Are Banks Becoming Just a Regulated Utility

Banks are losing up to half of new sales to up and coming competitors like fintechs and according to Bain & Company, it is about to get worse and fast.

As fintechs and technology companies siphon off customers seeking high-value products and services, such as credit cards, loans, insurance and investments, traditional banks run the risk of becoming just another big, regulated utility.

Management consulting group Bain & Company’s annual consumer banking report finds that in developing markets, where fewer consumers have longstanding relationships with a bank, clients are frequently defecting to the newer option.

Simple User Experience Winning

Bain’s latest survey of more than 137,000 consumers in 21 countries finds that when these consumers are up for grabs, a primary bank wins nearly two thirds of all purchases on average, but those purchases represent mostly new, low-value deposit accounts.

They often lose higher-value products to direct banks, fintechs and technology platforms because of their relatively simple products lines and streamlined user experiences.

Prisoners in Their own Banks

Figuring out how to win the new product sales that are currently going to competitors might also be an important defensive move to protect the overall relationship. Globally, about 29 percent of customers said they would switch their primary bank if it were easy to do so.

«There are a lot of customers who frankly consider themselves prisoners in their own banks, if someone makes it easy to escape their bank for a better place, they’re going to run right out,» said Gerard du Toit, (Pictured) Head of Bain’s Banking Practice and lead author of the report.

Gerard du Toit 511

There is evidence that it’s starting to become easier to move everyday banking elsewhere.

Will Fintechs Dominate?

As younger, more plugged-in generations learn how to bank, their purchases of banking products through digital channels, especially online, will become even more commonplace, further increasing the gap between the digital leaders and laggards.

According to Bain, we only need to look at China to see how fintechs and other tech firms could come to dominate the retail banking landscape.

While the rapid growth of mobile banking has begun to slow in the Netherlands, South Korea, India, the U.S., and the U.K., it has actually fallen in China.

The Growth of Non-Banks

Survey respondents reported lower usage for routine banking interactions, likely because they are moving to more convenient and engaging non-bank platforms.

For example, the messaging and calling app, WeChat, offers instant lending in China. WeChat and Alipay also offer payments, savings and other daily financial transactions with a «tap and go» functionality that is fully integrated with consumers’ daily social lives.

For banks looking to stem this tide of hidden defections, Bain’s analysis of the survey data shows where they should focus.

The Challenge

Based on the variables in the survey, purchases from a competitor are most likely when the consumer owns multiple products at a primary bank, has low customer loyalty, and is older. Defections may also be result of other elements, such as exceptional products, pricing and salesmanship at the winning competitors.

However, there are no shortcuts to organic growth, especially with regulators’ heightened scrutiny of cross-selling practices and their desire for banks to focus on high-quality advice and service over sales.

The digital disruption in banking should come as no surprise, and most banks clearly understand the importance of digital migration. The bigger challenge lies in how to organize the transition and instill the necessary changes, both at the frontline and in the back office, to improve how consumers do their banking.

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