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Do banks need to change so fast?

An interesting report from the BBC:

Banks in the UK and across Europe could lose their best customers if they fail to make massive investments in mobile banking and marketing.  Traditional 'retail' banks are most at risk, according to a survey by Deloitte Consulting, which talked to senior executives of 133 banks and insurance companies around the world.  These banks, which provide High Street customers with loans, mortgages and current accounts, could lose up to 25% of their profits over the next five years.

Cherry picking

Most retail banks rely for their profits on a very small number of well-off clients. At a typical retail bank about 20% of its customers generate nearly all the profit, effectively subsidising poorer account holders.

But now cherry-picking competitors are moving in. They poach the wealthy clientele by offering attractive financial packages and new services.

Technology is the driving force. Mobile banking cuts costs; better interest rate deals are the result.

Meanwhile, smarter database management and marketing techniques allow the newcomers to target the well-off customers.

The competitors

The assault is coming from several directions.

  • Upstarts: They offer mobile banking and tend to specialise on just a few financial products, for example current and savings accounts, or cheap mortgages and insurance deals.
  • Specialists: Some banking business is more profitable than other financial products. Single product operators, offering credit cards for example, can be leaner and more competitive than traditional banks.
  • Financial cross-over: Insurance companies, with their wealth of experience in other financial sectors, invade the banking sector, making use of their vast customer data bases and new technology.
  • Retailers turned bankers: Even companies without any experience of the financial sector are now taking the plunge. Many supermarkets, car manufacturers and other retailers are now offering financial services which go beyond the traditional store credit cards or cheap loans for the deal on wheels.

Some banks recognised the threat early on. HSBC, for example, set up its own mobile banking service under the brand name First Direct.  Others, however, lag behind and risk seeing their profits dwindle as customers flock to financial service providers like Virgin Direct, which has huge success with its PEPs and current accounts and Sainsburys and other supermarkets who now offer banking services.

Customer turnover

European banks will have to brace themselves for tougher times. Until now their 'customer churn' – the number of people switching their current account from one bank to another – has been low, only 3%.  But if the development in the United States is anything to go by, the numbers will go up fast.  First Direct, for example, claims that it is signing up 12,500 new customers each month.

MBNA, a US-based credit card issuer which came to the UK several years ago has now snatched a market share of 10-15%. One of its main competitors, Barclaycard, was recently forced to sack over a thousand workers as its business slumped.

Senior banking executives across Europe are worried. The Deloitte Consulting survey shows that 83% of them see retailers and even software companies as a significant factor in the future market place. 85% believe that customer loyalty will be a major concern for the future.  And many banks are just not prepared. Only 20% of executives questioned for the survey believe that their bank has done enough to keep customers on board.

According to Deloitte, the banks have reacted so slowly because they have been spoilt by strong profits in the past.  They are also hindered by out-dated computer systems that prevent them from targeting and servicing their customers in the same way as upstarts do.

Generation gap

But many people do not know how to operate a computer, never mind setting up a mobile bank account.  John Harrison, partner with Deloitte Consulting, predicts that the generational gap between computer-savvy 30-somethings and the rest of the population will soon disappear.  He believes that computer banking will follow a similar path as Automated Teller Machines (ATMs).  These cash points were quickly accepted by younger people. The market was then stagnant for five years, before the technology finally took off.  Mr Harrison forecasts that customers will switch as the new banking technologies get more established. In 10 years, he says, the majority of Europeans will have their account on the Web.  John Reeve, also a partner at Deloitte Consulting, calls it a "watershed in the evolution of the (banking) industry".

Security concerns

But are customers really prepared to hand over their money to a computer, instead of depositing it with a bank clerk in a proper bricks-and-mortar building? Is mobile banking safe?  John Harrison says he would be more worried giving his credit card to a waiter in a restaurant than passing on his financial details to a trusted bank on the Internet.

Fighting back

So how can traditional retail bankers fight back?  For starters they will need money, and lots of it. Deloitte's experts estimate that a bank will need to invest up to $160m (£100m) to get up to speed.

Besides the new technology, they will need to re-focus their marketing. Mr Harrison says banks will have to target and tailor their services for up to 25 to 30 different customer segments. Only then will they be able to retain those which generate profits.

If banks fail to adapt, their clients will simply fade away into cyberspace.


This article was dated November 16 1998.  I just switched 'online' to 'mobile', as then it sounds like something that could have been written this week.  This is also one of the reasons I keep saying that Fintech is challenging, but will not destroy banks.  I've heard that said for over 20 years but, during that time, the big banks have just got bigger and not a single new entrant has destroyed anything.  Banks learn to adapt in time and their customers take a long time to switch.  New entrants have no customers and big banks have millions.  New entrants are untested and unlicensed and therefore untrusted, whilst big banks are tested, licensed and trusted.  I could go on but, if I'm blogging in 2035, I wonder if I'll be posting this article again?

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  • Chris, that was a nice jolt (the 1998 article retooled). It’s shocking how slowly the industry changes and how willing bank customers are to ride with that slow change. It’s just as evident in the basics – that the “cross sell ratio” hasn’t come up (for the industry as a whole) in 10 years, either. Nothing changes fast and the beach is gradually eroding away.

  • Fintech sure will not distroy banks. But My little toe tell me that there is something deeper in the changes we might face now. The change from online to mobile was more like getting a new fancy fast car, but you were still riding the same roads with the same traffic. What I feel now is that by the upcoming DLT and digital currencies it will the roads and the traffic changing. It’s much more profound. Of course the banks have their clients and licenses. But clients are a moving asset and with PSD2 ahead, access to the financial world will get real easy. And the real treat may not come from the new start-up. Whats if Google, FaceBook or some other of those giants create financial services on Ripple rails? Do you think they will not be able to go for licenses to do that? If they create you an ID, an account and a wallet with super convenient payments they can serve me for most of my nowadays financial activity…. And who hasn’t already an ID on most of those social giants? Trust you say? Well take for instance Ripple. They have that wonderful little digital asset, called XRP. It’s a little asset that you can hold, within the network, completely trustless. Don’t trust your service anymore? Save your funds temporary in XRP and it’s safe, just have to trust the global Ripple network…
    I may sound as a huge Ripple fan, and actually I am. But it is for a reason. After I got enthousiast about Bitcoin, I soon discovered Ripple. I got me a wallet and I could send a friend some EUR converted to USD (as he was American), just like I could do an SMTP mailing – Amazing!!!! And the more I red and understood it, the more I realized that this gave me the same enthusiastic feeling that I got when I first discovered the internet, netscape and most of all when I could, for the very first time, sent an email to a friend. By than, I instantly knew that this would change the world of communication. And it did. Also for the telco’s. Communication once was dominate by the big telco’s and if it wasn’t that they had their infrastructure as an important asset, I wonder what was left from those institutes. The most important asset banks may have is the ID of their clients, even more than their funds. And an ID is not a solid asset I guess…