Retail banking has become a digital business, spurred by the rapid spread of broadband access and affordable smart mobile devices. But digital channels will not fully replace physical channels, nor will branches disappear. The main challenge for banks is to fuse digital and physical assets into a hybrid combination that customers now demand what we call a "digical" transformation.
The best practices so far tend to be occurring outside the U.S. Bain's surveys and interviews with 78 major retail banks worldwide show that five specific imperatives are essential for building a strong bank of the future.
1. Create a differentiated customer experience that combines digital and in-person services.
Truly customer-centered banks have married digital and physical assets to improve customers' banking experience. Commonwealth Bank of Australia, for example, took this approach to extend a core banking product the mortgage. Partnering with multiple listing database Domain.com.au, CBA developed a mobile app to search any house in Domain's database for visual and written details. Customers can start the mortgage application online or book an in-person appointment with a mortgage adviser. E-alerts keep customers updated on their application status. This convenient and engaging service has helped CBA reinforce its leadership in Australia's mortgage market.
2. Develop tech-savvy alternative branches, one market at a time
U.S. banks are just starting to develop new branch formats that include digital services such as in-branch tablets, video teller machines and smart ATMs. But the most common new model has been deployed for years in Asia. It consists of hub-and-spoke configurations of a full-service flagship branch supported by advisory offices, light-retail consumer branches and digital self-service kiosks. On average, satellite branches make up almost 40% of Asian banks' footprint.
3. Overhaul the technology platform to simplify customers' lives
Fragmented infrastructure remains a pervasive problem for many retail banks. More than half of the benchmark panel banks have no "one and done" processes in which a bank employee must only interact once with a transaction or request in order to complete or resolve it. As a result, customers at these banks still endure slow, clunky service.
Banks should ensure that their IT infrastructures allow for different departments and functions to share customer data so that each client has a holistic data file. This will also allow frontline employees to see the entirety of a customer's history with the bank. Banks should also implement technology that supports one-and-done processes and speeds up transactions by processing them in real time rather than in batches.
Building these kinds of capabilities is usually an expensive, multiyear process. Of our benchmark banks, however, only 60% report having a migration plan with clear budgets and allocated investments, suggesting that the other 40% have not yet adequately prepared to overhaul their IT.
4. Establish a "change fund" that will enable future investments in digital and physical channels
Investing in both digital and physical capabilities is expensive. It requires the courage and discipline to free up costs in the branch network, IT and operations. Establishing a "change fund" on the balance sheet is one way to ensure a bank has sufficient money to accomplish the change over a number of years. Several banks have established a ring-fenced venture fund, in which funds designated for investments in technology and innovation are separated from the rest of the bank, in order to protect such funds from quarterly earnings pressure.
5. Reorganize to spur innovation and change
Banks want to be innovative, but most don't possess the habits of innovators. Fewer than half of our benchmark banks said they exhibit common innovation requirements such as incentives to test new ideas, freedom to experiment and tolerance of failure.
Some institutions have set up venture units and innovation labs that are separate from the core business and offer the freedom to explore external deals and relationships. BBVA Compass, for instance, acquired online banking startup Simple and invested resources in a strategic alliance with social media savings site SmartyPig. BBVA also has global investments in companies such as 500 Startups, a seed accelerator active across 40 countries. The appeal is clear: Landing the right skills and mindset for digital innovation may require access to nontraditional leaders with nontraditional organization structures, even if that provokes a clash of cultures.
If banks are willing to rebuild their business around customers' priorities, they can emerge even stronger from the digital revolution that's underway.
Mike Baxter leads Bain & Company's financial services practice in the Americas and is based in New York. Dirk Vater leads Bain's global retail banking practice from Frankfurt.