Global Retail Banking Trends

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Global Retail Banking Trends

(Part-A)... Two additional trends in the global retail banking industry are growing collaboration with FinTech firms for point-of-sale (PoS) financing and blockchain solutions for KYC implementation. These trends are discussed below in detail with suitable examples and data.

Growing Collaboration With FinTech Firms for Point-of-Sale (PoS) Financing

  • Getting traditional loan approvals from retail banks cost customers a lot of time, effort in doing paperwork, and extra fees, which reduces their satisfaction with the banks. Hence, more and more customers, especially millennials who are not attracted by credit card balances or traditional loans, are turning towards technology-driven point-of-sale (PoS) financing.
  • A customer survey conducted by Payments Journal has revealed this shifting spending behavior of customers. 28% of the respondents said that they would prefer PoS financing for their online payments, while 39% of the respondents agreed to spend more if they would be given a PoS financing option. 76% of the respondents confirmed their preference to purchase if their payment would be done vide PoS financing.
  • The PoS financing market in the United States alone is currently estimated at $391 billion and is gaining significant traction among online shoppers.
  • The growing popularity of technology-driven point-of-sale (PoS) financing has been capitalized by FinTech firms that have disrupted the traditional retail bank industry by providing innovative, digital solutions to the shoppers of the present generation. These FinTech firms have included large e-commerce companies, traditional retailers, and payment companies in establishing a PoS lending ecosystem.
  • The PoS financing system creates a win-win opportunity for merchants and retailers as it leads to increased sales, improved cash flow, increased customer base, and a positive image of the company among customers.
  • As retail banks are falling behind in advanced technology-driven financing solutions, they have recognized the need to collaborate with FinTech firms to establish their presence in the PoS financing market. A joint survey of retail banks by EBA and Finextra has revealed that 81% of retail banks want to collaborate with FinTech partners to implement digital transformation.
  • Suntrust Bank, Fifth Third Bank, and BMO Harris Bank NA have partnered with Atlanta-based FinTech firm Greensky to consolidate their PoS lending business. Greensky connects banks, merchants, and consumers and has helped fund loans of value more than $12 billion. The FinTech firm has helped retail banks to gain more than 1.7 million new customers.

Blockchain Solutions for KYC Implementation

  • Know Your Customer (KYC) is a vital element of identity management and helps retail banks track and prevent financial fraud, money laundering, and terrorist financing. However, the KYC implementation and compliance process is stringent, long-drawn, and complex. This often leads to bad customer experience and affects customer loyalty.
  • There is no worldwide standard for the KYC implementation process, and it varies from one retail bank to another. This leads to extra work for the bank employees when banks and financial institutions collaborate to verify the identities of the customers. Also, compliance with the ever-changing governmental regulations proves to be a costly and labor-intensive process for retail banks.
  • As part of their daily business operations, banks have to automate real-time intra-bank, inter-bank, and third-party data exchanges. Also, customers have to transfer their private data to the bank server whenever KYC checks are done. Hence, there is a possibility of the data and private information being hacked by malicious people.
  • To prevent extra cost and redundant work, cybersecurity risks, and customer hassles in KYC implementation and compliance, more and more retail banks are exploring blockchain or distributed ledger technology to streamline their KYC implementation and compliance processes.
  • Under the blockchain system, retail bank customers will face the KYC implementation process only once, after which the blockchain architecture automatically allows them to confirm their identity without facing any third-party verification processes. The blockchain architecture allows retail banks to collect customer information from multiple sources into a consolidated, cryptographically secure, hack-proof, and unchangeable database.
  • Top Indian retail banks like SBI, HDFC, and ICICI have joined the BankChain community, a group of 37 global banks that aims to use blockchain for KYC implementation. Other global retail banks like HSBC, OCBC Bank, and Mitsubishi UFJ Financial Group (MUFG) have successfully tested KYC blockchain architecture.

(Part-B)... As per a report by McKinsey & Co., the retail banking industry in Asia-Pacific is expected to become an over $900 billion market by 2020, growing at a CAGR of 14% per year. It is expected to become the world's second-largest wealth management region after the United States. However, retail banking in the Asia-Pacific region is being revamped by changing customer behavior, an increase in wealth of the middle class, and the rapid adoption of technology. Three trends in retail bank branches in the Asia-Pacific region are increased focus on digitalization and mobile-banking, reduction of physical bank branches, and increased focus on training the workforce.

Increased Focus on Digitalization and Mobile-Banking

  • Retail banking customers in the Asia-Pacific region have become more technology-oriented over the years. A study by McKinsey & Co. has shown that digital transactions over devices are 1.6 to 5 times more frequent than branch transactions in the Asia-Pacific region.
  • The same study noted that retail banking customers in the Asia-Pacific region are ready to shift between 35% to 40% of their total wallets in these retail banks to digital-only platforms.
  • Owing to the considerable population of the Asia-Pacific region, there is a greater penetration of digital technologies (including smartphones) in this region than anywhere else in the world.
  • Recognizing this shift towards digital platforms, most retail banks in this region show an enhanced focus towards digitalization and mobile-banking. A survey conducted by Ernst & Young found that over 50% of the retail banks in the Asia-Pacific region aspire to become digital leaders by 2020.
  • The report by EY mentioned that retail banks in the developed APAC regions like Australia, Hong Kong, Singapore, and Taiwan stated that developing partnerships with FinTech firms and investment in technology are their top priorities for 2020. The retail banks in the emerging APAC regions like India, Malaysia, Indonesia, and mainland China stated that digital transformation, leveraging technology, and increasing cybersecurity are their top priorities for 2020.
  • An example of a major bank at the forefront of the trend is Singapore's DBS Bank that launched a mobile-only digital bank "digibank" in Singapore in March 2016. The app was downloaded more than 200,000 times within two weeks of its launch. The digital bank expanded to India and Indonesia in 2017. The Indian customer base of digibank was 2.5 million in 2019, signifying its total success.

Reduction of Physical Bank Branches

  • A study by McKinsey & Co. has shown that only 12% of the total monthly transactions of retail banks in the developed countries in the Asia-Pacific region take place in the bank branches. The corresponding figure for emerging countries in the Asia-Pacific region is 21%.
  • Since a majority of the retail banking customers in the Asia-Pacific region use digital platforms for their daily banking needs like balance checking, bill payments, and peer-to-peer transfers, most retail banks in the region are witnessing a massive decrease in transaction volume in their branches.
  • Also, with low return on equity, decreasing profit margins on most product categories, increasing risk costs, and the volatile economic scenario, most retail banks are now rethinking the role of the bank branches and deciding to move to digital platforms, call centers, and even ATMs. This will mean a reduction in the physical bank branches as a part of a cost-cutting initiative of the retail banks.
  • Owing to the declining loan demand in retail bank branches, unfavorable business conditions, lower profitability and revenue at physical bank branches that make them very costly to maintain, several Japanese retail banks have started shutting down their branches and laying off a section of their workforce. Mitsubishi UFJ Financial Group (MUFG) has announced a 20% reduction in its domestic branches over a period of six years. Mizuho Financial Group has announced closure of around 100 domestic branches within March 2025.

Increased Focus on Training the Workforce

  • Wealth is a demographic trend. It has been seen in the Asia-Pacific market that a significant demographic of retail banking customers is getting rich and moving towards the affluent segment.
  • A study by McKinsey & Co. has shown that total personal financial assets (PFA) in the Asia-Pacific region are expected to become $69 trillion by 2025. At the CAGR of 9%, the region will account for 75% of the global PFA by 2025.
  • To cater to the investment banking and wealth management needs of this growing affluent segment of the population, several major retail banks in the Asia-Pacific region have started training and boosting their investment banking and wealth management staff.
  • Considering the growth of digital banking in the Asia-Pacific region, a lot of transaction-related work done by the retail bank employees have become automated. Hence, the nature of the work done by most retail bank employees has shifted to advisory functions. There is a major emphasis placed by the retail banks towards rescaling and upscaling of the workforce, which has called for additional training to upgrade the skill set of the employees.
  • An example of a major bank at the forefront of the trend is HSBC Holdings. The bank has started hiring internal and external wealth management staff, product specialists, advisers, and relationship managers to add to its workforce, besides training its existing workforce on wealth management and investment banking.

Research Strategy

For both Part-A and Part-B of the above research, we focused on finding relevant reports and articles from market research leaders like McKinsey, EY, Capgemini, and Forbes, among others. We also searched for articles from reputed media houses in the industry like Finextra, Livemint, Asian Banking & Finance, and APAC Business Headlines, among others. Both the global trends and the trends in the Asia-Pacific retail banking industry are similar and do not show much variation. Despite this, we have tried to present suitable data and examples that give a broad overview of these trends. These facts, figures, and examples are thus presented in the above report.