Retail Banking

The retail banking business is the crown jewel of the financial services industry, offering attractive risk-adjusted returns and a source of low-cost liquidity that is becoming even more valuable in the new regulatory environment.

In a crawling post-crisis economy, however, retail banking is facing a revenue drought of epic proportions. In addition to slack consumer credit growth and a margin-crunching environment of low rates, Regulation E and the Durbin Amendment are effectively diminishing fee revenues. Novantas analysis suggests that up to $50 billion in revenue has been drained from the industry, most of it permanently.

In this environment, the old maxim that performance “is all about execution” no longer holds true. Instead, fundamental transformation is needed in an era when revenues are under assault.

There are three primary levers for breakthrough performance improvement:

1. Re-structure and re-price products: In setting interest rates and fees, many banks still look primarily at their own cost structures and the actions of competitors, without fully considering the strength of customer demand and sensitivity to price. There are many opportunities to enhance revenues through a detailed understanding of major customer segments and variations in price elasticity. Read more on pricing strategy »
2. Deepen relationships: Banks have a major opportunity to win more business from established customers. The prime opportunity for account consolidation is consumer credit, including credit cards, auto and other installment loans, home equity lines of credit and whole mortgages. Based on a recent Novantas national consumer survey, more than half of U.S. household loans — worth about $4 trillion — are heavily splintered among multiple providers. Another opportunity exists in the mass affluent segment, particularly in consolidating retirement savings. Banks are increasingly developing distinctive value propositions including segment-focused product offerings and packages that will allow them to consolidate share of wallet. Read more on customer relationship strategy »
3. Fundamentally reduce costs: Branch distribution is the largest cost component of retail banking and is badly in need of restructuring. Instead of expensive manual processing of simple transactions, the branch of the future will primarily focus on high-value sales and service, and outlets will be much more carefully placed and configured in alignment with the new revenue dynamics. In addition, winning banks will innovate around the use of non-branch channels to efficiently serve their customers. Read more on distribution strategy »

None of these avenues will solve the retail banking revenue crisis on their own. Raw cost reduction, for example, would require the equivalent savings from closing 50,000 branches. Alternatively, pricing offsets would entail a 1,500% hike in maintenance fees or a 60bp expansion of deposit margins. As for customer relationship expansion, an across-the-board 15% increase in customer “share of wallet” would be required, meaning banks would have to win $50 billion of annual business away from other types of financial intermediaries.

The clear implication is that winning banks will need to pursue all three avenues, and do so in a methodical way that preserves and strengthens core customer relationships.

Our Retail Banking practice helps banks to navigate the new environment and gain competitive advantage. In the challenging era that stretches ahead, winning banks will drive performance improvement through skillful use of all three major levers for profitable growth — cost control; pricing; and customer relationship expansion. Novantas will play a major role in facilitating this progress by enhancing the analytically-driven understanding of customers and local markets; through innovation in products and channels; and through customer strategies that will enable banks to capitalize on the market and regulatory disruption that is confronting the retail banking industry.