning services, WhatsApp and Microsoft pushing to enable payments into their products or Orange and MásMóvil working hard to launch their own banks are just a few exemplars of this trend.
Redrawing the map of industries offers amazing opportunities in terms of entirely different business models. But it also asks for hard strategic decisions:
- Where and how to play? The number of verticals in which a company does not participate is, in general, way larger than the number of verticals in which it operates. Deciding upfront which verticals to enter and the role to play in each one (orchestrator, producer, enabler, etc.) can be extremely difficult. Building capabilities and brand legitimacy is not an easy task either. Experimentation and the ability to move quickly, learn fast, develop and scale new services at speed will be critical.
