PwC: Retail Banking Industry Entering a Dynamic Era of Change

A number of key dynamics and developments are likely to substantially alter the global operating landscape for retail banks by 2020, according to a PwC report titled ‘Retail Banking 2020: Evolution or revolution’. Just over half of global bank executives (55%) surveyed believe that non-traditional players pose a threat to the traditional retail banking industry. However, 31% believe that they present innovative partnership opportunities. The study predicts that retail banking is expected to look very different from today and that banks will have to adapt their business models to ensure success and sustainability.

The report was based on a survey of 560 financial services executives from leading institutions in 17 countries, of which 19 were representatives from a range of South African banks.

The main purpose of the research was to gauge the opinions of senior banking leaders on the possible future shape of the retail banking industry around six themes: customer centricity, optimised distribution, open innovation, simplification, advanced analytics, and regulatory enterprise integration.

Tom Winterboer, PwC Leader of Financial Services for Africa, says: “Powerful forces are transforming the retail banking industry.

“The evolution of technology and heightened customer expectations combined with the emergence of disruptive competitors, especially globally, creates new pressure to deliver higher levels of service. Succeeding in this environment may require a fundamental rethink in approach.”

Over two thirds (70%) of bank executives worldwide believe it is important to consider how global macro-trends (such as economic growth, regulation, and social, demographic and technological changes) will impact the banking industry in 2020.

Johannes Grosskopf, PwC Head of Banking and Capital Markets for Africa, says: “Unsurprisingly the majority of bankers surveyed view attracting new customers as one of their top challenges over the next two years. However, banks also recognise the need to deepen their customer relationships and focus more on specific outcomes. Hence, enhancing customer service is an investment priority for banks, globally and in South Africa.”

From the survey it is apparent that focus on the customer is of paramount importance to the South African banking executive. Amongst South African participants surveyed, enhancing customer service was the top priority over the next few years and attracting new customers was the top challenge faced by banks. South African respondents believe that banks who successfully employ a customer-centric business model will gain a competitive advantage.

For South African bankers, plans to prepare for customer centricity are focused around allowing for increased customer choice in configuring product features (63%), and using social media to monitor customer preferences (47%). “Banks today have a simplistic understanding of their customers and a vastly complex product set. The winners of 2020 will turn this on its head. They will be able to understand their customers’ needs, and be present with a relevant solution at the time of need,” adds Grosskopf. In order to achieve customer centricity banks believe that simplification in products and fee structures are essential, with 68% and 58% indicating that these areas, respectively, require simplification. “Also key to achieving this goal is better use of the customer data which is already available, but hitherto not fully utilised”, says Grosskopf.

According to Thomas Magill, a retail banking specialist and Partner at PwC, another area where significant evolution is expected is in the banking channels. Over the next five to 10 years, South African banks plan to place emphasis on digital distribution, with a stronger focus on transitioning more customers to self-service channels (37%). Four-fifths of South African bank executives (79%) say that their organisation’s distribution model needs to change to meet future customer expectations, in line with the global view of 82%. In line with international norms, local banks also expect the importance of branch banking to diminish as consumers migrate to online and mobile channels (42%) but did not feel as strongly about this as their global counterparts. Magill suggests this may be as a result of a larger rural population and less developed digital infrastructure in South Africa.

Surprisingly, South African respondents view regulatory compliance as less of a challenge than their global counterparts. Almost two-fifths (39%) of local respondents believe that many banks will master risk and regulatory enterprise, which will provide them with a competitive advantage. However, according to Magill, with a greater focus on ‘Know-Your-Customer’ (“KYC”), anti-money laundering (“AML”) regulations, and with the imminent introduction of Treat Customer Fairly (“TCF”) and Protection of Personal Information legislation (“POPI”), this optimistic view may change.

Both South African and global respondents have indicated that research and development and innovation will be top investment priorities over the next few years, with local respondents planning innovation in second place, and global respondents placing it third. South African respondents indicated that partnering with third parties will form a key part of their innovation strategy (53%). This is already evident in the South African market if one considers partnerships around distribution channels and loyalty programmes.

Both local and global respondents say that technological constraints present a pervasive obstacle affecting their ability to deliver more customer-centric business models, advanced analytics, simplification and open innovation.

Forecast for 2020

According to Magill the retail banking industry is entering a dynamic era where technological developments are irreversibly changing the landscape. According to PwC studies the banking landscape is likely to evolve as follows by 2020:

  • Competition will be defined by brand and not physical presence only. This implies that a challenger with a banking license, technology and advertising budget could build a brand even in the absence of a physical distribution network.
  • Banks that survive and grow will be low cost producers, with nearly every product profitable on a standalone basis;
  • Capital management and regulatory compliance will be front of mind with a move towards embedding greater capital efficiency; and
  • Technological advances and reduced switching costs will result in a greater focus on customer centricity and customer retention.
  • Survey participants conclude that big banks are best placed to adapt and capture the majority of the market share over the next five years and emerge as the winners.

“In response to this rapidly evolving landscape, banks should develop a clear perspective on the position they want to play. Thriving in 2020 will require being receptive to leading practices from other industries and innovative approaches to identify effective strategies for tackling challenges and increasing opportunities as relevant to each bank’s unique strengths and priorities,” concludes Magill.