By Eoin O’Gorman, principal, Elix-IRR

The retail banking industry is undergoing rapid change with customer interaction shifting to digital channels, and online, mobile and contactless payments increasing in popularity.

As a result, the core customer-facing elements of the business are being forced to evolve rapidly to fill a widening gap between customer expectations and the service they currently provide.

Other industries such as retail, media and travel have already undergone this shift, and this has heaped customer expectation on banks which are expected to offer the same service levels. Customer expectations in retail banking are being set by the increasingly positive experiences offered by these industries. But banks face major challenges thanks to a potent cocktail of legacy technology, pressure to cut costs and the increasing costs surrounding compliance and regulation. This perfect storm has led to three fundamental shifts in the retail banking sector.

Paradigm shifts in retail banking

Firstly the way in which customers interact with their banks is shifting from physical to digital channels. Gartner predicted recently that 50% of all bank customers will be using mobile banking as their primary channel by 2016. Banks need to develop coherent banking applications and services across all their channels, while at the same time optimising the existing branch network to reduce the number of under-utilised branches and cut operating costs.

Secondly, customers are pushing for better service across all channels. Generally speaking, retail customers are not looking for complex banking products – they just want solutions that support their desired banking objectives. Disruptive organisations such as PayPal, Square, Google Wallet and m-pesa in Africa have all picked up on this trend, and are providing more focused solutions in direct response to customer needs. Banks need to integrate their services to support improved, “multi-channel” customer experiences, across all channels including branches, contact centres, online, mobile and ATMs. Multi-channel itself is merely a stepping stone towards an “omni-channel” future, where customer interactions are truly integrated across channels and an interaction started on an application has the potential to be completed online or via a contact centre.

Finally, retail banks have to make better use of analytics and big data to drive more customer-centric service. Banks are already using analytics to drive actionable insights from big data, but in the future real-time analytics will be used to understand and respond to specific customer objectives. This will enable banks to innovate around lifestyle events, such as shopping, travel and entertainment, as well as customer lifetime events, such as university enrolment, buying a house and retirement. It is through these experiences that customers can derive real value from their banking provider, and this advice should be offered via any and all available channels – including contact centres, mobile, ATMs, social media and even branches. In fact, within the next decade, banking advisory may be entirely replaced by algorithms; a digital platform, with access to customer data, market data and financial algorithms, could be able to provide financial advice to customers.

Innovative banking business and operating models are expected to emerge over the next two to five years. More progressive retail banks and disruptive entrants to the market will use digital opportunities to seek differentiation and growth, and as a consequence of this increased competition we are likely to witness profound structural changes in the retail banking sector. This in turn will drive radical changes to banks’ operating models and sourcing strategies.

The changing face of customer interaction

A number of solutions and trends are emerging as banks try to deal with the changes described in the first part of this article, including taking back control of customer service channels from low-cost, outsourced options. Santander brought its call centre back from India to the UK in 2011 in an attempt to boost customer service.

Another option is to outsource more functions, but purely transactional elements. Many banks are divesting control of the operational elements of the bank in order to focus on the customer-facing elements. Metro Bank in the UK has outsourced the majority of its back office activities/operations to a selected few outsourcing providers.

Alternatively, if customer management is simply not a certain bank’s strong suit, it might consider using outsourced providers to deliver personalised customer service. This “outsourcing of customer relationships” may seem a radical departure from banks’ historical strategies. However, for many banks, burdened with legacy technologies and constraining organisational silos, retaining relevance in the digital economy may require exactly such a radical decision.

Similarly some institutions may use outsourcing to fast-track innovative solutions and technologies that they themselves do not have the capability or resources to deliver. Some banks are opting to use smaller, more agile providers to meet their digital needs, and Barclays’ partnership with Tech Hub in Manchester shows banks are not afraid to ask start-ups to help them solve strategic challenges. However, careful management of suppliers is required for banks seeking to achieve a consistent omni-channel customer experience, as using a larger number of small suppliers can cause unwanted integration challenges.

The future

The digitisation of retail banking presents profound opportunities to banks, but inevitably there are also challenges to be overcome. A new breed of technology and a new customer mindset are potential sources of business inspiration, but for this inspiration to have a positive effect on the bottom line banks will need to make some fairly dramatic changes. These include defining a common vision of the bank’s digital future; innovating around customer objectives rather than products; transforming operating models to instil new capabilities and put customers at the centre of the operation; and choosing the most appropriate sourcing models for various bank functions.

In the coming months and years, retail banks will need to make some big, bold moves to cope with changing customer needs and expectations. As banks and disruptive start-ups form new business models that exploit digital technology, they will look to outsourcing providers and partners to enable increased focus. These dynamics will create a raft of new opportunities, beyond the more traditional areas of retail banking outsourcing. In turn, to keep step with the digitalisation of retail banking, outsourcing providers will also have to innovate within their own capabilities and business models. And all of this is good news for customers.

To download a free PDF copy of the full report, please visit the Elix-IRR website: http://www.elix-irr.com/white-papers/trends-outsourcing-financial-services-industry-2009-to-2013