Retail Banking: A Wealth of Opportunity for Retailers?

Retail Banking: A Wealth of Opportunity for Retailers? The retail banking sector, facing unprecedented change, offers an exciting opportunity for new entrants and particularly retailers if they ask the right questions. 1

An unlikely consensus is forming in the UK s financial services market as the government, media, and consumers all appear ready for more new entrants. In the past five years, more than 10 new players including major supermarkets and tech companies have entered the sector and are gaining greater market share, and at least another 10 are expected in the next few years. The question about whether non-banks can start banking has been answered. Retailers can benefit from retail banking with a strong, well-implemented plan. Now, there are more important questions to answer: Is entering the banking sector actually worth it for non-banks? And for retailers in particular, what challenges will they face entering financial services? For retailers not just in the UK but across the world, the benefits of entering with a carefully designed, well-implemented plan are clear. Those that have already taken the plunge have seen sales uplifts of as high as 20 percent in sales of non-financial services, along with less quantifiable benefits such as increased customer loyalty and stronger brands. So, for non-banks considering entering, what does it take to win? The UK s Retail Banking Sector Political, cultural, technological, and regulatory barriers are dropping, and the financial services market is opening up for non-banks. Government has taken several steps to encourage new challengers to enter the sector. The standing and reputation of traditional banks has taken a beating since the start of the economic slowdown. Technological advances have allowed more consumers to do their banking online. And consumers today are increasingly interested in doing their banking with organisations they already trust such as supermarkets and other retailers (see sidebar: The Four Parts of the UK s Financial Services Market on page 2). For non-banks, the pieces of a solid business case are coming together as never before. Business growth potential. Our research shows that adding financial services to a retailer s offering has many benefits: better customer insight; increased footfall; improved loyalty; enhanced brand; and enhanced overall customer relationship. And it s not just the thrill of the new : across multiple customer surveys, we have found that customers who purchase a financial services product typically spend more on retail products, both immediately after that purchase and over time. Barriers to entry. In the past, the barriers around entering retail banking were high, thanks to traditional banks strong reputations, the power of their existing networks to keep the market static, lower service demands from customers, and a lack of political will to change the complex regulatory status quo. The costs of market entry were also high. Investment was needed in real estate, banking players had to develop their own systems, gaining customer trust required expensive marketing, and a lack of automation meant that a greater number of more expensive people were needed. 1

These factors have changed. The recent financial crisis and incidents such as the LIBOR and PPI scandals seriously eroded customer satisfaction and trust in traditional institutions. Consumers are more open-minded about where they bank. Digital developments and cultural changes mean that consumers are much less dependent on visiting branches, preferring websites and apps instead, which lowers the costs of entry. Meanwhile, regulatory pressure is moving in the direction of increasing competition and breaking up big banks, while, in parallel, regulators are simplifying the process for accepting new institutions. As these changes take hold and as the economy rebounds and UK consumer confidence continues its slow increase the timing is right for non-banks to consider entering the market. Routes to Entry There is no single market entry path to UK banking the right option depends on the company. The options include co-location, white label, joint venture, acquisition, or organic. Each has its advantages and challenges. Co-location. Co-locating with a traditional bank is a quick and simple launch strategy, and it leaves much of the risk with the partner bank. Overall, the financial upside of co-location is limited but retailers gain a beneficial use of floor space and can also see some uplift in footfall. However, the retailer does run a risk to its brand if its partner suffers negative customer outcomes in areas such as branch closures. The Four Parts of the UK s Financial Services Market The financial services market in the UK is currently dominated by four groups of organisations: traditional banks, mutuals, technology companies, and retailers. Each type has a distinctive approach to market and its own challenges and opportunities. Traditional banks face intensified competition and threats from new entrants, as well as pressure on revenue streams, including net interest income and current account charges. Meanwhile, the big banks are also under growing regulatory pressure to break up their operations. On the plus side, they can still benefit from economies of scale, bundling their many product offerings to get a bigger share of wallet, and they have the resources they need to improve their image to customers. Many mutuals suffer from a lack of scale and inefficiencies in their operating model. However, while changing regulations will affect them, they typically get less attention from regulators than traditional banks. They also enjoy stronger brand loyalty, and have room to cut costs significantly by cost sharing or outsourcing. Tech companies, relative newcomers to banking, don t have the same expertise and experience as banks and mutuals. Because their offerings are enabled by technology, their risks of reputation and customer relationship damage are much higher if technology fails. That said, most of the technology companies that have entered financial services have already built up a strong brand and trust among consumers. Moreover, they have a wealth of experience delivering cutting-edge solutions that make life easier and more enjoyable for their customers, and may be able to capture different revenue streams, such as advertising, data, and even hardware, which opens up a range of different business models. Retailers, like technology companies, lack the financial services expertise and experience of banks and mutuals, particularly when it comes to regulation. The upfront costs and timeline for taking a retailer into the financial services sector can be high. However, if the entry is well planned and implemented, brand strength, customer loyalty, and customer knowledge will prove powerful levers for success. A launch initiative also gives retailers the opportunity to set up new lean operating models. 2

White label. White-label approaches allow retailers to launch quickly (as they use an existing bank s business) and simply with limited market risk (as income is commission based). The downsides include potential reputation risk if the partner declines customer applications; only supplementary income (rather than a full financial services offering); and the risk of the partner not delivering in line with expectations. Joint ventures. Joint ventures incur relatively low costs, as the retailer can use its partner s regulatory framework and banking licence as well as its financial services capabilities regarding risk management and IT. However, the retailer also has reduced control over strategy, brand, and products, while being partially exposed to market risk. History shows that joint ventures are difficult to maintain over the long term. The timing is right for non-banks to consider entering the banking market. Acquisition. Buying an existing bank offers the benefit of speed to gaining market share and a banking licence, and it also ensures immediate access to a customer base. But success depends on the availability of good acquisition targets, and the amount of capital needed is high. Any retailer taking this approach must quickly build up its financial services expertise not only to run the bank effectively but also to manage its regulatory responsibility. Organic. Entering banking organically gives a retailer the opportunity to maximise its profit, and have greater control over brand, pricing, and products. It also, however, entails a higher initial investment requirement, higher operating costs, and increased market and reputation risk. In addition, an organic approach requires more time to realise a return on investment and also faces more regulatory hurdles. A Strategy for Success Successful entry into the UK s retail banking sector depends on four key factors: differentiating; maintaining a customer focus; aligning profit pools and value propositions; and keeping lean operations, which is essential for competitiveness. New entrants often incur delays and unnecessary costs because they do not ask the important questions up front: What customers are we targeting, and how are we meeting their needs? How do we state our customer value proposition to create greater loyalty and more effectively portray our brand values? What exactly are we aiming for in terms of market share vs. profitability? What is the best operating model for our venture? How do we build a low-cost operating model? How do we build risk management in from the start? What is the best way to develop the new skills needed for financial services, including product knowledge, compliance and risk management, marketing, supplier relationship management, and operations? 3

An appreciation of the complexities of different banking products is essential (see figure). This will allow a new entrant to plan and implement an effective step-by-step approach to the market: first launching simpler and better understood products; taking time to build internal experience and also credibility with the regulator; and then going on to extend the product portfolio with more complex products. Figure Product offerings can extend in scope and complexity as capabilities improve Product offer High Cash services Current account Offering scope Travel money Personal loans Mortgage Insurance Savings Credit cards Low Short-term Low complexity Time and complexity Long-term High complexity Source: A.T. Kearney analysis Also vital is an understanding of the main risks involved. Costs. Cost risks are not always obvious in particular the cost of not having, from the outset, a clear vision of what you are trying to do. If you are too slow to make a decision quickly, you will find that the market has changed, thus extending the time it takes to enter the market. Regulations. The regulatory process is becoming easier for challenger banks, but it remains complex and time-consuming to get right. Would-be players need to engage with regulators as early as possible with clear plans to ensure mutual understanding. Brand. Some retailers worry about potential risks to their brand, and as in any market there needs to be controlled and structured entry. Partnering with an experienced bank in the initial stages is one way to mitigate the risk. 4

The Way Forward For retailers considering dipping their toes into financial services, it is possible to move quickly for example, from initial opportunity to full launch within nine months for a whitelabel proposition provided that they ask the right questions and take the appropriate actions at each stage. The most important decision today, however, is making sure not to wait too long on this opportunity or else your competitors will beat you to it. Authors Simon Kent, partner, London simon.kent@atkearney.com Andrew Stewart, partner, London andrew.stewart@atkearney.com Eric Gervet, partner, Paris eric.gervet@atkearney.com Peter Hewlett, principal, London peter.hewlett@atkearney.com 5

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