Evolution of Retail Banking & Future Challenges

I am observing the evolution of retail banking in India over the years, right from the 1980s to 2010s. I must say that banking has come a long way in these years. There is a lot of difference in terms of customer experience which I have experienced over the years.

Though there is a lot of improvement in service levels delivered by the banks over the years, creating a consistently high quality customer experience continue to elude the banks. Though banks are trying to provide astute and nimble responses to the customer's needs, they are still slow to adopt the strategies that could allow them to capitalize on the tremendous additional potential for growth and profitability that a customer-centric retail orientation brings. What opportunities should they pursue to realize a dramatically different customer experience?

Many banks have made strong progress in improving their customer experiences in the following areas:

• Customer Data and Segmentation
• Leveraging Data to Deliver a Better Product Mix
• Creating a Distinct Brand Image
• Improving Service Operations

The challenge now for Banks is to improve and integrate their multiple distribution channels to consistently deliver an enhanced customer experience and foster better customer relationships. In this, distribution channels play an important role in customer relationship process. 

For most banks, branch presently dominates their distribution approach, while other methods of interaction such as direct channels are less important and not well integrated. But this situation is fast changing. There are three market dynamics, the convergence of which has created the inflection point banks face in the evolution of retail distribution channels.

1. Branch generated revenue growth is becoming more challenging: While growth at existing branches continue to be strong, this is not the case at many new branches. Growth in branches outside the bank's existing footprint is uneven and weak. At the same time, it is becoming more expensive to acquire existing branches. The cost of real estate has gone up over the years and therefore new branches in semi-urban and rural areas have become nonviable. 
2. Transactions processing and customer service are becoming increasingly independent of the branch channel: Why visit a bank branch. For many years/ decades, most people visited the branch for loan approval, know about products/ services, conduct transactions etc. However, most credit approvals moved out of branch many years ago and most of the core transactions that were once conducted in bank branches have now shifted to electronic form. The momentum for this kind of change has accelerated a lot in the last few years.
3. New Technologies are gaining widespread adoption: Initially, the shift was from branch banking to ATM banking and in the last few years, it has moved over to internet banking, which gained wide acceptance. It seems now the latest change gaining traction is mobile banking as mobile phones are becoming more sophisticated and capable of handling advanced applications and services. Banking via mobile phones appeals to consumers on various fronts. Mobile phones also serve as efficient medium for making person-to-person transfers. Other technology developments are also poised to affect the distribution of retail banking services. For example growing broadband penetration and cheaper web cams will help banks to connect with customers via webcams.Technological progress is also helping banks to reduce the cost of operation and improve its efficiency.

What Next?

I personally believe that the following will change in the coming years in the retail banking distribution channels:

• Over the next few years, the branch will remain the primary channel but other channels will become increasingly important for both sales and service. This will mean that the branches will evolve over the years into "next generation" branches offering different value propositions. The focus will be on improved layout helping the customer to navigate better, improving customer service by engaging customer in new ways, and technology improvements leading to improved efficiency & customer experience.
• The branches will be smaller in size and will be used more for cross selling and less for routine transactions. This means that productivity (revenue per square feet) will move northwards.
• Banks will invest more in mobile sales force i.e. sales team members visiting customers at their premises and helping customers in product selection.
• Customize products to meet customer's requirement rather than designing a product and trying to sell  the same product to all the customers.
• Provide customers with online research capabilities & inviting them to evaluate the products and publish results to help others make buying decisions.
• In the future, customer needs and preferences will increasingly drive the integration of all the channels. Thus banks should seek to accelerate the steady progress towards greater integration to meet customers' cross-channel needs.

Core Strategy & Core Competence

This article is based on the viewpoints expressed by the author in the 2 earlier posts - What Ails Indian Aviation Industry & What is Core Competence...

In my earlier post I mentioned that businesses should follow a consistent strategy and take a position according to the strategy. To throw further light on this statement, I like to cite few examples where companies tried taking multiple positions and failed to deliver.

• Maruti Udyog is the market leader and a very strong brand in entry level segment and cars in price range of 3 to 7 Lacs. Maruti tried taking a strong position in Cars/ SUVs in 16 to 20 Lacs price segment by launching Maruti Grand Vitara & Maruti Kizashi but both the products never really took off and bombed badly. 
• Hyundai is a strong brand in 4 to 7 Lacs price band with offerings like i10, i20, Santro etc. It also tried to compete in SUVs in price range of 20 to 25 Lacs by launching Hyundai Santa Fe but again failed badly.

The above are examples where businesses tried to do something not consistent with their Core Strategy and also Core Competence and fell flat. 

If a company wants to come with a successful offering which is not consistent with their Core Strategy, then they need to create a separate brand/ company and keep it completely independent. I will elaborate this with few examples:

• Toyota is a hugely popular brand in mid-segment sedans with offerings like Corolla and Camry. When it wanted to offer a product in luxury segment, it created a new brand - LEXUS. The entire leadership team, employees, dealerships, service stations etc for Lexus is separate and does not share anything with Toyota.
• Tatas, again hugely popular in entry level cars (3 to 7 Lacs), when decided to operate in premium luxury segment, decided to buy-out JLR.
• Volkswagen, again very popular in mid-segment sedans created a new brand AUDI in premium segment. It also has another successful brand - SKODA.

From the above examples it is obvious that businesses need to be consistent with their Core Strategy, else they will not be successful. Another important point to be noted here is that when a business focuses consistently on the same strategy, it further enhances its Core Competence thereby increasing the distance between itself and its nearest competitors.

Core Strategy & Core Competence are interlinked and one drives another thereby improving the brand, positioning and success of a business.

What is Core Competence

The idea of Core Competence is becoming more and more important in today's world as businesses try to outsource as many activities as they can and are focusing their efforts on things they do well. All the Management Gurus want the businesses to focus only on their core competence.

WHAT IS CORE COMPETENCE:

Core Competences means that businesses need to have something that customers uniquely value. "Me Too" businesses which have nothing unique to distinguish them from competition compete on price - they drop the prices and margins become thinner and thinner.Therefore its is necessary that businesses need to identify and build USPs (Unique Selling Proposition). If you can offer something uniquely good, customers will be willing to pay a premium for the same. The question now is "HOW TO GET THIS UNIQUENESS?".

There are 3 important criteria which an idea must pass before it can be called "CORE COMPETENCE". These 3 criteria are as below:

1. Relevance: The competence must give your customers something that strongly influence the customer to choose your product or service. If it does not, then it can't be called a core competence.
2. Difficulty of Imitation: The core competence should be difficult to imitate. This ensures that you are in a position to develop products which are better than those of your competitors. Moreover, since you are constantly focusing on your core competence, you are able to sustain its competitive position.
3. Breadth of Application: The core competence should be such that it opens up a good number of potential markets. If it opens up only few niche segments, then the success in these niches will not be sufficient to sustain significant growth.

The above 3 criteria are very critical for an idea/ skill to become core competence for a business. Once the above 3 criteria are met, then a company can develop on it and gain a foothold in the market.