Most European countries have their Big Four (or five or three) retail banks that command a sizeable market share – often recognisable as the banks that created headlines by needing taxpayer bailouts. These are the traditional ‘first bank’ for most consumers’ being the trusted, stable institutions that don’t have dynamic banking, but do have the convenience of a large branch and ATM network with a fleet of complementary products. During the recent financial crisis, the flaws in these banks were exposed and consumers had their heads turned by some Tier 2 banks. However, as the economic situation improves, the Tier 2’s need to keep these customers and find ways to keep growing – but they are not the only players looking to take a bite out of the Big Four. New entrants from retailing alongside completely new banks are emerging. PayPal has also announced new ambitious plans. Can the Tier 2’s learn from this hunting pack, or will they be the first easy victims?
Most of the Tier 1 retail banks are in a similar state – punch-drunk from an expensive financial crisis, dazed by reams of new legislation (with more still to come) and vilified for returning to profitability too soon. They have invariably turned inwards to undertake major operational efficiency programmes – renewing infrastructure and closing unprofitable business activities. Many find themselves looking inwards with few lookouts seeing the circling wolves, a situation compounded by being denied the budgets for developing the new products needed to see them off.
The biggest wolves are the retail giants, including the likes of Tesco, Carrefour and Ikea, looking to expand their existing financial services portfolio into retail banking operations. Each of these example companies have had financial arms for a considerable length of time – Ikea’s Ikano Bank was established in the 1970s – but these were previously limited to activities that supported the core aim of the retailer such as low cost corporate banking services.A number of retailers have sensed bank vulnerability and decided that the time is right to go on the attack. But why would a consumer choose a supermarket over a 350-year old bank as the right place to look after their hard-earned cash?
To answer this, it is important to look at why consumers are disillusioned by their banks. Beyond the press image of ‘money-grabbing, self-interested, fee-charging institutions’ come the gripes – “my branch is never open when I need it”; my bank doesn’t tell me what i’m paying for”; “they charge me when they have to be flexible”; and worst of all “they charge me more if i actually use the account”. Banks also are accused by consumer organisations such as the European Consumers’ Association (BEUC) of lacking innovation, running scared of new media and hiding behind their ‘too big to fail’ mantra by echoing ‘too complacent to care’.
Tesco, unlike the Big 4 banks in the UK, doesn’t need to invest in a branch network. its instant access account allows transactions at the checkout (or ATM) and account management by the web or call centre. With many stores open 24 hours, customers can get cash from a person at any time of day – many consumers like the human touch and dislike paying ATM fees. Ikea has built its reputation on demonstrating where every bit of your money goes – such as in their price-per element approach to kitchens – and is replicating this in Ikano Bank, which recently took over Shell Cobrands in Scandinavia from Citibank. This flat-pack approach to pricing seems to be pleasing consumers judging by Ikano’s growing market share. Carrefour spent Q1 2010 implementing a multi-country financial service platform to run alongside its multi-country retail network, gaining economies of scale and efficiencies. most of all, these retailers do not need to worry about 350 years of legacy process and operations. It is unlikely any financial system at Tesco bank runs on a COBOL mainframe. Similarly when you sign up to a credit card at Carrefour and it is linked to your loyalty card, the servers will be capable of talking to each other.
These retailer banks will know a lot more about you – their vast loyalty schemes and data warehouses can even work out when you went on holiday, and where it was (when you buy Jamaican spices a week later). So, when they put together a promotion, it can be personalised to you. Moreover, they are used to reacting to changing customer demand: a supermarket will introduce a product in terms of weeks when it sees an opportunity, not months. Tesco and Carrefour are also up to speed with mobile – being service providers (MVNOs) themselves. As has been shown elsewhere, it is the share of profits between Telco and Bank that invariably blocks mobile projects – a non-issue if you are both – and acceptance becomes much easier if you also own a large number of retail locations.
On this basis you might expect most large retailers to have their own banking arm. However, this is not the case – the main reason being that it isn’t easy. For example, in order to get a banking licence in the UK you must first assemble a group of people of whom the Financial Services Authority (FSA) approve – not an easy task in itself. The next hurdle is where the FSA gives approval for them to perform one or more strictly ‘controlled functions’ on behalf of an authorised firm. These controlled functions relate “to the carrying on of a regulated activity by a firm”, which means that each time they change roles or add activities they need to be vetted again. This process also applies to those wishing to become a Payment institution in that market.
PayPal obtained a banking license in 2007, significantly shifting operations from the UK to Luxemburg in a very public piece of regulatory arbitrage, and now more difficult under the Payment Services Directive. PayPal can teach further lessons to Tier 2s as it maintains a healthy ‘revenue as a percentage of transaction volume’ of 3.6%. It operates a deported three party system where transfers occur from pre-funded accounts, making its capital requirements considerably lower. Operating both sides of the transaction allows it to keep costs to a minimum and also have knowledge of both counterparties. This extends KYC into KYT (Know Your Transactors) whereby it can intervene in transactions that are high risk or that do not fit the patterns of behaviour of either party. By making the ‘holds’ easy to remove, they also do not act as a bar to commerce.
So a Tier 2 bank that wants to be its customer’s first bank has the advantage of waning confidence in the Big Four, but what must it do to permanently turn consumer heads and truly run with the wolves? One of the keys is really knowing your customer – understanding where they are under financial pressure and seeking to solve it, either with service suggestions or new products. If 50% of your account holders have a monthly direct debit with a Telco, look at offering a mobile element to your product range, or even at starting your own Telco that you can link to the account. Wouldn’t it be nice if banking got cheaper the more often you used your account? Perhaps customers could bulk-buy ATM transactions at a cheaper rate or get buy one, get one free on credit transfers for heavy users? Most Banks now understand why Saturday opening is important – but supermarkets will bring 24 hour opening, so why not be one step ahead of them by opening a flagship branch 24/7? Better still, work with them to put branches into stores or encourage cash-back as opposed to ATM use. Make the endless volumes of data work for you by turning it into knowledge and context.
The final wolf is new banks, entrants to the market looking to be traditional banks but better, to put the retail back into retail banking. Metro Bank in the UK, the country’s first truly new bank for over 100 years, has learned many of these lessons with a real focus on the customer (including instant card issuance and dog water bowls in branches) and promises “No Stupid Fees, No StupidHours.” In its first month Metro Bank had already signed more customers than it targeted for its first year – and no doubt other similar new banks and payment institutions will do the same across the continent. Consumer sentiment towards these new banks is that they offer something different. As a Tier 2 bank, so can you – with the right strategic support and mindset.
(This article was orignally published in Banking Technology magazine’s SIBOS supplement “Unified payments for a diversified world”, download it here)