Today’s bank customers are generally happy. But for how long? Learn how banks can deliver what customers will want next.
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One step ahead: How banks can anticipate what customers will want next
One step ahead: How banks can anticipate what customers will want next 1
The heart of the matter
Are US retail banking customers happy with their banks? How do bank CEOs see the future? We know that banking is being changed by a combination of technology, millennial preferences, and non-traditional disruptors. And while many customers are currently generally happy, sentiment can turn on a dime. Learn how banks can understand changing consumer expectations and stay one step ahead.
The very paradox of disruption: the more you satisfy your current customers, the more likely you are to miss the very thing that will rock your industry.
When they talk about the future, many CEOs are fond of quoting Wayne Gretzky. The hockey great said that he always tried to “skate to where the puck is going to be, not where it has been.” Chief executives set strategy and define budget priorities for a company, and they’re always trying to balance today’s realities with tomorrow’s possibilities. They need to anticipate where the puck will be at a specific time in the future—to think about what their customers will want—and stay one step ahead at all times in order to deliver.
In our view, today’s banking CEOs face a future-defining challenge. They instinctively want to skate forward into the digital future, and they have very good reasons for doing so. But, many of their customers are still coasting around at the other end of the rink wanting traditional, customer-service driven banking. And for now, these customers still drive a considerable part of today’s business.
In our 2015 Consumer Banking Survey, we asked a representative sample of US consumers about what they want and expect from their primary financial institution. In very broad terms, consumers appear to be pretty happy with what they’re getting today. And this is the very paradox of disruption: the more you satisfy your current customers, the more likely you are to miss the very thing that will rock your industry. In our view, the financial services industry is also
ripe for disruption from competitors from other industries who are targeting a subset of the customer base and a portion of the services offered.
In this paper, we examine how consumers feel about their banks today, what bank CEOs see for the road ahead, and how banks that focus too much on the present may thwart their future success. We agree with most of the bank executives that the financial services industry could look very different by 2020. However, it’s too easy to say that banks must disrupt themselves or become irrelevant. The message is clear: banks are under pressure from non-standard competitors, and consumers are willing to listen to these competitors.
Every day, financial services executives make tactical decisions about the people they employ, the processes they implement, and the technologies they use. In each case, they’ll succeed by acknowledging the different constituencies they serve, and developing a plan for each, based on behaviors and preferences.
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An in-depth discussion
The CEO and the consumer, through the looking glass
What do US retail banking consumers want? We asked, and they told us. As shown in Figure 1, the vast majority of people we asked considered the following features to be important or very important: responsive customer service (86%), competitive pricing (86%), convenient branch locations (81%), online banking offerings (77%), and convenient branch hours (77%).
Contrast that with the to-do list for financial institution CEOs. They have to worry about how to remain relevant and keep customers loyal in a fiercely competitive environment. They also have to meet ever-changing regulator expectations and manage everything from fraud to operational risk. To satisfy their customers, they have to find ways to upgrade systems and improve their service quality. But they need to do this without the margins that their trading desks and consumer fees once offered, while at the same time competing with upstarts who typically don’t have to follow the same capital or compliance rules. That’s a lot of juggling that consumers don’t want to think about—or, arguably, care about. Consumers just “want it to work.”
Figure 1: What US retail banking consumers want
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………………………..…..… 1 PwC, “18th Annual Global CEO Survey,” BCM sector results 2015, www.pwc.com/CEOsurvey.
What keeps CEOs up at night
Earlier this year, in PwC’s 18th Annual CEO Survey, we asked senior banking executives their thoughts about the future. Six out of seven leaders said they feel somewhat or very confident about their companies’ revenue growth prospects between now and 2018. But they feel that the probability of disruption is very high, and they have a right to be concerned. It’s all coming faster than ever: 68% of the leaders we asked were somewhat or extremely concerned about the speed of technological change, up from 57% only a year earlier.
As shown in Figure 2, bank CEOs told us they see the following six forces at work: customer expectations on the rise; technology that’s changing everything; non-traditional players disrupting existing models, regulations continuing to challenge business models; new risks on the horizon (such as cyberattacks); and trust remaining elusive.1 We share the bank CEO’s view, but this further illustrates the disparities in finding the consumer perspective. After all, consumers report they are generally happy with their current financial institution.
Figure 2: Bank CEOs told us they see six forces at work
According to our most recent CEO
Survey, 68% of
leaders see the speed of technological change as a threat to growth, up from
57% only a year earlier.
Source: PwC’s 18th Annual CEO Survey, Banking and Capital Markets respondents only.
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Consumers are happy—or are they?
On the surface, it would appear that consumers are generally fine with the status quo. For example, at least 75% of those surveyed described themselves as satisfied or very satisfied with the banks’ customer service, mobile banking offerings, and branch hours and locations.
That’s certainly good. But banks need to look a step ahead, and know that consumers can be shaped by their experiences with companies in other industries. When people check into a flight using their phone, or get context-sensitive shopping hints (“if you like this, you may like that”), they may start to wonder why banks can’t also provide them the same seamless, on-demand, interactions for a wider set of banking services. So, when far fewer express satisfaction with their financial institution’s customized product offers (57%), mobile offerings (57%), or reward programs (45%), it’s a red flag (see Figure 3). The fact is, consumers have seen it done better outside the financial services industry.
Figure 3: Banking services with relatively low consumer satisfaction ratings
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………………………..…..… 2 PwC, "2015 PwC Consumer Banking Survey," 2015, www.pwc.com/fsi.
A new kind of competitor emerges
In addition to consumer expectations being driven by their experiences outside the banking industry, non-traditional competitors have started to offer financial products to consumers. Many of these disruptors do a better job engaging with customers and further contribute to rising customer expectations. These non-traditional competitors often use digital technology as an entry point. As the CEO of a large American regional bank told us, “The days of being able to just think of other banks as your competitor are over. We’ve seen new entrants that are being driven by technology.”
To start with, new competitors have an unfair advantage. After all, technology-driven competitors don’t have to support a branch network, a legacy technology infrastructure, a support structure that relies on human capital, and so on. And when it comes time to raise money for improvements, financial institutions may find that their cost of capital makes investment problematic.
There’s also the issue of market appetite: consumers don’t have the loyalty that might keep them locked in. In our survey, we asked consumers about their willingness to buy a wide range of financial products from non-traditional providers: retailers, technology companies, and hybrids.2 As one might expect, many were skeptical about turning to a non-traditional provider for complex and critical products such as mortgages. But they could easily see a technology company, say, as a provider of peer-to-peer payments (44%), bill pay (40%) or point-of-sale transaction processing (45%), and other products that don’t require a lot of research.
Finally, we note that technology companies can cause trouble for banks, even if they don’t provide financial services themselves. In the same way that comparison engines revolutionized the way we book air travel, we’ve seen the rise of virtual brokers for financial services. These tools, which steer consumers to lower-priced competitors and capture value in the process, have helped push down margins. This is a zero-sum game, in which consumers are perfectly happy to shop around and reward the provider with the lowest price.
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Some customer churn is worse than others
A final worry: over the long term, the customers banks want most may stick the least. As shown in Figure 4, consumers are more likely to trust retail, technology, or online retail/technology companies for products such as credit cards and checking accounts than they are for loans or mortgage products. When we examine these trends by age, millennials are slightly more likely to trust technology companies and hybrids as financial services providers than older generations.
In addition to differences by age, wealthier customers are more likely to trust non-traditional providers as well. For all financial service products/services that we asked about, consumers earning more than $100,000 per year tended to be more likely to trust technology companies than consumers with lower incomes. For example, 44% of those who earn less than $75,000 per year would trust a technology company for peer-to-peer payments, but this rises to 68% among earners making more than $100,000. Experience has shown that disruptors don’t target the entire client base of a bank, just the valuable ones who are interested in the services they offer.
Figure 4: Consumers are more likely to trust non-traditional providers for products such as credit cards and checking accounts.
One step ahead: How banks can anticipate what customers will want next 7
Understanding the playing field, reinventing the bank On the surface, the solution seems straightforward. Non-traditional competitors are offering new and innovative products to consumers who are interested and willing to listen. The solution? Banks should become more digital while emphasizing their brand and long histories as a competitive advantage. While on the surface this makes sense, it’s not that easy. Banks can’t simply make this shift. Why? First, it would require a fundamental cultural change for the institution. Second, they would also risk alienating some of their most valued customers in doing so. And this is unfortunate because organizational inertia can be controlled—unlike regulation, low interest rates, or demographics.
There are large groups of important customers who are perfectly happy with the status quo. In fact, 86% of the consumers in our survey said they either agree or strongly agree that they’re satisfied with the service they receive from their primary financial institution. So why change what appears to be working?
True, the average promoter score (“I’d recommend my primary financial institution to friends or family”) is lower, at 77%. True, even fewer trust their provider to look after their best financial interests (74%) or feel valued as a customer (74%). But there’s a strong inertial force to keep customers tied to their banks because moving accounts is inconvenient and time-consuming.
So bank CEOs aren’t just trying to figure out how to outfox the tech start-ups. They do have to do that—but they also have to work with the hand they’ve been dealt. Given that the vast majority of their customers are reasonably satisfied, employees and managers don’t have a desire to implement drastic organizational changes, and the fact that change is very expensive and time-consuming, there will be a large, powerful constituency that argues for taking a more incremental approach.
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………………………..…..… 3 PwC, “Retail Banking 2020: Evolution or Revolution?,” 2014. 4 PwC, “Making omnichannel work: The ‘to do’ list for banks,” 2015 and PwC 2015 Consumer Survey.
Focusing on priorities: how banks can succeed today and tomorrow
There’s no doubt that banks have to make choices now to shape the way they’ll perform in a very different future. We see macro trends that will soon affect what gets sold, and to whom. They’ll also affect how services will be delivered, and where.
As shown in Figure 5, our Retail Banking 2020 report discussed the six priorities that banks will need to execute well in order to thrive: developing a customer-centric business model; optimizing distribution; simplifying business and operating models; getting an information advantage; enabling innovation, and the capabilities required to foster it; and managing risk, regulations, and capital.3
In each case, they’ll succeed by acknowledging the different constituencies they serve, and by developing a plan for each based on behaviors and preferences. Consider the following example of a “customer first” way of defining segments based on behaviors rather than products.
We recently considered the case of Anup and Bree, both consumers with average balances near $2,000. It’s tempting to market to the Anup-Bree segment because, at initial glance, it’s easy to define who belongs. But take a closer look and the marketing pitch gets a little more complicated. Anup manages his finances on his phone, while Bree visits a branch every three weeks. By leveraging an analytic approach, we could identify Anup as a mobile customer whereas Bree sounds like she’s part of the 81% who care about convenient branch locations. 4 Over time, the bank should help Bree become more comfortable with self-service channels (cut costs) or help her take advantage of the advisory opportunities within the branch (grow revenue).
While it’s important to focus on the top priorities of the bank after gaining an understanding of technology capabilities, millennial preferences, and disruptors from other industries, bank executives should not underestimate the importance of change management.
Figure 5: Banks need to execute on six priorities in order to thrive
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Making change stick
When you want to encourage people to think about moving forward, it’s arguably easier to make the change when you’re standing on a proverbial burning platform. When you want to encourage people to think about moving forward—in ways that could encompass people, processes, and technology all at once—an 86% satisfaction rate could even be counter-productive. Change management is the secret weapon.
We’ve seen many examples of companies having announced great projects, rollouts, expansions, upgrades—only to see them run into trouble soon after launch. That’s because organizations tend to focus on the technical details, rather than on helping to motivate people based on their own self-interest. To make change stick, you have to combine logic and emotion. We firmly believe that the human side of implementing change is every bit as important as the analytics behind the change.
In the case of banks on the verge of a critical transition, this is especially important. CEOs are right to think about redesigning the branch, for example. But for staff and managers who will be worried about job losses, changes in authority and status, and changed responsibilities, knowing that it’s the right idea just isn’t enough. And without addressing the human side of change, it’s easy to imagine incomplete implementation, reduced productivity, turnover, or worse.
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What this means for your business
Our survey found that millennial (18-34) customers are about 50% more likely than their older counterparts (55+) to trust companies with a strong track record of innovation. That’s the future: the mobile banking, peer-to-peer paying customer who researches mortgages and IRAs online instead of in a branch. But the future isn’t here yet. At present, for example, customers still prefer to apply for a mortgage in person.
When financial institutions understand what their customers really want, banks and consumers both win. And when they apply an effective change management program, they can show employees and legacy customers that the future is filled with opportunities.
The way consumers are buying continues to change, and as technologies morph, there’s no magic potion that will prevent attrition. Consumers will almost always consider their existing provider—but even with good products offered through the right channel at a fair price, an incumbent bank may find that its best isn’t good enough. When you already serve a customer, though, you’re in the best position to know what that customer values most.
Some banks may choose to bet it all on a digital future. Others may carve out a niche that emphasizes service over everything else. Still others are likely to build partnerships with disruptors as part of a model focused on cooperation. There are many ways to play, but they all require change and the knowledge necessary to stay one step ahead of consumer expectations. Banks that act now will be among the winners.
Some of the changes will be externally visible and will likely be key findings in future consumer survey results. Nearly all will also require back-office and strategic shifts that may not be visible to consumers but will have tremendous customer impact. All will require a coherent plan to explain the changes to consumers and employees, so they have a stake in successfully skating to the puck together, while allowing banks to stay one step ahead of the competition and customer expectations.
www.pwc.com/fsi
“One step ahead: How banks can anticipate what customers will want next,” PwC, December 2015, www.pwc.com/fsi.
© 2015 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
For a deeper conversation, please contact:
Peter Sidebottom
(646) 471 7743
https://www.linkedin.com/in/petersidebottom
Catherine Zhou
(408) 808 2969
https://www.linkedin.com/in/catherine-zhou-9960222
Ashish Jain
(312) 578-4753
https://www.linkedin.com/in/ashish-jain-851231
Doug Stotz
(212) 222-7272
https://www.linkedin.com/in/dougstotz
We would like to thank Steve Norman, Cathryn Marsh, and Kristopher Hoover for their contributions to this publication.
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Marie Carr Principal
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