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In a recent retail banking review, Accenture defines three bank business models that together could double bank revenue growth while “reducing cost to serve by 20 percent or more”:
Last week, we took a deep dive into retail bank financial disclosures to get a clear picture of key revenue generators. This week, we look ahead to where the retail bank market might be going. While certain revenue models are drying up, other revenue models are expanding. One thing is clear; retail banks must keep a sharp focus on customer needs.
Where to Start? Pay Attention to Fintech Innovation
Many fintech firms seek to take market share from traditional banks and credit unions. Fintech companies often target outdated banking services, products, and processes because they can deliver new technology that makes these segments more affordable and easier to use. If there is blood in the water, fintech usually finds it first.
In fact, if you pay attention to fintech innovation, you can generally tell how quickly a financial service revenue stream will be challenged or eliminated. Previous high revenue and margin products such as fee based checking and bill pay now pull in less revenue because alternative free options exist. Robust mobile banking platforms are mostly free and ubiquitous across the industry. While the mobile segment may not provide an immediate source of revenue for banks, developing a robust mobile experience remains necessary if banks are to retain (and acquire new) customers.
Keep the Momentum With Your Customers
Fintech firms might be nimble but most of them haven't built customer bases large enough to compete with banks at scale. Instead, customer acquisition has long been the core competency of larger retail banks. Retail banks have spent billions of dollars developing and maintaining their customer bases. It simply makes sense to retain and capitalize on this advantage.
Customer-centric models are nothing new, but as certain fee structures (and associated revenues) decline, banks should look to their customer bases and associated data to customize revenue models and build long term strategies for growth. Customers still offer significant revenue generation potential; growth will come from new business segments.
Which Revenue Models are Drying Up and Which Models are Growing?
Revenue Models in Decline:
To reiterate the points above, fee based mobile banking, bill pay, checking, and savings are dying. While it may be possible to charge recurring fees or require minimum balances to generate some revenue from this segment, innovative competitors will lure customers with free service offerings. Customers have been nickel and dimed by fees (from this segment) for years. Don’t give your customers a reason to jump ship.
Revenue Models Holding Steady:
New capital requirements have continued to restrict bank lending, however it is too early to tell if this bank revenue stream will decline or grow over time. As we noted last week, this segment has been extremely profitable for banks and continues to be a strong revenue generator. The question is, can banks issue enough credit to maintain growth? Recently, alternative lenders have made in-roads offering credit extension to the credit hungry marketplace, hoping to disrupt the sector. However, failures in companies such as Lending Club may force regulation upon the upstart alternative lending industry, curtailing competition.
Revenue Models in Growth Mode:
As the predominant issuers of credit (cards, revolvers, loans) and repository of historical documentation and identity verification information, banks are in a unique position to utilize customer and network information to deliver revenue producing value added services. While most fintech firms innovate within certain product or segment silos, only banks reside at the center of multiple financial and information systems. Using these systems, banks can add new customer engagement channels to build exclusive products and develop customer loyalty.
We have previously reviewed retail bank growth segments such as loyalty reward programs, affiliate discount models, commercial matchmaking fees, and integrated discounted payments.
Additional Ways to Grow Revenue
In addition to these offerings, the following three segments could generate revenue by capitalizing on consumer behavior shifts and macro market trends.
According to PwC, “US consumers are saving more, spending less, and paying down debt. Retail banks can capitalize on consumers’ new focus on thrift and concern about retirement income by offering financial planning and related products.”
While consumer debt repayment trends will negatively affect bank revenues at first (via reduced interest collection), improvements in customer savings will allow banks to pad capital buffers and eventually generate revenue via increased lending. In addition, as consumers improve their personal credit, their appetite for other bank products and services will increase. Higher consumer savings necessarily means that customers will be looking for a place to store and invest funds. Family wealth planning and retirement advisory services are growing retail bank segments which can generate significant revenue via set up and recurring management fees.
In addition to financial planning, there are other revenue growth opportunities available in the savings segment. While fee based savings accounts have declined, incentive based savings applications offer a new pathway to incentivize customers to join a bank network. Several Fintech firms have launched popular incentivized saving and investing applications and banks should follow suit. Whether through acquisition or internal development, banks can integrate new savings based technologies to can tap this trend and build new revenue streams. Fees and revenues may run low at first but as customer behavior evolves, banks will be able to use purchasing and relationship data gathered from these applications to tailor consumer product and service package offerings.
Advanced customer data analytics and customer segmentation will drive revenue growth by helping to determine proper product and service offering baskets. Credit cards, credit revolvers, and commercial lending segments will all benefit from improved analytics. American Express is making strides to deploy enhanced data analytics to the merchant financing space and PayPal has eliminated certain legacy metrics altogether.
Take a look at PayPal’s recent innovation in merchant finance. PayPal Working Capital is using payment transaction analytics to determine creditworthiness (versus traditional credit history). PayPal assesses the annual total transactions made via PayPal, and then offers working working capital up to 18% with no credit check. Alternative credit scoring mechanisms such as this may eventually translate to the retail lending space bolstering lending and revenues.
In short, advanced analytics will improve customer product and service targeting and will deliver combined revenue growth and cost savings.
Traditionally, American identity security and verification has been managed solely by the U.S. Government (using social security number identifiers). However, the “Social Security number system was not built for identifying people uniquely, but as an account for retirement savings,” Civic CEO Vinny Lingham said. While governments will remain issuers of identity documentation, banks may be able to provide a layer of protection, encryption, and verification services not available from the Government. In fact, banks already track many key identity and behavior identifiers and interface regularly with government regulators. Suspicious behavior, actions, and behaviors can be shut down, protecting accounts and identities. Banks will be able to generate significant revenue and reputation by providing secure verification and monitoring services over time.
In order for retail banks to keep on pace with revenue targets, they need to rethink their revenue generation strategies. Whether banks decide to innovate internally, or acquire specialty capabilities, they must capitalize on their customer relationships and provide a variety of channels to support customer communication, engagement, and productivity.
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