NEW YORK, July 13, 2011 /PRNewswire/ -- Industry analysts have estimated U.S. bank revenue to grow by five percent annually, but, according to surveys conducted by PwC US, major regulatory changes and shifts in consumer spending, saving and borrowing behavior are likely to depress revenue growth, increase operating costs, and squeeze profit margins in the retail banking sector, which accounts for one-half of U.S. bank industry revenues.
Regulatory and market-driven forces have created a perfect storm of events that banking executives say will make it more costly to compete and attract new customers. According to PwC, retail banks are on the verge of a major overhaul as they adjust their growth strategies and business models, including reevaluating the role of branches, incorporating mobile banking, payments and social media and breaking down the organizational, operational and technology barriers that have prevented them from growing organically.
"After years of talking about cross-selling and customer relationship management, many banks still operate in product silos and not based on customer needs. They still cannot identify who their best customers are, let alone identify appropriate products, pricing, servicing and channels for them," said John Garvey, partner and leader of PwC US's banking and financial services advisory practices.
Retail banking profitability limited by regulations, changing consumer behavior
In a 2011 PwC survey of CEOs, nearly 90 percent of banking industry leaders cited over-regulation as the biggest threat to their growth prospects. The regulatory changes that will most affect retail banks' relationships with their customers and make it harder to capitalize on growth opportunities include:
- Dodd-Frank, which will restrict fees, increase compliance costs and, potentially, further commoditize banking, making it harder for banks to differentiate themselves. By some estimates, Dodd-Frank will reduce profits by as much as 12 percent over the next five years.
- The CARD Act, which reduces the amount of interest and fee income that banks can collect. Some have estimated that the CARD Act will reduce the average annual income of large banks by $500 million to $1 billion and of mid-tier banks by $50 million to $100 million.
- The Basel III accords, which will more than triple capital requirements for banks, increasing their funding costs.
Other trends can challenge profitability, including changing consumer behavior. Consumers are saving more, spending less and paying down debt. The U.S. personal savings rate, in the low single digits a few years ago, is expected to continue rising, potentially reaching levels not seen since the 1970s and 1980s. While consumer thrift can reduce the demand for debit and credit cards, it offers banks the opportunity to benefit by offering financial planning and related products.
Banks also face the challenge of adapting to the Internet age of "anytime, anywhere, right now" by using social media to better target their customers and mobile technology to respond to their needs faster and more effectively. Already, more than 90 percent of U.S. adults have a mobile phone, and they are increasingly using them for financial transactions. While the numbers are currently small, they will grow rapidly as consumers become more comfortable with these mobile technologies.
The explosion of mobile technology, combined with a surge in the popularity of social media outlets such as Facebook, YouTube and Twitter, gives retail banks a new way to connect with consumers and a mandate to do so: The average Facebook user has 150 "friends," who can hear about a good, or bad, banking experience within minutes.
PwC survey shows difficulty banks face is acquiring new customers
Complicating the challenges that banks face in trying to grow organically is the growing cost of attracting new customers, given how few Americans remain "unbanked." FDIC research indicates that 92 percent of U.S. households already have a checking or savings account with at least one financial institution, leaving little opportunity for banks to attract customers who lack financial servicesentirely.
Moreover, those who already have accounts are not likely to leave. A recent PwC retail banking survey found that more than 40 percent of survey respondents have been customers with their existing primary financial institution for more than 10 years, and that consumers hold an average of 3.3 products at those institutions, providing a measure of "stickiness."
At the same time, there are opportunities. The same PwC survey indicated that, while the average consumer has 6.1 financial products, only about half of them are with the customer's primary financial institution, mainly checking and savings accounts. The other most commonly purchased financial products are more often acquired from financial institutions other than a consumer's primary financial institution: Credit cards (48 percent*), mortgages (57 percent), IRAs (66 percent) and insurance (85 percent). (*Percent of customers who purchase these products from a financial institution other their primary financial institution).
Accordingly, there is significant opportunity for banks to acquire a greater share of their customers' business over an entire financial lifetime, based on life events from opening a first checking account to rolling a 401(k) into a post-retirement IRA.
Competing by breaking down product silos to focus on customers
To address these challenges and capitalize on the opportunities available, banks need to attempt to meet more of their customers' financial needs throughout their lifetimes. Doing so means that banks would have to adopt a more customer-centric focus to better understand and anticipate their customers' needs and preferences.
Adopting such a customer-centric focus is difficult for some retail banks because they are organized primarily around business lines, with products housed in silos. In particular, the silos limit the knowledge any one business unit has about a customer's other accounts with the bank, hindering efficient product pricing, customer segmentation and cross-selling.
Leading banks, including some entering the U.S. market from overseas, are moving beyond product silos to become more customer-centric. PwC identifies three essential strategies for becoming customer-centric: Breaking down product silos and restructuring incentives; understanding customer needs, preferences and behavioral drivers; and, delivering a consistently high-quality customer experience. These strategies can enable banks to move beyond merely "pushing" products to better anticipating customer needs and proactively offering the most relevant products and services.
"While the future of retail banking demands a customer-centric approach, some banks have resisted moving toward this model because of institutional impediments, including internal disincentives, conflicting organizational priorities and concerns about integration complexity and execution risks," said Peter Pollini, principal, financial services, PwC US. "If banks are to make the changes that are necessary to break down product silos and become more customer-centric, they will need assertive leadership from the very top. Nothing less will enable these necessary transformative, organization-wide changes."
PwC's conclusions reflect the findings of two recently released reports – When the Growing Gets Tough: How Retail Banks Can Thrive in a Disruptive, Mobile, Regulated World and Getting to Know You: Building a Customer-Centric Business Model for Retail Banks – which provide an overview of the competitive landscape for retail banking based on proprietary analysis and a nationwide consumer survey.
The PwC report When the Growing Gets Tough: How Retail Banks Can Thrive in a Disruptive, Mobile, Regulated World is available at http://www.pwc.com/us/Mobile-Retail-Banking.
The PwC report Getting to Know You: Building a Customer-Centric Business Model for Retail Banks is available at http://www.pwc.com/us/Customer-Centric-Business-Model.
About the PwC Network
PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 161,000 people in 154 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See www.pwc.com for more information.
© 2011 PwC. All rights reserved. "PwC" and "PwC US" refer to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.
This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
Related Links:
SOURCE PwC
