Strategy and innovation


3 May 2011


Michael Pearson reveals how innovation is a key driver of long-term, profitable growth within the retail banking sector. Here, we present an exclusive excerpt from the European Financial Marketing Association (Efma)’s 2011 ‘Retail Financial Services: Strategic Insights and Best Practices’ report.


After nearly three years of crisis, in 2010 there were signs of the retail financial services industry beginning to recover. However, there are significant strategic challenges ahead such as:

  • the impact of numerous regulatory changes being introduced
  • the ongoing need to focus on and improve risk management
  • growing competitive threats from new entrants and new business models.

At the same time, the take-up of mobile financial services is potentially at an inflection point and social media is growing in importance, even though the longer-term impact of social media on financial services remains unclear. Banks therefore need to plan for new developments in both of these areas.

Strategy transforming retail banking

Efma's report with Microsoft 'Transforming Retail Banking to Reflect the New Economic Environment' is a summary of the Efma Retail Banking Advisory Council's views from the meetings that took place during the year. As such it identifies many of the key strategic issues facing retail banks.
According to John Kirkbright, who chairs the Council: "The vision of most banks is to provide their customers with a seamless, fully integrated and uniform experience across all channels. Many banks are still years away from achieving this. The severe impact of the economic crisis has hindered progress in this area."

Other key conclusions were:

  • Many banks have refocused on the branch as the main method of controlling and maintaining customer relationships. This isn't easy when fewer customers are visiting branches, so there has also been a considerable emphasis on improving the online banking experience.
  • Branches will continue to play an important role in customer acquisition and the sale of more complex products. Banks must decide the extent to which customers will be managed remotely rather than face-to-face. Some banks have already demonstrated that it's possible to develop excellent customer relationships with few (if any) face-to-face meetings.
  • Banks now need to take much more care in ensuring that they sell the right products to their customers. 'Needs-based selling' is having a radical effect on how banks operate. It requires better systems and processes - not only for a clearer understanding of customer needs, but also for implementing the appropriate solutions.
  • We are likely to see the potential emergence of many new, customer-centric banks. These factors put banks under considerable pressure to provide higher levels of customer service and to ensure that there is more dialogue with customers through all channels. Banks will increasingly focus on matching the level of service provided with the profitability of the individual customer.

Competitive threats to the industry

Significant disruptive innovation has not taken place in the banking industry for reasons that include customer inertia and conservative regulators. Many of the direct banks that were set up in the last ten years have had a relatively small impact and the traditional competitors continue to dominate the market. Price-comparison websites have also emerged and contributed to the commoditisation of some areas of the business, but the change has not been as great as many had feared.

There is recognition of the threat by banks, but this is not universal. According to research for the Efma 'Innovation in Retail Banking' report, which was published with the support of Infosys, only 35% of banks in Western Europe believe the threat from new entrants and business models is high or very high (see Figure 1, page 18). In Central and Eastern Europe the figure was 38% and in Russia and the CIS it was just 14%. Banks in the Middle East and Africa were the most concerned about the threat with 50% believing the threat was high or very high.

When asked where the main threats would come from, the most common answers were retailers, telcos, alternative payment providers, and person-to-person business models that disintermediate banks. There are also opportunities in most markets for
start-up banks with new, customer-focused business models.

The progress of all these new entrants is relatively slow, but they continue to eat away at the total revenue and profit pools available to retail banks in mature markets. There is also a feeling that the industry may be at a turning point as a result of the financial crisis, and as the use of broadband internet and mobile smartphones with fast data access has reached critical mass. The way consumers use these new technologies is developing in very unpredictable ways.

Innovation and growth

There was evidence in 2010 of an increasing focus on innovation, and increasing investment in innovation across Europe, Middle East and Africa by retail banks (see Figure 2); however, relatively few banks have made innovation a strategic priority or made a clear link between their strategic priorities and the role of innovation. This should be a concern as innovation is likely to be an important driver of long-term, profitable growth. A good example of a bank that has made innovation a strategic priority is BBVA.

There are also mixed views on whether banks are becoming more innovative or not (see Figure 3, page 20). For example, on balance, banks in Western Europe do not see improvements in innovation, whereas banks in Central and Eastern Europe do.

The 'Innovation Index', a self-assessment by banks of their innovation performance, shows that Central and Eastern Europe, closely followed by the Middle East and Africa, are the most innovative regions. Where innovation is flourishing, there is evidence of an increased customer focus in the innovation process, made possible by new tools and techniques to involve customers directly. Having an innovation department is not essential, but it can be a catalyst and provide a point of coordination for innovation activities.
The challenge is very different for start-up or smaller banks, and larger banks. It is not easy for the larger banks to radically change their business models and typically they are serving a diverse range of customers. Smaller banks are able to focus on specific customer segments and can innovate their propositions more easily, and more quickly.

There are many examples of incremental product, channel and process innovation, but there are also examples of how banks are using a combination of product, channel and process innovation together with a new business model to create an improved customer experience. A good example is ActivoBank from Millennium bcp in Portugal.

The 'Innovation in Retail Banking' report also looked closely at the role of IT for innovation and found it to be a critical factor in most banks. Innovative banks like Capitec Bank in South Africa have made IT a central feature of their strategy. When asked about the challenges of implementing innovation however, banks revealed that managing the relationship between IT and the business was just as or more important than technology itself.

Social media and financial services

Efma's report on social media titled 'Social Media at the Starting Blocks', published with Aite Group, begins with the observation that "with the number of people on Facebook crossing the 500 million mark, there's no doubt that social media is the hottest topic in marketing for 2010"; however, the use of social media in financial services is still in the early stages of evolution. In Europe 59% of firms are novices or beginners, and this situation is similar in the US.

The research also found that only around 6% of firms were spending more than 5% of their marketing budget on social media, but that within five years 40% of firms were expecting the percentage to be higher than 5%, a significant increase.

Firms appear to be mainly focused on the early stages of the marketing funnel (for example, Facebook, Twitter) but not on the later stages, such as customer review. The report concludes that firms should focus on the later stages of the funnel, and should integrate social media tools and techniques into the overall marketing strategy by focusing on influencing customer preferences, and providing collaborative support. The latter should help to reduce call centre volumes and costs in the medium term.

Figure 1. Threats to the retail banking industry from new entrants and business models.
Table 1. Change in level of investment in innovation (2010 vs 2009).
Table 2. Are banks becoming more innovative?
Figure 2. The innovation index.
Figure 3. Scale of challenges for implementing innovation.