Global Retail Banking 2021 The Front-to-Back Digital .

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Global Retail Banking 2021The Front-to-BackDigital Retail BankJanuary 2021By Thorsten Brackert, Chaojung Chen, Jorge Colado, Bharat Poddar, Muriel Dupas,Andy Maguire, Holger Sachse, Sam Stewart, Juan Uribe, and Monica Wegner

Boston Consulting Group partners with leadersin business and society to tackle their mostimportant challenges and capture their greatestopportunities. BCG was the pioneer in businessstrategy when it was founded in 1963. Today, wehelp clients with total transformation—inspiringcomplex change, enabling organizations to grow,building competitive advantage, and drivingbottom-line impact.To succeed, organizations must blend digital andhuman capabilities. Our diverse, global teamsbring deep industry and functional expertiseand a range of perspectives to spark change.BCG delivers solutions through leading-edgemanagement consulting along with technologyand design, corporate and digital ventures—and business purpose. We work in a uniquelycollaborative model across the firm andthroughout all levels of the client organization,generating results that allow our clients to thrive.

Contents05 T he ChallengeStarts Now07 Revenues AreUnder Pressure17 Front-to-BackDigital ValueStreams22 A StackedOperating Model11 More CustomersAre Becoming29 The Need toMore Digital—Act NowMore Quickly15 A New Paradigmfor Costs

3 THE FRONT-TO-BACK DIGITAL RETAIL BANK

Three Challenges Define the Future for Retail Banks3years30%2xThe amount of time it will takefor global retail-bankingrevenues to return to 2019 levelsThe increase in the use of mobilebanking worldwide during the COVID-19crisis—and further increases will followThe efficiency of leading retailbanks, compared with that of thetypical retail bankSource: BCG analysis.BOSTON CONSULTING GROUP 4

Chapter or Section Start Page with author bio and one columnThe ChallengeStarts Now5 Retail banks around the world reacted to theCOVID-19 crisis with speed, dexterity, and purpose,while remaining true to their environmental, social,and corporate governance goals. When customers stayedhome, banks closed or converted branches, redirectingtheir resources and customers to remote and digital channels. As it became clear that an economic crisis loomed aswell, banks promptly took steps to improve their financialposition. To help financially stressed customers weatherthe crisis, banks offered them loan deferrals or moratoriums. And they did it all in the span of a few weeks.THE FRONT-TO-BACK DIGITAL RETAIL BANK

That was then. Now, as the new reality starts to take shape,banks face further challenges. The pandemic shock hasaccelerated changes already underway and sparked newones. Institutions’ revenues are under pressure, and globalbanking revenue pools have already taken a significantbeating. Under the most optimistic scenario, those poolsare not expected to return to precrisis levels until 2022.Customers are moving to digital channels faster than theyhave in the past. Online banking use has risen by 23%, andmobile banking use is up by 30%. These changes are likelyto be permanent, accelerating the migration to digitalchannels by three to four years over precrisis trends.As customers move online, banks’ position at the intersection of the customer and financial services is coming underattack. A stacked industry landscape, with different typesof players competing at each level, is taking shape. Nonbank insurgents are making strong inroads in distribution,threatening to commoditize many banking products.BOSTON CONSULTING GROUP Perhaps above all, retail banks need to rethink and realign costs—starting now. Current cost structures are notsustainable.Retail banks must become digital—from front to back—and they must organize around value streams, a series ofvalue-adding activities that lead to the overall result thatcustomers need. While most banks have prioritized selectdigitization measures (often focusing on front-end functions that will have the most customer impact), they havenot put an equivalent effort into cost and risk control (theback-end or internal processes). As a result, customers’digital experience has improved, and they are enjoying newoptions and features, but banks’ fixed costs, which arelargely tied to terrestrial assets, remain in place. Withoutaddressing costs, banks will struggle to monetize theircurrent investments.This report examines what retail banks need to do.6

Revenues AreUnder Pressure7 The new reality greets banks with trouble at the topline. We plotted three revenue scenarios for retailbanks using different global GDP forecasts.A Quick Rebound. Under this scenario, GDP revertsquickly in a V-shaped recovery, returning to 2019 levels in2021. Employment recovers to pre-COVID-19 levels. Globaltrade picks up and overcompensates for short-term outputlosses, while consumer confidence returns to precrisislevels. Large-scale loan losses don’t materialize, thanks togovernment support and the recovering macroeconomicenvironment. Banks can make up their revenue losses by2022.THE FRONT-TO-BACK DIGITAL RETAIL BANK

Subdued Revenue Growth Is Anticipated During the Next Four YearsRetail and private-client revenues globally ( billions)3,000Quick rebound2,500Slow recoveryPre-COVID-19Deeper 19–2024 (%)Retail and private-clientrevenues globally ( ct2024 scenario estimatesSource: BCG’s banking pools, September 2020.A Slow Recovery. In a slow recovery, a deep decline in theGDP growth rate in 2020 reverts to the prepandemic ratefollowing a U-shaped rebound. GDP returns to 2019 levelsin 2022. Employment improves, but stubborn pockets ofunemployment continue in deeply affected sectors. Globaltrade slowly regains momentum, although many barriersremain in place. Consumer confidence partly recovers, butit remains volatile as uncertainty lingers. Banks experiencesector-specific loan losses and some impact on unsecuredretail lending.BOSTON CONSULTING GROUP A Deeper Impact. Under this scenario, the coronavirusremains prevalent, resurfacing in multiple waves. Recessionary conditions are hard to overcome in many regions.GDP follows an elongated L trajectory, with high or risingunemployment rates over multiple years. GDP does notreturn to 2019 levels until 2024. Global trade takes a structural hit, and geopolitical tensions rise. Consumer confidence declines in the face of repeated lockdowns. Corporate and retail lenders experience large-scale loan losses.8

From a regional perspective, there’s bad news for banks indeveloped markets. In the latter two scenarios, the revenueoutlook is between modest and bleak. Even with a quickrecovery, retail banks in developed markets face a slowclimb back to 2019 revenue levels.The Most Profound Revenue Declines Are Expected to Be in WesternEurope and North AmericaGlobal retail-banking revenue pools ( 129273201998248Worldwide301Western Europe640North America89117223Eastern EuropeMiddle East and AfricaLatin AmericaAsia-Pacific7122287392,132939851762Quick rebound2024ESlow recovery2024EDeeper impact2024ECAGR for revenue scenarios, 2019–2024RegionsQuick rebound (%)Slow recovery (%)Deeper impact (%)Western Europe0.6–0.9–3.0North America1.1–0.4–2.5Eastern Europe4.12.20.1Middle Eastand Africa2.50.8–1.1Latin America3.71.7–0.4Asia-Pacific4.92.90.6Source: BCG’s banking pools, September 2020.9 THE FRONT-TO-BACK DIGITAL RETAIL BANK

From a product standpoint, revenues from consumerfinance loans and other lending will take the largest hit.New business will be hard to come by. The positive impactof e-commerce will be partially offset by a decline inconsumer spending, especially on big-ticket items.Nonperforming loans will weigh on the ability to generatefuture growth. The expected long-term run of rock-bottominterest rates will affect both deposit holdings and returns.In addition, an increase in contactless mobile paymentsmay lead to a long-term shift away from credit cardusage—a change that could be exacerbated by a shift fromcredit to debit cards as consumers grow more cautious andbanks limit credit lines.Revenues from Consumer Finance and Other Loans Are Expectedto Take the Biggest HitGlobal retail-banking revenue pools ( 312Investments228Checking deposits228Other deposits583Payments and transactions473Consumer finance and other 3523413082019Quick rebound2024ESlow recovery2024EDeeper impact2024ESource: BCG’s banking pools, September 2020.Note: Because of rounding, not all numbers add up to the totals shown.BOSTON CONSULTING GROUP 10

More CustomersAre BecomingMore Digital—More Quickly11 The pandemic is incentivizing customers’ shift awayfrom traditional branches to digital channels. According to BCG’s most recent retail-banking survey, anaverage of 13% of respondents in 16 major markets usedonline banking for the first time during the pandemic (12%for mobile)—and in some markets, the percentage issubstantially higher. Cashless payments are also receivinga major boost during the crisis. More than 20% of respondents told us that they have increased their use of digitalpayment solutions, such as those provided by internetbanking and third-party apps, and more than 10% said thesame about credit and debit cards.THE FRONT-TO-BACK DIGITAL RETAIL BANK

Branches are feeling the brunt. Our survey showed a 12%net reduction in the use of branches during the pandemic.Lockdowns and social-distancing regulations restrictedaccess to branches and forced many customers to sign upfor online or mobile banking for the first time, and most ofthem liked what they found.More important, the shift to digital channels is likely to bepermanent. On the basis of our survey, we expect an additional net increase of 19% in mobile banking and an additional net reduction of 26% in branch usage after the pandemic. Less digitally adept banks may soon find that bothnew and more-experienced users choose online bankingover visiting branches. The danger is that digitally awarecustomers will defect to more digitally advanced incumbent competitors or nimble and innovative challengers.COVID-19 Is Driving Increased Use of Digital ChannelsNet change in expected channelusage after the pandemic (%)3, 4Net change in channel usageduring the pandemic (%)1, 2Digital channelsMobile apps3023Online banking1916Remote channelsRemote advisors7Contact centers7–11–15Physical channelsATMsBranches0–12–14–26Source: BCG’s Retail Banking Excellence COVID-19 Pulse 2020.Net change is the percentage of respondents who increased their usage minus the percentage of respondents who decreased their usage.1Survey statement: For each channel that you used in the last three weeks, please describe your shift in the usage compared with last year.2Net change is the percentage of respondents who expect to increase their usage minus the percentage of respondents who expect to decrease ordiscontinue their usage.3Survey question: How likely are you to use the following channels post COVID-19?4BOSTON CONSULTING GROUP 12

Many Customers Are Using Digital Channels for the First TimeRespondents who enrolled in online banking for the first time because of the COVID-19 crisis (%) 33%21%Ø ndents who enrolled in mobile banking for the first time because of the COVID-19 crisis (%) 32%21%Ø e: BCG’s Retail Banking Excellence COVID-19 Pulse 2020.Note: Percentages were rounded.Survey question: Have you enrolled (signed up) in online and mobile banking for the first time as a result of the COVID-19 crisis?1As we observed in our 2019 retail banking report, banks’traditional competitive advantages, including large bases ofsticky customers, are coming under significant pressure.Digital networks are undermining physical networks’ roleas a barrier to entry, threatening legacy banks’ captivepools of data and scale in their markets.13 Our survey shows that the coronavirus has accelerated thistrend, and customers are reconsidering all kinds of behaviors and business relationships. While a healthy number ofsurvey respondents continue to have trust in their banks, asignificant percentage—about one-quarter—said that theyare planning to switch banks during next six months.Younger customers are especially likely to make a change,and they are also more likely to be comfortable depositingmoney into digital banks.THE FRONT-TO-BACK DIGITAL RETAIL BANK

Customers, Especially Younger Ones, Are Willing to Switch BanksRespondents whose trust in their bankhas not changed since the start of thepandemic 69%Respondents who are planning toswitch to another bank during thenext six months 24%Responses by age group (%)12More trust83No change34255366139518–3435–54 55Less trustResponses by age group (%)3323818–34Respondents who feel comfortabledepositing money in a digital bank333%35–54 55Responses by age group (%)40342018–3435–54 55Source: BCG’s Retail Banking Excellence COVID-19 Pulse 2020.Survey question: Has your trust in your bank changed since the start of the COVID-19 crisis?1Survey question: Do you intend to switch your main banking provider in the next six months?2Survey question: On a scale of 1 to 5, how safe do you feel with a traditional bank vs. a digital bank (a bank without branches)? 1 I feel safestputting my money in a traditional bank; 5 I’m comfortable with putting my money with a digital bank. Respondents who chose 4 or 5 wereclassified as feeling comfortable depositing money in a digital bank.3BOSTON CONSULTING GROUP 14

A NewParadigmfor CostsThe bank of the future cannot operate with the coststructure of the present and remain competitive. Ouranalysis shows that the operating costs of the bestbanks are already about 40% lower than those of the typical bank, and they have roughly 50% fewer employees.These banks make larger and more sales, and they do sowith branches that are less transaction focused. Specifically, the top banks open 69% more accounts per branchfull-time equivalent (FTE) and conduct 80% fewer branchtransactions per customer, compared with the typical bank.The best banks run more efficient contact centers, withrepresentatives handling, on average, 10% more inboundcalls than those at the typical bank. The top banks alsohandle 65% of calls without a human involved, comparedwith 45% for the typical bank.15 THE FRONT-TO-BACK DIGITAL RETAIL BANK

The Best Banks Already Operate Far More EfficientlyThan the Industry as a WholeRetail bank with 4 million customersCost base ( millions), indexed100Full-time equivalents, indexed100–39%–53%Front officeBranchesContact centersATMs61Middle office47Online and mobilebankingSales, channel, andproduct managementBack officeOperationsITSupport functions1Typical bankEfficient banks Typical bankEfficient banks Source: BCG’s Retail Banking Excellence COVID-19 Pulse 2020.Note: Based on our analysis of a group of leading global banks. ATM automated teller machine.Includes risk, compliance, and legal functions.1The average for the top 25% of banks in the sample.2But even the best banks focus their digitization efforts oncertain aspects of the business and do not excel across theboard. They are only at the early stages of applying advanced technologies, such as artificial intelligence, to theirbusiness and the entire value chain.BOSTON CONSULTING GROUP A theoretical bank of the future that is modeled on themost efficient functions of today’s most efficient banks(the top 25% of our sample by function) could operate withcosts that are 69% lower than those of today’s typical bank.In practice, of course, no single bank will be this efficientacross the organization. But banks that are not planningnow for a major step change in their cost structure will findthemselves at an unsustainable competitive disadvantage—perhaps sooner than they think.16

Front-to-BackDigital ValueStreamsDespite years of investments in digitization, mostretail banks have struggled to improve the customerexperience, grow revenue, build their sustainablecapabilities, reduce costs, and enhance the quality of theircontrols. The main problem is typically a lack of coordination. Many digital initiatives take place in silos, resulting inlimited, isolated, incremental changes and stranded orduplicated efforts.A New Integrated ApproachRetail banks can achieve their goals by identifying valuestreams—a series of value-adding activities that they canundertake to produce a result that customers want—andredesigning, digitizing, and integrating them from frontto back.17 THE FRONT-TO-BACK DIGITAL RETAIL BANK

A Typical Retail Bank Has Fewer Than Ten Potential Value StreamsBorrowingJoiningOpening a new accountto make transactions,such as paying billsBuying a homeMaking a largepurchase, such as buyinga car or a boatGetting funds fastSavingSecuring a loan quicklySaving for a child’seducation or forretirementOptimizing financial well-beingMaking transactionsAddressing fraud and disputesRequesting serviceUnderstanding, organizing, ormanaging finances, as well asrenegotiating debtPaying bills and makingother transactions (includingordering checks)Dealing with fraudulenttransactions and identity theftResolving service needs(such as updating accountinformation) and issues (suchas closing an account)Source: BCG analysis.Successfully implementing an integrated approach requires: Bold Business Goals. Setting ambitious targets, rather than objectives for incremental improvements, andusing end-to-end metrics, instead of siloed functional orservice-level agreement metrics, help ensure visibilityand coordination at the top of the organization. A Reimagined Customer Journey, End to End. Takinginto account a customer’s full circumstances, includingunderlying nonfinancial needs, is important to identifying relevant products and solutions. Banks shoulddesign processes and solutions from scratch (as opposedto trying to adapt those currently in use) and use digitaland artificial intelligence (AI) tools to eliminate work andduplication of capabilities across products and customersegments. Simplified and Automated Processes. Optimizingprocesses across sales, operations, and service functionssimplifies work and eliminates rework.BOSTON CONSULTING GROUP Improved Risk Controls. Building risk and compliance procedures into products and services when theyare designed (rather than adding them later) is a bestpractice. Risk and compliance teams should jointly solveproblems and develop user-friendly and efficient controlsolutions. Transformed Technology. Tying technology, digital, anddata investments to use cases eliminates duplicationsacross silos and helps integrate the design and deliveryof products and services to reduce waste. Integrated Teams. Bringing people from variousfunctions together to work with a joint purpose and on acommon value stream can avoid backlogs across digitaland nondigital channels.In our experience, front-to-back value stream redesign cantypically deliver a reduction in costs of 15% to 25% and anincrease in the consumer advocacy or net promoter score(NPS) of 20 to 40 percentage points.18

ancyCuex stope mrie enerceatonleiefficriThe Value Stream Approach Creates Impact by Pulling Multiple LeversOp15%–25%cost reductione growthI m proved10%–20%20 p.p.–40 p.p.lsTotrop-conincrease in NPSlinrevenue increaseNews u s tai n a bleca p a biltiesOperational efficiencyCustomer experienceTop-line growthBenefits include:Benefits include:Benefits include: Better change delivery A higher level of customer engagement Lifti

ing to BCG’s most recent retail-banking survey, an average of 13% of respondents in 16 major markets used online banking for the first time during the pandemic (12% for mobile)—and in some markets, the percentage is substantially higher. Cashless payments are also receiving

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