Academic journal article The McKinsey Quarterly

Retail Banking: Caught in a Web?

Academic journal article The McKinsey Quarterly

Retail Banking: Caught in a Web?

Article excerpt

New web-based competitors are positioning themselves as trusted, objective intermediaries

Most bank executives are following a "fortress" strategy - defending themselves while they wait for clarity in the online world

As electronic networks become more robust and widespread, they are beginning to attract the attention of retail banks. Like ATMs and phone banking before them, however, they tend to be seen as merely one more cheap distribution channel. Accordingly, banks are replicating the branch banking experience on line - even to the extent of creating 3D virtual branches for their customers to navigate through. Such an approach is characteristic of early attempts to use any new technology platform. Consider the first television programs: people stood around microphones in what were essentially radio broadcasts with visuals awkwardly added on.

Efforts like these miss the opportunity afforded by the new medium to rethink the entire value proposition of a retail bank. Some non-bank entrants into the online world are experimenting with an altogether different business model. They are exploiting the unique capabilities of electronic networks and leveraging their own resources through web-based strategies. These strategies unbundle the financial services business and mobilize a broad array of specialized providers to deliver increased consumer value through more innovative products, wider choice, reduced complexity, and lower prices.

These new entrants could pose a threat to retail banks, targeting their most profitable product lines and customer segments. On the other hand, the same approaches are available to retail banks themselves, should they choose to pursue them. However, to do so will not be easy. It will demand a profound shift in mindset and the development of new organizational capabilities.

New entrants, new business models

New entrants into the financial services arena vary in their focus, but all are pursuing a business model unlike that of the traditional retail bank. In general, these new entrants fall into two groups: those that are focusing on a specific customer segment and those that are focusing on a specific transaction category. Both are mobilizing a "web" of participants to deliver key elements of an unbundled business system.

Targeting customer segments

One category of new players, represented in particular by software companies like Microsoft and Intuit, is targeting specific groups of customers, most notably affluent households that are early adopters of new computing and online technologies. Their goal is to develop a trust-based relationship with these customers in helping them obtain a wide range of financial services.

Banks that fear these entrants are seeking to enter the retail banking business miss the point. The new players are not interested in providing specific financial services; rather, they want to focus on the acquisition and management of customer relationships. In essence, they are becoming a new form of intermediary that "unbundles" the customer relationship management element of the retail banking business from the product manufacturing and processing elements. Their distinctive value proposition will be to develop a deep understanding of a specific customer's needs and to provide access to the best mix of financial services from a multitude of "manufacturers" (banks and other providers).

Banks have, of course, been trying to do this themselves for quite some time, but their information system architectures and organizational structures tend to emphasize products, making an integrated customer focus difficult to adopt. Even if a bank does manage to make the shift, it is hampered by being able to "see" customers only through their use of its products and channels. Unless customers rely on this bank for all their financial service requirements - an increasingly rare eventuality, especially among affluent households - it cannot attain an integrated perspective on the full range of its customers' transactions and needs. …

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