When we talk about retail banking we’re generally referring to a few ‘big names’, the main high street banks, built up over many decades – in some cases centuries. They have grown and acquired their smaller competitors and are an established presence in all our lives.
But we’re starting to hear that banking in the future may not be the same, there’s talk of start-ups and challenger banks. The established brands are looking to adapt to the new world of retail banking – so what trends might determine what the retail banking looks like in the future:
1. High Street to Online
For the past 30 years we have seen a sustained reduction in the number of bank branches operating on the high street. There were 20,583 branches in 1988 but only 9,383 in 20121 . This change has been driven by the adoption of technology, particularly the internet, and the reduction in the use of cash.
It would seem that the march to digital banking is inexorable, and yet there are signs that the importance of the high street is still recognised in the banking industry. The major banks have a voluntary policy that they will not close a branch if it is the last bank branch in that town or city. Meanwhile challenger Metro Bank started in 2010 with four stores on the high street, they’re aiming for 150 stores by 20202.
Those new entrants who are basing their offering in the digital world can be fast and agile in deployment, they don’t have to adapt legacy systems and have the luxury of building an IT system from scratch that is fit for purpose in the digital age.
2. One Stop Shop to Account Specialists
Traditionally banks have offered a wide range of products; current accounts, savings accounts and mortgages to name a few. Working in this way allows the banks to offset risk, balancing less profitable offerings against those that bring them more revenue.
In a time when banking relationships were personal and often face to face, a customer might well look to one organisation to provide them with all the financial products they needed. This is no longer the world we operate in, the ease with which we can view the latest deals and offers means that we’re more likely to move our accounts, particularly with products such as mortgages where the end of a scheme prompts us to look for the next deal.
Newly emerging challenger banks have more scope to specialise in a small number of products. When their route to market is purely digital their overheads are lower. Lower cost delivers higher margins, this in turn means less need to offset the profitability of one product against another. Products such as current accounts, which are not viewed as profitable by many banks, can create profit in the online world.
3. A Few Big Banks to Many Smaller Banks
The past 30 years have witnessed much consolidation in the banking industry. By 2014 75% of all current accounts were with just four providers3. To increase competition initiatives such as the Current Account Switching Service were introduced. There have recently been moves to make it easier to apply for a banking license and this has prompted a flurry of potential new entrants – in April 2014, 29 such applications were under consideration.
It seems unlikely that the consolidation witnessed in the retail banking market will be completely reversed, however with challenger banks willing to enter the market we may well be set to see interesting and novel approaches and in some areas an increase in competition for our banking business.
The world is changing and the retail banking trends identified suggest that there will be a battle for our hearts, minds and money. However, as the bank of the future develops, providing people with the accounts, services and approach they want will be the key to survival.
Experian provides a range of services to help banks serve their customers online, in call centres and in branch for more information click here.
1. Source: British Bankers Association; Annual Abstract of Statistics 2013; table 5.02
2. Source: Metro Bank Website: https://www.metrobankonline.co.uk/Discover-Metro-Bank/About-Us/
3. Source: Reported in thisismoney April 2014 http://www.thisismoney.co.uk/money/saving/article-2606119/FCA-reveals-29-firms-lodged-banking-licence-applications.html