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Tectonic Shifts in Retail Banking: What Innovations Will We See?

The retail banking industry, unlike other sectors, has only recently undergone major changes, from the standpoint of software.

Innovation was inevitable with the ubiquity of mobile devices, increased Internet speed, and shifts in regulation, and the Covid-19 pandemic only accelerated it, forcing companies around the world to adapt quickly to social distancing norms.

With the macro-environment in a slump, retail banks, like other banks, have little choice but to embrace digital transformation. This will eventually benefit consumers.

However, both within and outside the retail banking sector, true innovation will occur through rebuilding – not just tacking new software onto old systems.

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Currently, the universal retail banking model is unsustainable for the long term. Reinvention is necessary to thrive.

There has been much speculation about the threat fintechs and Big Tech pose to banks. However, many experts believe that incumbent banks will continue leading in retail banking. Having said that, banks playing by the old rules are unlikely to survive; the winners of the future will operate similarly to tech companies, with agile operating models, advanced data capacities, and cutting-edge tech stacks.

This is important, because retail banks have long realized economies of scale through the effects of networks and investments in infrastructure and brands, and, beyond a certain size, these scale economies have limits.

Hence, in most markets of retail banking, a few big institutions dominate market share. Shifts in the retail banking business model have mostly occurred due to regulatory changes instead of a purposeful vision from within.

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The Fault Lines in the Retail Banking Industry

Generally speaking, retail banks have not kept pace with the kind of improvements in customer experience that are taking place in other consumer sectors.

It is important to note that few banks stand out in terms of innovation in branch formats or customer interaction models. Traditionally, marketing has focused on increasing loyalty and building the brand. Post the Great Recession of 2008, banks started focusing on generating revenue through financial products.

Fast forward to today, and many banks are not innovating where it arguably matters most: customer journeys and experiences. Often, financial products are isolated and do not offer relevant insights into customer needs.

This could be a contributing factor to the relatively low trust in the banking industry. According to a 2020 study by Accenture, only 14% of consumers who had experienced serious financial consequences from a major life event turned to their bank for help. Furthermore, only 35% of small business executives depend on their banks for financial advice.

The Current Landscape of Retail Banking

Covid-19 has sped up digitization in the retail banking industry – we are moving towards a period with seamless and integrated banking experiences. However, to truly launch into the future, the retail banking industry needs to come to grips with its flaws in design.

Some players are expected to emerge to gain a large share of their markets. It will likely be at least in part due to the following changes in the industry.

1. Customer Experience is King

Financial customers are generally happy to spend more money for convenience. Having said that, convenience is not a substitute for good customer experience. That is, customers will spend more money for convenience, but not at the cost of a poor experience.

But what counts as a good customer experience? It encompasses a combination of factors, including ease of transacting, quality of service, quick resolution of issues, and minimizations of uncertainty of engagement.

There are many ways to deliver on such experiences. For example, companies can deploy chatbots and AI for 24/7 customer service. They can also use financial reporting to ensure they are following best practices.

Customers don’t just want, but expect interactions to be intuitive, simple, and connected across digital and physical touchpoints. While many banks are trying to meet these expectations, they are struggling, often due to siloed data and legacy IT infrastructure.

The few banks that do provide excellent customer experience tend to generate higher growth than their competitors. The goal is not just a satisfied customer, but a highly satisfied one – such customers are much more likely to open new accounts or products with their existing bank.

2. Changing Old Relationship Styles

The old one-on-one relationships in retail banking are changing.

Many households in the US today hold deposit accounts with more than one institution. Indeed, it is common to have separate deposit and investment accounts, a mortgage with a bank, and an unsecured loan from a separate lender. The one-on-one relationship is growing less popular faster in countries with high digital adoption.

While incumbent banks have the advantage of access to customer data, new players in financial services can compete on customer experience as well as aggressive pricing.

3. The Decline of the Distribution-led Growth Formula

Until the financial crisis of 2007–08, in the retail banking sector, the total share of deposits was closely tied to the size of the branch network. However, since then, this relationship has weakened.

Even though deposits have the largest US retail banks have doubled in the past decade, their combined branch footprint has shrunk. This has persisted even through periods of economic growth. Across North America, Europe, and the UK, these branch networks are contracting, though the pace varies between regions.

There are, however, banks that have swiftly adopted remote and digital channels for interactions. Some of the steps they have taken include the following:

  • Using advanced analytics to optimize NPV: Many leading institutions are using algorithms to optimize the networks’ NPV, based on customer data regarding willingness to travel, digital propensity, transaction patterns, and so on.

  • Digitize to reduce number of customers using branches: Banks need to set targets for services and sales across channels; for this they can encourage more customers to make the shift to digital channels.

  • Digital marketing and optimizing every stage in the funnel: Already, many if not most customers search for information on digital channels, but relatively few institutions are truly effective at converting such enquiries into digital sales. To achieve this, leading banks use third and first-party data, agile models and robust tech stacks.


The retail banking industry is evolving, transforming itself to keep up with the times. It can do so more easily with professional services.

Staff at banks are often overworked, particularly the accounts department. To help ease the load, we recommend daily reconciliation. NextGen Accounting offers bank reconciliation services, credit card reconciliation services, and consulting services.

To give you the most accurate and fastest reconciliation, we use our patented software CrushErrors, which we specifically created for huge amounts of data that other reconciliation software cannot easily manage. You can also obtain CrushErrors as a product if you’d rather conduct reconciliations in-house.

NextGen Accounting’s management team has decades of experience and includes former executives of Barclays Bank, Bank of America, and ICBC. Contact us today for reconciliation services or book a free demo if you’d like to get CrushErrors!


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