The future of retail banking starts with the customer. Behaviors are changing, sometimes significantly, led by those who want seamless digital banking solutions as part of their daily lives. These shifts are quickly spreading across all customer segments and age groups, as more people demand simple, reliable products and services from financial institutions—or other companies with similar offerings—that put the customer first.
The combination of these expectations and technology-enabled solutions is fundamentally challenging the advantages of traditional banks (such as branch networks, trust, loyal customer bases, and proprietary data), and opening opportunities for newcomers.
Indeed, banks are facing a new struggle for customer relevance and scale—relevance being the ability to offer ubiquitously available banking solutions, and scale being about the number of customers that banks can retain in the face of nontraditional competition. Incumbents also face the dual challenge of competing with both their peers and the new entrants.
In order to thrive in the new environment, banks will need new skills in addition to their traditional areas of expertise. Critical new capabilities will include improving customer centricity and personalization, widening the breadth and depth of customer reach, and embracing open banking and ecosystems.
Most retail banks assert that they’re “open” to open banking. In several markets, regulations have forced them to be. In other markets, fintech innovation is driving the trend. But what counts for being open varies. Too many banks remain stuck in a tactical mindset focused on compliance and on fending off the risk of disintermediation. Yet, a few retail banks view open banking differently. They believe that it offers more opportunity than risk, so they are embracing it with bold plays centered on strong third-party relationships and innovative business models.
BCG data shows that open banking has the potential to add or erode retail-banking revenues by 15% to 25%. Therein lies the real threat to established players. Although some industry observers point to fintechs’ disruptive potential, the real disruptive force will be generated by incumbents that seize the potential of open-banking ecosystems to create long-term differentiation and growth.
Ten years after the 2008 global financial crisis, the profit margins of banks in advanced economies remain at historically low levels. The reason is simple: costs have been growing faster than revenues. Banks’ average return on equity has fallen to unsustainably low levels, especially in Europe.
Banks urgently need to act if they want to increase their profit margins. Because boosting revenue in the current environment will be difficult, banks must slash their costs. This will require simplifying offerings, digitizing operations, pursuing low-cost organic growth, and building scale through M&A and partnerships.