Innovate and rebuild image

Facing the New Normal of Retail Banking

Regain customer trust and ensure sustainable financial performance

The world economic turmoil has disrupted the entire financial services sector, creating a new normal characterised by increased regulatory demands and a severe loss of trust from the average retail banking customer. More than ever, the industry will have to innovate in order to prosper and rebuild the damaged image.

Facing the New Normal of Retail Banking

The new normal: A disrupted industry

The term “financial innovation” has a certain ring to it that instantly brings the root cause of the current world economic turmoil to mind.

When presented with this particular term, the average retail banking customer is left with a reluctant and cautious mind, thinking of lost pensions, enormous bailout plans and plain and simple unfairness caused by “too smart investment bankers”.

It just does not smell right, and the imperative customer experience metrics are suffering just as the general public perception of the entire sector has taken quite a beating.

Financial innovation as the remedy

On the other hand, financial innovation is exactly what retail banks need in order to comply with “the new normal” they are facing. But how can one apply financial innovation without losing even more of the precious customers’ confidence?

The answer to this is not about adding even more complexity to the financial products and services – quite the contrary. It is about making potentially radical changes to the manner in which banks operate and engage with their customers. It is about designing new innovative business models with the ability to delight the customers by leveraging the banks’ core capability of putting money to work in a productive manner – without increasing the risk.

Characteristics of the new normal

To fully understand the challenges that retail banks are facing and why this has disrupted the entire financial services sector, consider this:

  • The Occupy movement started in Spain in May 2011 as a protest against the political system, unemployment rates and corruption. Less than six months later, in September 2011, Occupy Wall Street was formed, and since then the movement has evolved into a worldwide protest against power vested in the top 1% income earners and general economic inequality. And it is all to be blamed on the banks.
  • The disintermediation trend is challenging the traditional role of banks as intermediaries. Today, it is not unusual to see private enterprises with higher credit ratings than the average bank. Boerse Stuttgart is taking advantage of this by offering bonds issued by mid-cap companies, effectively opening up for cheaper and alternative “business-to-business funding”.
  • Some banks are now considered to be systemically important financial institutions. They have been categorised as being “too big to fail” by policy makers. Currently, the total capital ratio must not be lower than 8%. Once Basel III has been fully implemented in 2014, that number will reach 13-14% depending on the size and systemic importance of the bank. This alone will potentially lead to a decrease in ROE between 4-5% – if nothing is done.

In other words, banks are forced to act just to maintain their ROE. Regulatory demands are tightening, and the cost of being a regular bank customer is increasing – all in all, something that does not go easy with low market confidence, changed customer behaviours and expectations.

Fight for freedom to innovate

As a consequence of ROE being under pressure in the years to come, all sails are set to deleverage the books because without proper earnings, credit ratings will be lowered, funding of capital will go up and products will become more expensive to the end customers, which essentially affects the customer experience in a negative way. The fact is that a lot of retail banks are in urgent need for deposits, and Amazon-like promotions have begun popping up, urging customers to “start saving now and get an instant giveaway or bonus!”

Not all countries and regulations allow for such instruments to be applied, so instead focus is shifting towards private banking and cash management – areas in which the customers bring their own money to the table, so to speak. Still, this is not enough. There is a strong need for even more innovative thinking.

ROE and credit ratings are imperative to our ability to deliver superior customer experience. We will see that only those with a solid financial performance will have the freedom to innovate. Developing new products is a risky business, and mitigating financial risk is the largest obstacle for innovation – but also the largest driver. The banks that find ways to manage this catch-22 will have a clear advantage".

Ken Adrian, Head of Segment Household, Nordea Danmark

The traditional sources of innovation cannot be tapped this time

For decades, innovation in the financial sector has been more or less trivial. There has been a heavy focus on optimisation of internal processes to reduce operating costs per customer as well as to be able to serve the customers faster. And to some extent, this has proven to be a viable path.

However, the primary focus for strategic business development has been on the product side. Developing the right set of products and services capable of both serving existing customers as well as attracting new ones seemed to be the one and only truth.

Over time, this product-oriented focus has not only spawned increasingly complex and risky products, but ironically enough also made it even harder to implement cost-effective straightthrough processing solutions in the back office operations. Truly, this depicts an unfavourable situation where the striving for higher profits from the product side is jeopardising the agility and transparency of customer interactions.

Reduce risk through product innovation

Rest assured, product development will continue to be a central topic as the risk and complexity are bound to be reduced, thus requiring radical changes to products and product structures. An example of this type of innovation is the changes to the price and product structure of home mortgage financing recently introduced by Nykredit and Totalkredit:

1. Under the new price structure, prices differ according to risk.
2. For a combined mortgage, the loanto-value ratio of SDOs has been lowered from 80% to 60% for retail customers.

Traditionally, one of the primary sources of innovation has been calculators and engineers in product development, spinning off increasingly complex and risky products. For obvious reasons, this can no longer be the case. The new normal forces the entire industry to rethink our offerings and business models based on transparency and simplicity".

Ove Feddersen, Head of Product Strategy, Nykredit

Look beyond the products to increase the customer experience

As a direct outcome of the current economic turmoil and the derived changes to the products, terms and conditions, a great deal of existing retail customers are not only finding themselves in a hard position, but, even more importantly, they are having a difficult time assessing the consequences of this new situation.

This implies that retail customers in particular are becoming heavily dependent on superior advisory services, and if anything positive has come out of the financial crisis, it is the wakeup call to every retail bank constantly reminding them to consider the needs of the customers in every touch point, channel and type of interaction, while bearing in mind that there is a crucial discrepancy between what customers think and say they need and what they actually need and really want. This difference is best illustrated with the quote by the late Harvard professor Theodore Levitt:

People don’t want to buy a quarter-inch drill. They want a quarter-inch hole!”

This falls well into line with the current perception among leading retail bankers in Denmark. The products are becoming hygiene factors, i.e. nobody looks at them as stand-alone differentiators in the battle for market shares and customer attention. Instead, the bank advisers’ ability to transform knowledge and insights into viable solutions by communicating 1:1 with the customer has become a crucial trait to be displayed in every customer interaction.

Innovating the business models

Clearly, financial products have not lost their strategic importance, but, going forward, it is clear that retail banks need to give a lot more credit to the services – and the entire business model – surrounding the products.

If they fail to do so, providing complete and compliant advisory at the lowest possible risk based on the individual customer needs becomes almost impossible. In other words, banks need to rethink their business models and find new ways of creating, delivering and capturing value.

Already now, retail banks are facing competition from new entrants and innovative business models. While many of the new entrants are still operating on the fringes of the industry with low growth rates and market shares, they should be taken very seriously. Many of the players exhibit disruptive potential and possess the power to radically alter the rules of the game by targeting small niche segments in the existing market.

Basically, the new players are exploiting attractive subsegments which are not appropriately served by current business models. In some cases, entirely new markets are created for customers who have been totally locked out of existing markets in the past.

Look out! New kids on the block!

An article by Rita McGrath states that one of five large business trends in 2012 is that oblique competition will become ubiquitous, emphasising that enterprises traditionally were competing within industries, whereas competition can now come out of the blue and take over entire markets.

Take the average German consumer. He or she controls a total of six deposit accounts, but only two of those are placed in a bank. The other four are placed with iTunes, DIY stores, PlayStationNetwork, third party logistics providers etc.

Now consider this: Apple has more than 200 stores worldwide – stores that are well-recognised by high-end consumers. More or less all placed on high streets. Besides that, Apple has a rather large amount of capital available.

The question that banks should ask is: When will Apple open a bank near us? Perhaps not a traditional retail bank as we know it, but “just” some sort of addon service that provides credit on the fly to purchase products in the store. Another example of a potential challenger to retail banks is Facebook with staggering 800 million registered users.

In 2009, something called “Facebook Credits” was introduced rather silently. Anyone could buy 50 credits for the price of $5 “to buy things (i.e. game-related content) on Facebook in an easy and safe manner”.

In 2010, users could buy theatre tickets for Harry Potter, and, over time, Facebook Credits may actually end up being the preferred currency for buying any media content over the Internet. The obvious question remains: Where will the retail banks be in that set-up?

Examples of new business models

Rather than risking instant “paralysis by analysis” and complicating things by trying to figure out how to innovate your business model, simply start by looking at what is already going on within – as well as outside – the financial sector and let that be an inspirational guideline for challenging your conventional wisdom.

Peer-to-peer lending by Zopa

Peer-to-peer lending by Zopa

At Zopa, people who have spare money lend it directly to people who want to borrow. There are no banks in the middle, no huge overheads and no sneaky fees, meaning everyone gets better rates”.

The lending platform Zopa (an Internet marketplace) is offered to members, making it possible for them to connect traditional lenders with borrowers and save them both money by “cutting out the middleman” (banks). The business model allows depositors to have a higher return on investment by becoming direct lenders, hence accepting risks normally taken by banks/VCs. At the same time, the risk of lending e.g. £1,000 is reduced by splitting the amount into chunks of £100 each going to different borrowers.

To reduce the risk even further, Zopa offers their lenders free-of-charge assistance in chasing up missing payments on behalf of the lender. The revenues are coming from charging borrowers fixed fees added to their loan amount, charging lenders a 1% annual service fee and selling payment protection insurance to borrowers.

JAK – operating an interest-free savings and loan system since 1970

New Normal of retail banking

We regard receiving money in exchange for labour as legitimate, however, we do not consider it legitimate to earn money simply with money. In our opinion, it is unethical to lend money against interest”.

JAK operates like a not-for-profit bank enterprise, trying to make one million SEK annually to add to equity, by offering interest-free savings and loans through a total of just three products.

JAK is primarily driven by volunteer members for other members, and through grants and JAK Schools they are offering courses where participants receive more information about how JAK works, discuss different aspects of an interest-free economy and get tips on how to present JAK in public. Currently, JAK has approx. 34,000 members, and the number is increasing every year.

Boerse Stuttgart is offering mid-cap companies a new way of accessing capital

Boerse Stuttgart new normal

With the launch of Bondm, the Stuttgart Stock Exchange has introduced a new segment for bonds issued by industrial or industry-related mid-cap companies in the upper segment of the range in the need for finance.

The bond issuer gets access to another source than the traditional bank offerings, and retail investors, on the other hand, get the opportunity to participate directly in the bond subscription (primary market), which was originally reserved for institutional investors.

Tradeshift provides an on-line invoicing service and an instant payment feature

JAK interest free new normal of retail banking

Tradeshift is basically a social network for businesses to connect, communicate and exchange documents in real time. They provide an on-line invoicing service and an instant payment feature. TechCrunch sees this as a potential disruptive game changer – on the same scale as Skype which managed to disrupt the telecom industry.

Compared to the traditional charge per transaction or conversion, Tradeshift offers free on-line real time einvoicing for all suppliers over a global network. In return for free transactions, they offer their customers additional non-free services like master data subscriptions. Besides that, the revenue stream also includes financial services such as instant payments and exchange rate hedging. Finally, they have implemented a two-sided Apple-like platform around an AppStore fed by a partner community developing and selling apps.

The list of customers includes prominent enterprises and organisations like ADETEF (the French international assistance agency of the Ministries for the Economy, Budget and Sustainable Development) with their 300,000 suppliers and UK National Health Service (the 5th largest buying organisation worldwide).

Regain customer trust and ensure sustainable financial performance

Keeping in mind the root cause of the financial crisis combined with the characteristics of the new normal, retail banks must demonstrate superiority in customer service, capital risk management and operational excellence by applying three essential design principles to every dimension of their business model:

  • Simplicity
  • Agility
  • Transparency


Retail banks should strive for becoming an integral part of their customers’ life. Every customer interaction is a chance to provide advice, build a relationship and, above all, learn about the customers’ personal needs driving the financial needs.

In that sense, complexity is a real killer. Not only with regard to operational efficiency or the ability to rapidly change and react to changes in customer needs and trends, but, more importantly, complexity makes it difficult for the customers to keep a high amount of daily interactions with their bank. Besides that, simplicity is, by far, the hardest (product) attribute to copy and potentially also a real game changer.

A business model to be inspired by:

Google Docs which disrupted the market for home office applications by providing a “good enough” product experience for free. The lesson is that even the best and brightest product eventually becomes a commodity, and the only thing left is how the value proposition is being served.


Being a first mover is expensive – especially when the development of products and services that you provide is framed by tight regulations. And tighter regulations are exactly what retail banks are facing these days.

The largest uncertainty is not about the amount or scope of the coming regulations – it is about not knowing the consequences of those regulations. No one can foresee how the market will change nor feel safe that the regulations will not take away the last bit of possibility to differentiate between the individual banks.

The uncertainty characterising the financial sector right now calls for “justin-time” strategies, and as such this emphasises the need to be extremely agile. Besides the strategic aspect, agility in terms of reacting to customer demands is a notable trait.

A business model to be inspired by:

Inditex which is one of the world’s largest fashion distributors. They have completely changed the game of the market for affordable fashion by pursuing a high degree of vertical integration. The turnaround time from idea to launch is 2-5 weeks versus 3-9 months for more traditional retailers, making it possible to dispatch new designs to stores twice a week.

Compared to fashion retailers, banks have a long history of ITC-driven innovation, which is something to be built upon. Already, banks around the world have begun to utilise the Internet for more than simple Internet and mobile banking services: “The social web”, i.e. the sharing and exchange of information, is being utilised for customer interactions, real time problem solving and improving the customer experience.

“Social CRM” is definitely something that should be thought into a sound innovation framework. A great example of this is Danske Bank which has co-developed their iPhone and iPad mobile banking app through a Facebook page where users can propose features and provide feedback directly to the team behind the app.


To restore the confidence in the industry as a whole will require more than changed behaviour of the individual banks. Currently, not everybody is adapting to the new capital requirements in a viable way, and that affects the entire industry.

On top of that, disintermediation is gradually pushing banks into unfavourable market positions where more and more business is diverted into areas such as peer-to-peer lending and business-to-business funding.

In order to recover properly, the industry needs to start “playing with open cards” – externally to regain trust and internally to be able to act even more agilely and to ensure complete and compliant processes. Apparently, this would be achieved by breaking down the functional and organisational silos. However, the thing is that even if breaking down the silos has been a mantra for many years, there is an important twist to it: Knowledge, insights and professionalism thrive in functional silos, and those traits are imperatives for a great customer experience. As a customer being serviced, we do not want to experience the lag time caused by the silos – we only want to experience the optimised process.

One way of increasing the transparency in the processes of the business model is to make use of the enormous amount of (large) data stored in the back office systems – as well as in the minds of the customers – for “real-time analytics” during customer interactions.

A business model to be inspired by: has managed to design a viable (disintermediating) business model based on patients handing over their personal medical records to them in return for a platform where they can bypass expensive medical bills by getting advice from similar patients.

Seize the moment

Retail banks are in the middle of a perfect storm. The entire financial sector is under heavy fire from regulatory authorities and policy makers, and their modus operandi is bound to change in order to survive.

Just like amber flushes up on the beach after a storm, so do new entrants, and innovative business models emerge when an industry is being forced to innovate. Unfortunately for the incumbents, both amber and new entrants are hard to spot by others than the trained eye – and that may very well prove to be lethal for those who are not paying attention.

Traditionally, innovation in the industry has not been disruptive. Much has been about incremental changes to products, processes and back office operations, and we are still to witness a radical game-changing move where the business model itself becomes the primary competitive differentiator. As a consequence of the new normal, now is the perfect time to do just that.