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Trust is at the heart of banking – can the incumbents hold off the challengers?

There was a time when banks were pillars of the community. Customers relied on them to keep their money safe and help them weather economic storms. This intimacy – and the trust associated with it – started to wane in the 1980s, when shareholder pressure made profit maximisation the overriding management priority.

Accompanying this shift was the introduction of technology that allowed customers to transact remotely, creating distance in what had often been a truly personal relationship. Although customers still trusted banks to keep their money safe and protect their personal data, they became increasingly sceptical about whether banks would always provide advice that was in their best interests.

When data driven “segment of one” personalisation did emerge, it was used more to market banks’ products than improve customers’ financial well-being.

Trust in the banking sector was shaken by the 2008 financial crisis, while subsequent mis-selling scandals across multiple markets only served to reinforce many consumers’ suspicions that their and their banks’ interests were divergent if not opposed.

New entrants to the retail banking market saw an opportunity to not only create innovative digital propositions, but also to change the tone and nature of their customer interactions. They emphasised a collaborative, empathetic, “we’re in this together” brand position that has resonated with many customers, resulting in more than 20 million accounts being opened with challenger banks operating in the UK.

This left incumbent retail banks little choice but to invest heavily to digitally transform and modernise their businesses. The impact of this was studied in the 2019 Digital Banking Leadership study, and found that while digital leaders among traditional banks have increased their margins through improved efficiency, they have yet to achieve the strong top-line revenue growth associated with the best digital brands in other sectors.

The best of incumbent retail banks now deliver efficient, highly appealing digital customer experiences, but consumer surveys still show pronounced scepticism that the interests of banks and their customers are truly aligned.

This is the key sentiment of a new report which states, at its heart that incumbent banks are at risk of losing billions of dollars in retail revenues in the next three to five years, as new competitors draw customers with no-fee banking services and regulators in select markets mandate simple banking fee structures to protect consumers.

A sizeable portion of retail banking revenues are at risk

The report, titled “Purpose-Driven Banking: Can Trust Create Win-Win Banking Relationships?,” is based on quantitative analysis of retail banks’ revenue pools across 12 markets in Europe, North America, South America and Asia-Pacific and was complemented by a survey of nearly 15,000 banking customers in those markets. It found that the revenue that traditional banks generate from overdraft and other fees and from charges for services like cross-border payments and foreign transactions will erode as a result of both competitive and regulatory pressures, resulting in an average revenue loss of 5%.

“Whether in one year or five, the billions in revenues that traditional banks collect annually for basic services and penalties, like overdraft fees, will erode,” said Alan McIntyre, senior managing director and global head of Accenture’s Banking practice. “Banks that proactively cannibalise this diminishing revenue by helping customers manage their money better will earn their trust, which benefits both parties. The economic logic is simple: Better advice leads to better customer decisions, which create more wealth over time — more wealth for banks to help manage.”

The report notes that banks could use innovative technologies, such as artificial intelligence and predictive analytics, to build personal relationships with their customers and become trusted advisors —capturing 9% incremental revenue growth, on average, by doing so.

For example, to help customers make better financial decisions, banks could provide advice on what payment options will generate the most rewards or how best to finance a large purchase. In fact, more than half (55%) of consumers surveyed said they would be willing to pay a fee for relevant add-on services from their bank.

“Banks in markets experiencing high revenue loss, such as the UK and Hong Kong, have an opportunity to reap first-mover advantage and grow net revenues by building trust through day-to-day advice and transparency,” said Julian Skan, senior managing director and European head of Accenture’s Banking practice.

“For most of the countries we analysed, banks could increase revenue through a trust-based approach that would more than compensate for the revenues under threat. However, in countries like Sweden and France, where customers are more sceptical, banks would have to find additional ways to defend and grow their business, perhaps by becoming intermediaries for non-financial products.”

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