In a new four-part blog series, Dan Jones looks at some of the key issues associated with creating a new kind of consumer banking product range and service style. A fresh approach can and must directly reflect the aspirations of consumers themselves. In part I, Dan examines the fundamental forces that are reshaping the consumer banking landscape. 

Five fundamental forces that drive the need for change

Why does consumer banking have to change? Isn’t this one highly complex and specialised industry that should survive insulated from the pressures of ‘ordinary’ markets? After all, a bank account used to be for life. Banked customers historically have been more likely to change job, house or even their partner than consider moving to another bank. Isn’t there still something ‘special’ and ‘untouchable’ about bank status?

That’s certainly a mind-set prevailing inside many financial institutions. But on the outside, meanwhile, nothing short of a revolution has happened. Constant change and a sharply rising expectation curve are the hallmarks of consumers and their attitudes towards banks and banking. (Our own recent research confirms the scale of the changes, backed up by a major global survey into consumer banking attitudes by Capco parent company, FIS.) So what has happened? And why is change now inevitable?

There are five fundamental forces driving the deep changes that are happening in consumer banking:

1)     Lack of trust Many banking brands (even the world’s most established, in some cases) have been mistrusted since the financial crisis in 2008. The time when banks enjoyed unquestioning loyalty and a consumer belief that only they could provide secure and trustworthy financial services has long passed. For traditional banking brands, the consumer ‘trust fund’ can no longer be taken for granted. 

2)     Lowering the bar to competitor entry The growth of challenger banks, coupled with the regulators’ enthusiasm for competition, means that it has never been easier for new market entrants to start a bank. In just one high profile example, new entrant Harrods Bank leverages the strength of the Harrods store brand while attracting new customers with their competitively priced products. Similarly, Tesco Bank and Sainsbury’s bank in the UK are leading the way as supermarkets successfully using their established brands and customer bases to move into banking. Partly as a result of their growing profile as ‘supermarket banks’, customers are becoming increasingly aware of the choices available beyond the traditional market leaders. The scale and ever-growing familiarity of these new choices pose a profound threat to established players. 

3)     The rise of customer choice Recent Capco research has confirmed a key trend in customers’ expectations. They want more differentiation and personal choice from the range of financial products available to them. They are becoming well used to banking and spending within financial ecosystems that are tangibly rewarding. This means far greater direct benefits than simply an interest rate on their balance, or a credit facility. Our research shows that the success of just one reward vehicle - the British Airways-branded American Express credit card - has led to a new pattern in consumer behaviour. Many customers now put regular day-to-day spend on their BA Amex card in exchange for air miles. Those same customers are equally aware that, if they shop at certain retailers and other outlets that are part of a scheme such as Nectar in the UK, they can convert their additional points to BA air miles. Effectively, they can ‘double up’. How influential is this incentive proving? Capco research has shown that 87% of customers now expect to be rewarded for their credit card expenditure. In fact, they wouldn’t even consider a card that did not offer some sort of loyalty reward scheme. 

4)     Loss of interest Low interest rates put savings customers off. At the same time, they are increasingly aware of the alternatives. And alternatives mean incentives. Who, after comparing interest-rate-only savings products with an account that gives them, say, hotel points is going to opt for the bare minimum? That dream holiday, enjoyed sooner and for less, is a strong attraction. So much so in fact that the emergence of products offering air miles and other rewards means interest rates are dwindling in importance. They are becoming merely a hygiene factor for customers. The result? To maintain customer interest in every sense, banks now need to offer more. 

5)     The call of convenience Consumers are demanding ever greater levels of logistical and lifestyle convenience. They want to manage life’s tasks simultaneously, for example doing their shopping and their banking at the same place at the same time. Meanwhile, many banks’ approaches are still very much ‘anti-convenience’. Many banks’ distribution models still force customers to interact in the banks’ channels of choice, which may not be the most convenient for the customer. For example, Chase Bank customers can only bank in Chase branches and speak to Chase staff on the Chase-only phone line. In strong contrast to this approach, ‘pro-convenience’ options are rapidly establishing themselves. Barclays’ partnership with the UK’s Asda supermarket chain is one of the first joint ventures to address the demand for ‘real-life-friendly’ banking. Barclays are setting up banking counters in Asda stores. This initiative does have a precedent in the hugely successful venture between Bank of Ireland and the UK Post Office network. Having determined to enter the UK market, and rather than building their own branch network, Bank of Ireland distributed their products through the recently privatised Post Offices. This has given them the largest physical network of any UK bank, with 11,500 branches.

Taken together, these five fundamental forces are combining to erode the 250-year-old consumer banking landscape at a pace that is leaving it unrecognisable. In the next blog in this series, we look at the first of the banks’ three key lines of defence.