By Marcus Leach

The new era of retail banking will be transparent, made-to-measure, and multi-channel according to an Ernst & Young survey of 298 senior retail bankers across Europe.

The report will be published on Tuesday to coincide with the European Retail Banking Summit. The survey reveals banks’ concerns about falling margins, rising customer attrition and pressure for improved return on equity and how their reaction to these pressures will change customers’ retail banking experience in the future.

“The industry cannot continue as it is and generate returns that will satisfy investors," Omar Ali, head of Ernst & Young’s EMEIA retail banking advisory team, said.

"The survey results show that the days of selling opaque and complex products through expensive channels, using antiquated systems and processes, has gone — banks realize that they need to re-connect with consumers in order to protect their margins and their market share.”

Customer attrition has increased across Europe

Sixty percent of banks surveyed report that the rate at which customers leave has increased. One in four banks experiences attrition rates of 10% or higher; attrition rates are highest in France, Spain and Switzerland.

The survey highlights high fees, complex and opaque charging structures, and lack of trust as the main drivers for this customer attrition. This echoes Ernst & Young’s Global Consumer Banking survey, published earlier this year, in which 60% of consumers listed quality of service as their main reason for leaving their banks and 50% said their trust in the global banking system had decreased since 2010.

“Customers’ expectations are high. On the one hand customers want a secure branch-based bank offering low risk and easy access to their money; on the other they want personalization, advice, access through all channels, and complex products. The expectation of levels of service, are akin to other fee-paying industries," Ali continued.

“The market dislocation and the subsequent sovereign debt crisis have re-framed the debate about what retail banks want to be. The management actions that follow should see the industry come out stronger, safer, better for investors and with a more tailored and clearly defined offer for customers.”

Falling margins are banks’ biggest concern

Falling margins were voted the biggest challenge facing retail banks across Europe in the next five years, closely followed by the cost of regulatory compliance and increased competition. German banks are most worried about the cost of compliance, with 91% rating it a key concern.

“With increased pressure on banks to meet their return on equity targets whilst facing higher costs of capital and funding, generating returns in a highly regulated environment is the industry’s major concern. The immediate response is to cut costs, with 58% of banks looking to reduce the cost of serving their customers. However, with increased competition in the market, particularly for retail deposits, banks will also have to focus on keeping their customer base happy and so costs can’t be cut at the risk of quality of service,” said Ali.

However, significant improvements to customer services are planned
Although 58% of the banks surveyed are looking to reduce the cost of serving customers, 57% are also planning significant improvement to services.

“These two statements seem contradictory but the results of the survey show a renewed willingness from banks to invest in improving the quality and efficiency of critical customer interactions. This is good news for consumers as many of the system inefficiencies that cost the banks money are also the root cause of the industry’s ongoing problems with customer service,” Ali added.

Digital channels cannot wholly replace face-to-face

Sixty-three percent of respondents believe that processes will be fully automated in the next three years and 72% believe new technology is a key factor in attracting and serving customers, but Ali questions how successful a purely digital business model can be.

“One channel of communications with customers will not win out over the others as this would not suit the banks’ customer base. Instead banks will be looking to use digital and automation of basic services to improve the consistency and efficiency of service to customers, and branches will remain as the main conduit for the sale of more complex products," he said.

“For example, the survey results show that the majority of consumers still look for face-to-face advice when buying complex products such as mortgages or pensions.

"These products hold some of the largest margins for banks and, in order to differentiate their offer and preserve their margins, banks will need to work their branch networks harder in the future. Being solely digital is currently not a viable option for a scale retail bank, but could be for a new entrant without the legacy customer base.”

The one key customer-facing process that the majority of banks agreed needs improvement is communication around fees and charging structures.

“Transparency over pricing is still an issue for customers. Bank charging is part of a wider issue within the industry particularly ensuring pricing is reflective of risk and cost. The survey reinforces our view that a tailored approach to banking will emerge whereby a predominantly digital offering will be the core basic offering at a minimum or no fee but that all other services will be charged. Prices for these types of service and products will become openly competitive and it will also ensure a better standard of service for customers,” said Ali.

Banks will struggle to meet their ROE targets unless they reform

Our analysis shows that banks will continue to struggle to meet their ROE targets unless they are able to improve their operational efficiency and improve fee income through componentized and transparent pricing.

“It would appear that the party of the last decade, in which ROE hit 20%, is firmly behind us. ROEs for retail banks are expected to be subdued in the medium term with a possible return to 1980s levels of 10-12%. However by focusing on improving the interactions that matter most to customers, banks can deliver consistent returns of circa 15%," Ali concluded.

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