The Future Of Retail Banking

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The Future Of Retail Banking – At the dawn of an unprecedented technological disruption, Swiss retail banks face a growing need to understand future customer demands and adjust their business strategies and priorities accordingly. As such, banks will be forced to implement a completely transformed business model that will enable them to use new technologies as well as new talent to be able to “adapt, adapt and adapt”.

Recent observations of players active in Swiss retail banking and key other retail sectors indicate that the following capabilities will be key dimensions of a successful retail banking business model in the future.

The Future Of Retail Banking

The Future Of Retail Banking

We have developed four scenarios for the Swiss retail banking sector that we believe can be realized by 2030, taking into account the most influential drivers. We have also formulated seven “no-regrets key actions” and transformation strategies that, regardless of which of the four scenarios are ultimately implemented, will enable Swiss retail banks to generate business value in 2030 and beyond.

Data Strategies That Shape The Future Of Retail Banking

In international comparison, Swiss retail banks operate in an attractive market characterized by a slow pace of change and a long time to market technological innovations. However, traditional players face multiple challenges, with unexpected geopolitical conflicts, energy shortages and inflationary risks being the latest on the long list, and the promise of a new digital dawn growing.

In recent years, the European retail banking sector has been operating in difficult market conditions. The weak and fragile economic environment due to the pandemic, the ever-increasing regulatory burden, digital disruption and the historically low interest rate regime are impacting the profitability of the industry. Consistent with the above, our analysis shows that between 2018 and 2020, the level of profitability of banks in major European countries fell by more than half. Historically low profit margins due to negative prime interest rates combined with significantly increased business volumes have exposed banking inefficiencies, limited scope for operating volume and high levels of operating costs. In parallel, competition from low-cost neo-banks and challenger banks intensified and put additional pressure on European mainstream banks.

However, the post-pandemic macroeconomic recovery, driven largely by unprecedented government intervention in 2020 and 2021, has reduced banks’ average returns on capital to levels seen before 2018 and even beyond. So are European banks good again? In our view, not at all: growing global geopolitical conflicts have dampened the post-pandemic macroeconomic recovery, fueling many ominous economic factors. Meanwhile, inflationary pressures on energy and commodity prices have spilled over into the wider economy, fueling fears of a permanent stagflation trap.

With rapid and significant changes in the level of global interest rates, rising funding costs and shrinking real profits are putting pressure on both banks’ profit and loss coverage and balance sheets. In addition, banks face an increased risk profile in their loan portfolio due to deteriorating credit quality in the real economy. Consequently, we believe there will be continued pressure on banks’ top lines and bottom lines, ultimately leading to significant reductions in achieved return on capital in the near term. The recent bank failures in the US, the forced merger of UBS and Credit Suisse here in Switzerland, and the subsequent global market turmoil in banking stocks have made it clear that the global banking crisis could escalate again.

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Although the Swiss banking sector has faced unprecedented events in recent weeks, our analysis shows that Swiss universal and retail banks have weathered the crises and upheavals of recent years much better than their peers across Europe. The level of profitability of Swiss banks also fell between 2018 and 2020, although much less than elsewhere in Europe. Thus, the recovery in 2021 and 2022 in Switzerland was much weaker than that of its European peers. We believe there are three main factors that explain the different, less volatile behavior of the Swiss retail banking market.

We believe that the three factors that explain the different behavior of the Swiss retail banking market compared to the European retail banking market are the following.

1. A relatively affluent customer base allows Swiss retail banks to generate high levels of operating profit per customer.

The Future Of Retail Banking

Compared to other European markets, the higher revenues of Swiss retail banks are determined by a relatively high volume of transactions per customer, which ensures a higher operating profit per customer.

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2. The boom in the Swiss mortgage market over the past two decades has allowed Swiss retail banks to deliver solid profit growth.

The Swiss mortgage market was a dynamic and steadily growing segment of the Swiss retail banking business as it grew by more than 50% from the global financial crisis to the end of 2021, fueled by expansionary monetary policy from central banks, including the Swiss National Bank . . Over the past two decades, the market has doubled in size and achieved a strong average annual growth of 4.5%.

3. Swiss retail banks have so far benefited from strong customer brand loyalty, as evidenced by exceptionally low switching of bank accounts.

Academic research shows that Swiss retail banking customers have built a strong relationship with their primary bank and have little or no desire to change their primary banking relationship.

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In our view, Swiss retail banks will soon face a challenge to maintain their current level of profitability and growth. This will be the result of the social and economic transition to «net zero», the further maturation and saturation of the domestic market, the demographic changes in the customer base and the growing customer demand for «

» banking services. Competition is set to intensify, fueled by regulatory changes in open banking and technological advances in machine learning, artificial intelligence, the cloud and distributed ledger technology.

Attracted by strong local market conditions and above-average revenue potential, the new entrants will challenge Swiss retail banking providers in a number of ways.

The Future Of Retail Banking

1. The growth of ecosystems will offer people a comprehensive range of services, combining hitherto separate non-banking and banking services.

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2. New and digital-focused challenger banks deliver superior customer experiences at lower costs.

The way Swiss banks did business in the past is now changing. With changing customer needs and preferences, new interaction patterns, increasingly fragmented value chains and technological advances, retail banks must develop new strategies to create and sustain competitive advantage over the next decade.

In a time of mass disruption fueled by “lightning” changes in technology, CEOs and CIOs face an almost insurmountable challenge to set the strategic agenda for the coming years.

Although it is difficult, indeed almost impossible, to accurately predict the future, imagining possible scenarios for future developments can help develop strategies for sustainable survival. Looking ahead, we see four possible scenarios for what the industry could look like in 2030 in terms of value chain transformation, customer behavior and demand, and customer interaction patterns.

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Today’s retail banking value chain will remain highly integrated. Banks will retain control of key customer touch points and will continue to be the primary providers of financial products. Digital retail banking channels are the main interaction points, but customers continue to selectively use offline banking channels as well. Compared to today’s business models, there are no significant changes and banks’ incremental (digital) efforts are sufficient to remain competitive.

The banking value chain is only ‘split’ to be ‘replicated’ with wider retail value chains. Core banking services for individuals as a standalone offer are becoming largely irrelevant – everything is done in the context of use cases and digital ecosystems are becoming the “new normal”. Banks may have the “right” and also the corresponding capabilities to own customer relationships and thus organize the entire ecosystem. However, it is likely that in most ecosystems, retail banks will become mere actors with only a product (goods) provider function.

Large platform providers are becoming dominant in customer relationships, moving from their original and current role as pure comparison service providers to digital platforms, becoming the default sales, distribution and advisory channels for retail banks. Retail banks will focus on providing the most competitive products and processing machinery as commodities with ever-increasing cost pressures as differentiation becomes almost impossible without bank control over customer relationships.

The Future Of Retail Banking

. Retail banks are going all-digital with maximum focus on customer convenience and hyper-personalization. Customer decisions are driven by AI-derived insights and predictive analytics, using real-time financial data, fully understanding customers’ financial needs and behaviors, and even acting on their behalf. Branches largely disappear,

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Adapting the existing strategy or developing a new strategy in response to the development scenario involves a difficult choice for banks. The key decision banks must make is where to compete in the value chain and how to define their future business model.

Swiss retail banks should consider the impact of the above scenarios on the success of their current business and operating models over the next decade. Redesign the organization to do more

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