By Richard Goold, Executive Director at Moorhouse
As the economy passes the pre-recession peak, the impact on the financial services (FS) sector is clear. Whereas previously traditional FS organisations were king in the marketplace, the move by regulators to open the market to new entrants is creating new competition within the industry. Tesco’s recent decision to launch a current account is a prime example of the way in which the retail banking sector is changing. Tesco might be the first supermarket to launch a current account, but it is by no means going to be the only one to make this move. Established banks cannot rely on existing customers staying with them just because they have been customers for life or even generations. The competitive landscape, ease of being able to switch and increasing expectations of customers are redefining the market. Growth, and in some cases survival, will be dependent on their relationship with the customer and the experience that customers ultimately have with their organisation.
After the government opened up the banking market more widely, there has been an influx of challenger organisations delivering banking services effectively and at competitive rates, leading to disruption of the traditional model. Furthermore, the quality of service that customers now expect has changed significantly in the past ten years. Customers expect organisations supplying services to be more customer focused than in the past which is posing some particular challenges for FS organisations. It is no surprise that retailers seek to enter this sphere as their ‘customer is always right’ attitude is more closely aligned with these new expectations.
Retail banking is a transactional experience which aligns to the strengths of the retail industry. Supermarkets are well poised to disrupt this market as they are adept at focusing on customer experience and can apply this to creating desirable banking services. For example, supermarket retailers can integrate banking services in to existing supermarket space creating more of a one-stop shop for customers. Alongside ample and free parking as well as extended opening hours, customers have far better access to banking services when they want them. Furthermore, supermarkets already possess sizeable customer bases, huge store networks and an excellent knowledge of their customers’ preferences as they are able to access data collected through loyalty schemes. In fact, with the vast amount of data that has been collected through loyalty schemes the opportunity for supermarkets to be both proactive and innovative in offering suitable add on FS products and driving customer loyalty is not insignificant.
Traditional banks must compete with supermarkets and challenger banks to offer a more flexible service that will appeal to customers. This is typified by the seven day service now offered by banks that allows customers to switch their current accounts from one provider to another more quickly and easily. The government is even considering mandating that banks must allow their customers to be able to switch their current accounts immediately. As the emphasis on choice has risen, the power in the relationship has shifted from banks to their customers.
An unexpected consequence of the financial crisis is the rise of shadow banking. As financial institutions have withdrawn from offering certain services, shadow banks have multiplied offering an alternative to traditional banks. Shadow banking, as it stands, ranges from the extremes of unregulated lending services that charge high interest rates, to other sources of funding. In the absence of banks providing necessary services to SMEs, many turned to crowdsourcing and peer to peer (P2P) services as a means of obtaining loans. As other sources rush to meet the need of customers that are unable to obtain loans from traditional organisations, it is these established firms that are losing out. Although the market share of P2P lending accounts is still very small, they are on the rise and collectively can still disrupt the market.
The rise of shadow banking and challenger firms should be a wake up call for the traditional financial institutions. In the wake of the global financial crisis, trust in the banking industry is low and banks must work hard to win the confidence of customers. Traditional FS firms need to change their mindset, otherwise they risk failing to make the investment and changes necessary to stay ahead of the competition.
In the aftermath of the recession, organisations were focused on cost reduction, consolidation and protecting core services. However, it is detrimental to remain in this mindset as the economy recovers and returns to robust growth. Our 2014 Barometer on Change, a survey among 200 of the most senior FTSE, multinational and public sector leaders in the UK, found that only half of businesses are “extremely clear” about their strategy. Around a quarter (22%) of the UK’s biggest organisations say their strategy is only “quite clear”, while only just over half (52%) of business leaders say that their strategy is “extremely clear”, up from 44% in 2013. If FS organisations are to remain competitive, they need to develop a strategy focused on developing a long-term relationship with their customers.
Customer experience cannot be underestimated. If an organisation truly succeeds at putting customers at the heart of what they do, they are likely to reap big rewards. Whilst many organisations have a customer engagement strategy in place, this must be assessed and revisited every six months at least. Customer engagement is not a box to be ticked each year, it should be a core and strategic focus for all organisations. Developing this strategic focus allows organisations to adopt a big picture view enabling them to see the benefits of each action.
While strategic focus is important, some quick wins early on in a programme can be a good way to motivate staff and create ‘ buy in’. This will help ensure support for these projects and help organisations resist the urge to re-allocate resource to short-term non-strategic initiatives. Without a clear strategy, it is much harder to prioritise and compare actions. FS organisations should create a single view of investments across the business and review them as a whole regularly to make sure they are achieving their objectives.
To take advantage of growth, organisations have to do new things. Unless they can turn strategy into action extremely quickly, they won’t be able to take advantage of the better economic outlook or stay ahead of the competition. However, securing the resources needed to deliver actions is crucial. Building partnerships both internally and externally will help to ensure the right skilled resource, at the right time, at the greatest value. It is up to project managers to demonstrate greater flexibility and be multi-disciplined – they are at their most effective when they can apply business analysis skills and subject matter expertise. There is a greater need for agility, responsiveness and engagement within the industry and it is up to the people within an organisation to ensure that the company has the necessary strategic focus and the means to put this in practice.
Challenger banks are currently the furthest ahead in the sector as they embrace innovation and build a strategy around their customers’ needs. Challenger banks have an advantage as they build their companies from new without being constrained by legacy or technology infrastructure. Unless traditional FS organisations seek to make the necessary changes to their strategy, they may find themselves lagging even further behind. Innovation and transformation in their businesses is going to be crucial to remaining competitive and to ensure that they take advantage of growth.