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Seismic shifts: Retail banking in the wake of COVID-19

The retail banking industry is facing unprecedented challenges as a result of COVID-19. Customer behaviour has changed drastically and will continue to evolve in a post-Covid world. This LABTalk explores trends in channel usage, customer preferences and brand perceptions captured in the latest REBEX Pulse Survey spanning 30 countries. Join this LAB Talk session to learn how you can use the data and insights for your next case.

Authors: Thorsten Brackert, Mindy Hauptman, Byron Marshall, Holger Sachse, Bjorn Schwarz, Aldo Tolentino & Monica Wegner

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Seismic shifts: Retail banking in the wake of COVID-19

  1. 1. 1 White Paper Seismic Shifts: Retail Banking in the Wake of COVID-19 Thorsten Brackert, Mindy Hauptman, Byron Marshall, Holger Sachse, Bjorn Schwarz, Aldo Tolentino & Monica Wegner September 2020
  2. 2. BOSTON CONSULTING GROUP SEPTEMBER 2020 he COVID-19 pandemic has accelerated the migration of retail banking customers throughout the world towards digital channels. Worryingly for less digitally adept banks, they will very soon wake up to find that a significant proportion of both first-time and more experienced users of online banking are turning to this channel much more than they even do today, while also frequenting branches a lot less. It now seems clear that the crisis has already brought about fundamental changes in customer behavior that have reshaped retail banking for good. Retail banks should urgently reassess their distribution strategy to see how best to capture the customer zeitgeist. These are among the key findings of BCG's Retail Banking Excellence Benchmark (REBEX) survey, a comprehensive and unique study of 17,600 retail banking customers in 30 countries conducted between mid-May and mid-June 2020.1 The survey offers much food for thought for bank leaders, and lays bare very considerable risks and opportunities for their organizations. In this paper, we will set out the most eye-catching and significant results from the survey, and explore the critical implications for banks. As the current crisis drives customers to move in even greater numbers from traditional to digital channels, established incumbent banks need to make appropriate investments in response, and improve the digital customer experience they offer. If they do not do so, there is the danger that many of their now more digitally aware customers will defect to nimble and innovative digital challenger banks. With footfall in branches greatly reduced, banks will also need to think carefully about how much physical space they really need and how to put it to best use. This will be a complex decision, based on a nuanced picture. Our survey also shows that a smaller group of customers will use branches more than they did previously, possibly because they believe they will need more financial advice in turbulent economic times. 1 BCG conducted online interviews with 17,600 respondents in 30 major retail banking markets throughout the world between 18th May and 19th June 2020. T
  3. 3. BOSTON CONSULTING GROUP SEPTEMBER 2020 During this period of uncertainty, many consumers have postponed purchasing decisions, including for financial products such as insurance, investments and pensions. At the same time, our survey reveals that a significant proportion of customers, younger ones in particular, are open to switching banks in the next few months. Market shares are therefore up for grabs if banks are able and prepared to meet the increased demand for financial advice and to provide the digital service and experience that customers seek. There is no time for hesitation for banks - the window of opportunity is now. Customers were willing to put up with merely adequate service as they hunkered down during the crisis. Now, as things gradually settle down, their expectations are likely to rise commensurately. Banks have to anticipate these rapidly developing customer needs, getting ahead of demand with a revamped distribution model and relevant products and sales strategy. The pandemic and customer response The use of digital banking, especially mobile banking, has increased substantially during the COVID-19 crisis. Indeed, almost one in three of all customers, and one in two customers aged between 18 and 34, say they have used mobile banking more than they did before the crisis. (See Exhibit 1).
  4. 4. BOSTON CONSULTING GROUP SEPTEMBER 2020 A large cohort of first-time users is partially responsible for this trend. Around one in six respondents to the survey said they had never used online banking or mobile apps until the crisis hit. Younger customers were more likely than older generations to say they had registered for online banking for the first time. The trend towards digital banking is set to continue after the crisis. Around a quarter of respondents say they are likely to use online banking even more as time progresses.(See Exhibit 2). What is more, those who signed up for online banking for the first time during the crisis, primarily out of necessity due to branch restrictions, are equally likely to say this as more long-time users. (See Exhibit 3). Customers’ increasing comfort with digital channels comes across repeatedly in our survey. Indeed, 50% of those customers who prefer branches are now willing to manage an account digitally if branches were unavailable, instead of delaying a purchase or opting for another provider.
  5. 5. BOSTON CONSULTING GROUP SEPTEMBER 2020 Cashless payments represent another area to have received a major boost during the crisis. More than 20% of respondents told us that they have increased their usage of digital payment solutions, such as internet banking or third-party apps, and more than 10% say the same about credit and debit cards. In terms of the willingness to use digital
  6. 6. BOSTON CONSULTING GROUP SEPTEMBER 2020 payments in the future, there was very little difference (less than two percentage points) between first-time users and those who were already using them before the crisis. The use of remote channels, such as a contact center and remote advisors, has also gone up during the pandemic and is expected to continue to grow. The proven willingness of customers to use such channels will be an important consideration for banks as they revamp their distribution strategy in the wake of the crisis. Perhaps inevitably, given widespread restrictions on access, there have been fewer visits to branches in the vast majority of markets surveyed. We saw significant variations between those markets, however, with already digitally mature markets unsurprisingly registering a more moderate decline in branch usage.2 Indeed, Denmark, the Netherlands and Hong Kong even experienced a slight uptick in branch usage during the crisis, while around a quarter of customers in countries such as South Africa, Russia and Greece say they have been using branches less than they did previously. (See Exhibit 4). 2 Digital maturity equates with digital competitiveness, as defined in the Institute for Management Development (IMD)’s World Digital Competitiveness Ranking 2019
  7. 7. BOSTON CONSULTING GROUP SEPTEMBER 2020 The exodus from branches seems unlikely to be temporary. In almost all countries, respondents are more likely to believe they will use branches even less after the COVID- 19 crisis is deemed to be over. Indeed, more than one quarter of customers are planning to either use branches less or stop visiting them altogether. That said, there is again some variation by country, with increases in branch uses expected in Hong Kong and Sweden. (See Exhibit 5) Younger customers are more likely than their older counterparts to say they will visit branches more in the future, perhaps to seek financial advisory services after such an unsettling period. The general move away from branches to digital is reflected in the respective levels of customer satisfaction with the various channels. Customers are most satisfied with online and mobile banking channels, and significantly less so with branches, although of course restricted access to the latter may partially explain this finding. (See Exhibit 6). Given the anticipated increase in usage revealed by our survey, banks should view with some concern that current customer satisfaction levels with remote advisors, and especially with contact centers, leave considerable room for improvement.
  8. 8. BOSTON CONSULTING GROUP SEPTEMBER 2020 First-time users from the crisis period are less satisfied with digital channels than their more seasoned counterparts. However, as we have seen, this relatively lukewarm initial response may still not stop them using the channels more in the future. Our comprehensive bank-by-bank analysis also reveals a significant variation in customer satisfaction. Customers of challenger banks are more satisfied with their experiences in both online and mobile channels than are customers of incumbent banks.3 A flight to safety versus an itch to switch Despite this greater satisfaction with the digital channels provided by the challenger banks, traditional banks gained more trust among customers during the COVID-19 crisis than their newer rivals. Overall, traditional banks enjoyed a net increase in trust of 12%, compared to a net increase of 8% for challenger banks. 3 Across all markets in the study, 124 challenger banks and 414 traditional banks were identified. Challenger banks include both digital newcomers and smaller non-incumbent banks.
  9. 9. BOSTON CONSULTING GROUP SEPTEMBER 2020 These figures may indicate some early signs of what has been a recurrent historical trend in times of economic uncertainty and recession, in which customers tend to gravitate towards more established financial institutions that are generally perceived to be more secure. However, banks need to ensure that they maintain the requisite quality of service within all their channels. Customers’ trust in their bank was much more likely to go up during the crisis if they were extremely satisfied with its channels. Indeed, the increase in trust was 50 percentage points higher among the extremely satisfied cohort than among those that are extremely dissatisfied; 25 percentage points more than among those that are dissatisfied; and 22 percentage points higher than among those that are neither satisfied nor dissatisfied. This trend is most pronounced for clients using contact centers and least for those using online banking, once again demonstrating the importance of perfecting the provision of remote human assistance. Younger customers were more likely than their older counterparts to say that they had become more trustful of incumbent banks since the start of the crisis. To complicate matters, however, younger customers are more disposed to switching banks in the next six months, and they are also more likely to feel happy depositing their money in a digital bank. (See Exhibit 7).
  10. 10. BOSTON CONSULTING GROUP SEPTEMBER 2020 This is important market information for banks to appreciate and make sense of. This is particularly true given another survey finding, namely that a significant proportion of younger customers are planning to delay a purchase until the crisis recedes further. Moreover, customer responses suggest that the sales mix is set to change, with a shift towards off-balance items such as insurance, investments and pensions. (See Exhibit 8). We can make the case, therefore, that market shares are up for redistribution in the near future, and that substantial revenue is there for the taking for those banks that offer the most persuasive overall offering. The digital component is likely to be a very significant factor when customers with purchasing intentions decide to switch to another bank. Whereas customers dissatisfied with their experiences in a branch are five percentage points more likely to delay a product purchase than those who were satisfied, those dissatisfied with the online channel were 10 percentage points more likely to do so.
  11. 11. BOSTON CONSULTING GROUP SEPTEMBER 2020 Implications for banks: Meeting accelerating demand for digital For a number of years, bank customers have been steadily migrating towards digital channels. The COVID-19 pandemic has squeezed what might have been several more years of further progression into the space of two or three months. Such a sudden acceleration in customer behavior, and the realization that these new habits are set to become still more ingrained, demand an urgent response from bank leaders. Let’s take American customers as an example. During the survey period, most of them (62%) were hybrid customers, using both digital and branch channels. Meanwhile, 26% used only digital channels and 12% relied on face-to-face communication. However, our survey suggests that after COVID-19, the percentage using digital only will jump to 39%. Banks cannot afford to adopt a wait-and-see approach as these developments unfold, but instead respond with energy and commitment. Despite the high adoption of digital channels, a large number of customers have still not used relevant features, such as disputing transactions or managing ATM withdrawal limits online.
  12. 12. BOSTON CONSULTING GROUP SEPTEMBER 2020 Great opportunities await those banks who can rise to the task. Many customers have left substantial sums in low-interest current accounts, delaying purchases of financial products until the crisis settles down. And, as our survey intimates, the good news for long-standing established banks is that customers may well view them as the safest option during what is likely to be a prolonged period of instability. However, incumbent banks have often been left behind in the digital space by the more innovative challengers that have entered the market in recent years, not to mention by the many efficient digital operators in other fields to which customers have now become accustomed. Our survey demonstrates that, when it comes to their experience of digital channels, banking customers are more satisfied with these challengers. Moreover, younger customers in particular appear open to depositing money with them. Incumbents need to expedite their digital progress just to offer what is now generally expected, and meet the rapidly growing demand for high-class digital channels. During the lockdown period, customers with more pressing concerns on their mind will have tolerated merely adequate service. They may not be so forgiving in the future. The short-term priority for banks must be to retain customers and capture the purchases that have been delayed by the crisis. Small-scale lighthouse use cases with this dual aim in mind, based on data analytics, can serve as models for more extensive transformation of digital banking. One eye, however, should be kept firmly fixed on anticipating and building for what customers will be looking for further down the line. We have seen that there are some customers who plan to use branches more, so banks should not simply resort to the blunt instrument of cutting their branch network. Banks need to undertake a fundamental review of their distribution model, in particular their branch network footprint and the nuances of its new role, and determine how best they can meet client needs through remote channels, such as video chat.
  13. 13. BOSTON CONSULTING GROUP SEPTEMBER 2020 It is critical that customers can start their journey in mobile channels and be offered seamless access to human support while still in that channel. They must always be able to enjoy such flexibility in their interaction with the bank. Although digital development should be the priority, banks should aim to provide bionic customer journeys, blending digital technology and human interaction to offer the right products and services. Those banks which respond most adroitly to the shifting momentum in customer behavior can grab significant market shares from their competitors. The COVID-19 pandemic has had a very considerable impact on the behavior of retail banking customers. Given the scale of the change revealed in our survey, banks should embrace the resulting opportunities. In the short term, they should exploit the greater trust now invested in them to capture delayed purchases and seek to retain clients. In the medium term, their distribution strategy will require a fundamental overhaul. Thorsten Brackert Mindy Hauptmann Byron Marshall Holger Sachse Bjorn Schwarz Aldo Tolentino Monica Wegner Thorsten Brackert is a partner and director in the Frankfurt office of the Boston Consulting Group. Mindy Hauptman is a partner and associate director in the firm’s Philadelphia office. Byron Marshall is REBEX director for North America in BCG’s Chicago office. Holger Sachse is a managing director and senior partner in the firm’s Dusseldorf office. Bjorn Schwarz is REBEX director for EMEA in BCG’s London office. Aldo Tolentino is the global director for REBEX in the firm’s Miami office. Monica Wegner is a managing director and partner in BCG’s Sydney office. The authors wish to express their gratitude to Ankur Patil, Richard Cummings and Sebastian Balmaceda for their support.
  14. 14. BOSTON CONSULTING GROUP SEPTEMBER 2020 You may contact the authors by e-mail at: brackert.thorsten@bcg.com hauptman.mindy@bcg.com marshall.byron@bcg.com sachse.holger@bcg.com schwarz.bjorn@bcg.com tolentino.aldo@bcg.com wegner.monica@bcg.com About BCG Boston Consulting Group partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. BCG was the pioneer in business strategy when it was founded in 1963. Today, we help clients with total transformation—inspiring complex change, enabling organizations to grow, building competitive advantage, and driving bottom-line impact. To succeed, organizations must blend digital and human capabilities. Our diverse, global teams bring deep industry and functional expertise and a range of perspectives to spark change. BCG delivers solutions through leading-edge management consulting along with technology and design, corporate and digital ventures—and business purpose. We work in a uniquely collaborative model across the firm and throughout all levels of the client organization, generating results that allow our clients to thrive.

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