High street bank’s advantages to counter the threat of uberisation
The word “uberisation”, taken in a broad sense, can be used to refer to the threat to an established model posed by a succession of innovations and the involvement of new parties. The question that arises today is whether the banking sector is experiencing uberisation and if so, what advantages do banks have to fight it? It is possible to establish arguments in response to these questions with a fair degree of certainty.
Retail banking is seemingly more affected by the phenomenon of uberisation than business banking. Digital innovations, which can find a use in banking, take various forms, including robotisation, digitisation of processes, agreements and signatures, big data, artificial intelligence, payments and many others. Such innovations are evidently highly disruptive and create many revolutionary possibilities, which should be analysed and incorporated into bank strategies.
Two types of disruption in the wake of this technological revolution are particularly worth studying, firstly the possible shift to virtually unique online banking model known as “neo-banking”, and secondly the appearance of new players, in particular start-ups such as fintech firms, competing with commercial banks in profitable segments within their value chain.
Both these issues are important and different, even if the responses that they generate might sometimes overlap.
Is it possible to imagine banking without branches ?
Some analysts describe banking as “tomorrow’s Kodak” or, less radically, as the “next steel industry”. The subject deserves responses that are built on a sound analysis. First of all, the issue of digital technology must be distinguished from that of interest rates. We are at the point where the two phenomena meet, but they have nothing to do with each other. On one side is a very flat interest rate curve which harms retail banks’ profitability. There is a reasonable expectation that rates will rise again, in particular to produce a sufficient gap between short-term and long-term rates, and the central bank will gradually emerge from quantitative easing, since it has already begun to recalibrate its actions in this area.
On the other side is digital technology and its effect on profitability. It would be a mistake to use digital technology to respond to interest rate issues in the belief that low interest rates are changing the model structurally. Interest rates at time ‘t’ do not change the model in itself, but do temporarily harm profitability, which is different.
Retail banking : day-to-day banking and banking for customers’future plans
The following arguments are a return to fundamental questions, namely what is the very essence of retail banking and what is the essence of the banking relationship? A clear distinction needs to be made here between invariants and contextual aspects that change according to the technology currently used and its adoption by customers. In retail banking, the model which may differ from one country to another depending on the custom and practice specific to each, there are two main areas, i.e. transaction banking or the “day-to-day” component, and relationship banking concerning customers’ plans for the future and financial advice. They are two separate types of banking demand, although they naturally often overlap.
Day-to-day banking is that of commonplace transactions – collecting a chequebook, making a payment, withdrawing or depositing cash, and so on. The development of the internet, smartphones and ATMs means that a transaction bank has almost no need for a branch network to perform these commonplace transactions. Branch footfall has decreased significantly, and there is therefore a constant decline in demand for counter services.
Relationship banking, meanwhile, relates to customers’ future plans and providing advice, offering support during difficult times that can happen to anyone sooner or later. It characterises the deepest relationship between consumers and their bank, well beyond just managing means of payment. Such a bank retains its customers for a long time. This lengthy period is tied to the fact the bank looks after customers’ future plans, from preparation to completion. Such plans can be highly significant, such as paying for studies, setting up a business, buying a house, pension planning, and so on, or be on a smaller scale and arise more frequently, such as planning a trip or buying a car. A lasting and strong relationship of trust is forged between the customer and the banker. The range of needs met by relationship banking can therefore be described as long-term, likewise the products offered, i.e. credit, savings and insurance, all of which are long-term products.
Opposing schools of thought are routine within a society. In the late 1990s and the 2000s, many questions were raised about whether supermarket chains were going to replace banks. At the time, numerous articles appeared opining wisely that supermarkets were going to swipe whole swathes of bank revenue. However, this did not happen, for the simple reason that supermarkets run a short-term business, where the products sold are consumed almost immediately. If a product fails to satisfy a customer, it is easy to change the brand, or indeed the supermarket chain used, which is not the case in banking as taking out a loan, savings account or insurance policy is, as a general rule, a longer term commitment. Bank advisors consequently need to stay in their jobs for a sufficient length of time, which customers very much prefer to see. In supermarkets, in the main, sales staff have vanished from the stores. At the time, it was consequently difficult to believe that supermarkets could take significant market share from the banks, precisely because a fundamental analysis of the very essence of the banking relationship showed that savings products were not bought shrink wrapped. The only overlap between supermarkets and banks occurred in the area of consumer credit, payment cards and loyalty schemes, all of which are an extension of the purchasing act. Until now, this has been the only area where there really has been genuine competition between supermarkets and banks.
Furthermore, different countries feature different mixes between relationship and day-to-day banking models. Research conducted on behalf of the French Banking Federation in 2010 attempted to find out which countries had banks with a strong relationship component. France was one such country, which did not mean French banks were not transaction banks, but simply that they had assigned relatively greater importance to the relationship aspect compared to many other countries. Countries that have models that are much more transaction-based than relationship-based therefore see a benefit in closing numerous branches, as their branches do not have enough products to offer. For relationship banking, the issues are different and the prospects more promising.
Fewer counter transactions presents an opportunity for banks
People are therefore travelling less and less often to banks for their day-to-day banking needs. But does this mean customers have less appetite for relationship banking services? Over the last ten years, relationship channels with bank networks have changed, to now include physical visits, telephone banking, email, video, online chat and others. However, they have not eliminated the need for bank advisors. But while there is still the same, if not more, need for advice, customers need to know where their advisors are.
ustomers want to physically see their advisors at regular intervals, either to deal with specific important matters or just for reassurance. Having local branches is therefore not entirely inappropriate, especially as they are also, as a location physically representing the bank, a means of reassuring a large number of both retail and business customers. So as these local branches already exist, why not take full advantage them? Furthermore, they have an advertising presence on the high street that is the envy of online banks.
In this way, relationship channels are changing and dovetailing but not being lost. Ultimately, they are really essentially based on the relationship with the customer advisor. The core element does not change, because there is no drop in demand for banking in relation to customers’ future plans, quite the opposite. With the internet, customers are increasingly demanding as regards the quality of advice received, as they know exactly how to use it to find information, compare and switch if need be. They require advisors to be even better, more responsive and more proactive than in the past.
In reality, the decline in counter transactions is actually an opportunity for banks, which is not the paradox it might seem. Firstly, digital technology has eliminated the repetitive counter tasks that earn banks nothing and costs are saved as a result. Much more sales time can also be allocated to customers who are asking for more, while converting people who were previously counter staff to banking advisors. Most of the time, such people are easy to train up, being younger staff and keen to advance. Thanks to digital technology, there is more time to sell banking products, and commercial staff can be spared repetitive tasks.
Secondly, as a consequence of the first point, advisors’ productive commercial time can be expanded, leading to increased productivity. Banks’ gross income is consequently increased through their greater capacity to advise and serve customers and thus meet their requirements.
Thirdly, digital greatly enhances the customer experience because some transactions are easier to conduct remotely or using ATMs. Customer satisfaction is therefore improved by greater bank usability.
Lastly, digital technology is also an opportunity as it enables the relationship model itself to be improved. Big data and artificial intelligence, as they are gradually incorporated, deliver better understanding of customers and their needs. This is a matter of intelligent sales productivity, and customers are much more satisfied as they are only contacted about subjects that relate to their actual requirements.
Take the high road : invest massively in improving skills and in digitalisation
Improving banks usability and the quality of advice are therefore both key to success. Two routes enable high street (i.e. branch-based) banks to achieve this, namely training and digital technology itself.
If high street banks deliver the same usability as online banks but without such low bank charges, then they need to differentiate themselves in some other way, i.e. high-quality advice. Although they are entirely legitimate operations, purely digital banks do not have any advisors.
In actual fact, customers in France are demanding both, i.e. a highly practical day-to-day bank, and a regular advisor who can offer them some added value. They therefore only try to split transaction banking from relationship banking, or even make do with a single, day-to-day, low-cost bank, when their usual bank does not excel in both areas.
High street banks therefore hold a definite comparative advantage, albeit subject to two conditions. Firstly, they must continue to invest to be as effective as online banks in terms of usability in day-to-day banking, which is totally feasible. Secondly, they must ensure they have the capability to deliver high-quality advice, worth paying for because of its added value. Significant investment in digital technology and training therefore constitute two key success factors to counter the threat of uberisation.
However, flexible organisation of both the network as a whole and each branch, together with optimum use of resources to allocate them to the greatest revenue generators, is also crucial. In some cases, banks may close branches because the need for day-to-day transaction counters is disappearing. It is consequently no longer vital to have a branch every 200 metres in city centres, although they are still essential for providing advice. Depending on current bank locations, the number of branches to be cut might vary considerably.
In addition, online banking is not profitable at this point, or only very slightly, precisely because it experiences great difficulties in supplying customers Furthermore, it has to incur considerable costs to acquire new customers, as it needs to advertise much more heavily than other banks to do so. Having no high street presence, online banks must attract customers before they simply wander into a high street branch. In a similar vein, online banks need to offer plenty of gifts and free offers. For example, €80 is the typical bonus paid on opening an account. Many students open accounts with more than one bank in turn in order to obtain these payments. Customer loyalty is therefore not straightforward. As a result, low-cost online banks must essentially focus on transaction banking. Generating profit from such business models and leveraging customers accordingly becomes fairly difficult, unless the range is expanded and advisors recruited, which is in fact starting to happen. Low-cost services, almost by definition, cannot ensure contact is always with a regular advisor. They therefore must make customers pay each time they use an advisor. In addition, when the low-cost banking service is provided by an existing high street bank, when customers need to deal with a personal issue or obtain advice in preparing or completing some long-term plan, they are forced to switch product category and stop using the low-cost service. Such a development, still rare, is very inspiring, as it could herald a situation where some traditional banks go partly digital while online banks up their game by hiring banking advisors. These two levels of banking would then move closer together in an interesting way.
Dispensing with people in delivering advice
The question then arises: can banking advice itself go digital? The following thought process seems simple enough: with properly organised big data and well-designed artificial intelligence, automated “pushes” (by text message or email) to customers would make human advisors pointless. Customers could receive intelligent suggestions, sometimes perhaps even more intelligent than those made by an inadequately trained or poorly supported advisor. Why therefore would we need banking advisors in future, when everything has been made digital? Although it is impossible to see 10 or 20 years ahead with any certainty, it is difficult to envisage eliminating people from the provision of banking advice.
Machines are admittedly able to beat human endeavour in many fields, but man and machine combined will beat a machine alone. Some humility is nonetheless called for, as who knows at this point what artificial intelligence will be able to achieve in future?
rtificial intelligence experts themselves adopt a cautious stance. There are however a number of factors to take into account.
The first is that trust is a key component of the banking relationship, for one simple reason, namely that customers entrust their money to banks and need their support in achieving their future plans, which makes banks very close to customers and vital to their security. Personal interaction currently generates infinitely more trust than dealing with a robot, no matter how “intelligent”. Younger people, completely at ease with digital technology, are for example asking banks to provide a regular advisor, even if they do travel to branches much less. BRED conducted an experiment whereby banking suggestions were sent by text message or email to groups of customers in identical situations. As ever when email shots are dispatched, a positive response rate of 2-3% was received. Secondly, the shot was sent to other people, in the same situations, but this time with a follow-up phone call from a banking advisor on the same subject. Response and conversion rates were ten times higher. This small, but genuine, experiment, gives grounds for real hope that people will remain a core component of the banking relationship.
The second issue relates to the fact that a bank’s reputation is also part of the basis for trust, which is an added value and an asset for banks.
In addition, cognitive science is now showing that decision-making involves not only rational intelligence, but also emotional intelligence. Research presents cases of individuals who have sustained injuries and lost the use of that part of the brain used for emotional intelligence. Such individuals then become totally incapable of making decisions, while their reasoning and analysis capabilities remain fully intact. Advances in cognitive science accordingly show that taking the right decision entails intuition about the solution combined with a proper analysis. Interpersonal relationships can therefore be a potent factor in decision making. In a similar vein, econometric research has found that learning is more effective when carried out face-to-face with a teacher than it is with a MOOC (Massive Open Online Course). Although the extraordinary benefit of MOOC in the dissemination of knowledge and its ability to reach many more learners is unquestioned, teachers (or trainers) present in a classroom still have a future.
Lastly, the population is receiving more emails and text messages each and every day, “pushed” out by unknown persons and organisations. If it has not already been reached, saturation point will soon occur. The difference will then take the form of human beings who can bring some added value to these “pushes”.
For all these reasons, high street banks are probably not threatened by extinction from anything approaching possible uberisation.
Can the technological revolution enable some players to compete with commercial banks ?
The second approach concerning uberisation consists of asking whether banks might suffer a loss of profitable market segments as a result of the arrival of outsiders, such as fintech outfits currently enjoying a boom.
In fact, fintech firms are increasingly developing services relating to certification and authentication, biometrics, budget management, secure digital archives, aggregators, payments, blockchain, etc. The question is therefore whether banks are running the risk of disintermediation affecting the profitable areas of their value chain.
The model that could legitimately cause concern is that of external aggregators, which can now potentially access data, offer fund transfer services, and therefore initiate payments. These aggregators have the capability to offer budget management services, for example. It then naturally follows to wonder what would prevent them in future from analysing customer data so as to able to offer improved banking products and services. Such players could in particular offer consumer credit using brokers and by offering the lowest bidder – but not necessarily the most appropriate – which might not be the customer’s usual bank. This hypothesis of part-disintermediation of banking is entirely conceivable, but the related hazards may be mitigated by a number of other factors.
In the first instance, many fintech outfits will not have access to customer data, those offering budget management software, for example. It is only with some difficulty that they will manage to take market share from certain segments currently dominated by banks. Two solutions are available to such fintech firms, either cooperation with specific banks through the latter buying the former or through partnerships, or the building of collaborative platforms with a number of other banks so as to offer services that can be shared. By taking action of this kind, fintechs are moving into and joining the banks’ value chain, but without however disrupting their model. They are even contributing to enhancing that model by forcing banks to broaden their services to become even more effective in their overall model with their customers. By way of example, BPCE Group actively sought out fintech firms to offer business customers CRM solutions linked to payments. Consequently, banks either have the necessary IT investment capacity and can enhance their services themselves, or they look to subcontract this work. In reality, the solution is often based on a mixture of these alternative approaches. The change will be that hitherto the bank was used to doing everything itself, whereas in future it will probably also be an assembler of components, and no longer entirely self-contained. There is nothing wrong with assembling components if it enables banks to broaden their overall relationship base, and their revenue.
The second case, which might obviously cause problems, is where the fintech firms do have access to some customer data. Web scratching – which could well soon be made illegal or at least strictly regulated – and PSD2 and API more generally give rise to the question of opening up access to bank and customer account data. All banks have now built their own aggregators so that their customers do not have to leave the bank’s environment to get access to their accounts held with their other banks. In the near future, regulations will require access to data to be governed by strict consent rules, making it much more difficult for parties external to the customer’s bank to process data, whether or not those parties are themselves banks.
Discussion is focused on establishing which data it will be possible to access. Customers and the general public are nowadays increasingly aware of the dangers of permitting uncontrolled use of their data. This trend is likely to accelerate, and can be seen particularly in young people. This greater awareness is an obstacle to such intrusions.
Furthermore, the General Data Protection Regulation (GDPR), in force since May 2018, reiterates that data belongs to customers, and customers must approve any use made of it. This regulation applies not only to banks, but to any and all users of data, so it also restricts third-party newcomers from using data in a cavalier fashion. The bank must remain the trusted third party that processes people’s private data, and obviously must not allow that data to be disclosed without customers’ express consent.
High street bank survival relies on their taking the high road based on an agressive strategy
Banks’ ability to survive and in fact improve their overall relationship model with consumer customers by offering and new, built-in services, will therefore be crucial in withstanding uberisation.
While banks are investing heavily in training and digital technology, and at the same time are bringing about essential changes to their organisations, there is no reason to think that the branch-based retail banking model will vanish. On the other hand, as in any model that endures, it can no longer remain undiluted but instead it must blend very closely with the digital model. These days, in all fields of distribution, pure digital models are struggling to survive and purely physical distribution models are dying. The future will therefore consist of the right mix between traditional and digital models, and the route to the right response will be found by understanding what forms the very essence of the banking relationship.
In banking as elsewhere, the risk of uberisation will have stimulated competition a great deal, which is vital in a highly-regulated sector not usually conducive to rapid change. Besides this stimulating effect which will have resulted in improvements to the banking model to customers’ benefit, uberisation also threatens to drive down profitability owing to newcomers exerting pressure. To respond to this threat and increase revenue, other areas could be developed in parallel to the recurring business of commercial banking.
The risk of uberisation needs to be assessed in depth against the yardstick of the advantages of commercial banks. Taking the high road in this way does appear possible, then, provided the necessary changes to be applied are properly assessed, and an intentionally aggressive strategy is adopted.
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