Bank executives have gotten the message: customer experience is critical to maintaining market share in the face of pressure from nontraditional competitors.
In a survey released Wednesday, KPMG found senior bank executives focused on improving their customers’ experience and transforming their business strategically, operationally and structurally.
Nearly a third of respondents said wealth management would be their biggest revenue growth driver over the next one to three years.
Asked to identify the top three drivers of transformation for their business over the next three to five years, 47% of executives cited “customer demand/changes in customer focus, buying patterns and preferences,” 43% said “coping with the change in technology” and 37% chose “domestic competition.”
KPMG noted that previously regulatory change rather than customer demand had driven significant changes in banks’ business models.
“The banking industry is at a critical juncture where it needs to transform on a number of fronts — most importantly, upgrading old and implementing new technology to enhance and simplify the customer experience,” Brian Stephens, national leader of KPMG's banking and capital markets practice, said in a statement.
“In addition to tougher competition and regulatory demands, consumer dynamics and preferences are evolving. In order to compete and succeed, banks need to become more advanced and agile to effectively meet customer expectations.”
The KPMG survey, which was conducted during the spring, captured the responses of 100 senior banking industry executives.
Thirty-eight percent of respondents represented banks with more than $250 billion in assets, 12% banks with between $100.1 billion and $250 billion, 15% institutions with between $50.1 billion and $100 billion, 17% banks with between $20.1 billion and $50 billion and 18% banks with less than $20 billion in assets.
Fastest Growing Customer Segments
While banks look to transform themselves, they must also focus on different customer segments. Asked which customer segments presented the greatest growth opportunity, 27% of the bank executives surveyed cited the top 10% of income earners, up from 25% in last year’s survey.
The unbanked and underbanked represent the fastest growing customer segments — nearly double in survey responses from last year. Twenty three percent of executives chose the underbanked, up from 12% in last year’s survey, and 13% cited the unbanked, up from 5% last year.
Nontraditional competitors, such as retailers, have already started gaining market share from this market segment, KPMG said.
IT and Mobile Technology
Executives in the survey said technology would be instrumental in their efforts to strengthen customer relationships.
One-third of respondents said upgrading and simplifying core platforms that communicate across the enterprise would be the single most important IT investment over the next 12 months. They expected upgrades to provide efficiencies, contain costs and enable a better customer experience.
Bank executives also continued to focus on mobile technologies, with nearly a quarter of those surveyed saying that enabling mobile payments was a key IT-related investment priority (relative to the customer interface) for their banks over the next year.
“Mobile payments offer functionality and enhance the ability for banks to connect with consumers for other services such as discounts and loyalty offerings, in addition to the convenience factors,” Judd Caplain, KPMG’s national advisory industry leader for banking and diversified financials, said in the statement.
Bank executives still identify regulation as a growth barrier, but in the new survey only 41% said it was the number one barrier, compared with 72% who said that in last year’s survey.
As for specific factors that negatively affected their bank’s growth, 55% of executives said “regulatory compliance costs,” 40% cited “regulatory limitations on products and services” and 36% pointed to “weak loan demand.”
Sixty percent of survey respondents reported that regulatory requirements accounted for as much as 10% of their total operating costs, while 22% said it accounted for 11% to 20% of total operating costs.
“This significantly adds to pressure banks are already feeling to keep costs down to deliver the returns investors expect while also raising the higher levels of capital now required,” Caplain said.
Thirty-two percent of respondents said asset and wealth management would be the top revenue growth driver over the next one to three years, 28% said it would be commercial and industrial loans and 21% indicated broker-dealer and capital market activity as the main growth generator.
Thirty-eight percent of those polled expected their company’s revenues to increase by between 1% and 5% over the next 12 months, while 31% expected a 6% to 10% increase, 9% an increase between 11% and 20% and 3% a more than 20% increase.
Check out 10 Ways Regulators Can Improve Dodd-Frank on ThinkAdvisor.