To try to help banks provide better banking to their retail and small business markets whilst sustaining or improving their profitability is no small ambition. The banks' customers want their own lives made easier and 'fairer'. And for a bank, the number one goal is to profitably increase its number of customers and the depth of its relationships with them (more accounts, more funds, more services). Providing better banking for customers will help achieve both, whether through initiatives from established large, mid-sized or small banks, building societies, or from new banks.
Our point is not that banks have a problem, and here is a solution. It is that banks have major opportunities to provide 'better banking' to the benefit of both their customers and investors - and here is a proposition, together with some approaches to consider. Not, we must add, that banks do not know this already.
The confluence of market, societal and technological possibilities makes the present times markedly different for banks than the past. Banking has got progressively 'better' over the years, but slowly. It is a question of whether this pace of improvement could happen faster, how that could happen, and what the consequences would be. Retail banking has noticeably changed from a mature market with benign competition into a growth market with aggressive competition. The more one understands about the retail banking business, the more exciting it becomes.
Change could happen a great deal faster than we are used to. Change in retail banking has been slower than, say, in corporate banking. The retail banking market is huge, with relatively few environmental factors. In a slow moving business, as retail banking has been, decisions tend to be cumulative and irreversible, so although decisions have been fewer and more widely spaced out, they are more fundamental and critical.
The choice is not between evolutionary changes and new, revolutionary approaches. Both are involved. We attempt to support both a faster evolution of the industry and safe progress with the more revolutionary ideas within the industry.
In order to cover the ground, the book breezes along trying to avoid detours - and failing on occasions. But this is a complicated business, and it is right that the complexities are acknowledged and explained to some level so that readers with a wide variance of knowledge and experience of the subject can appreciate the forces at work. We give explanations and opt for generalised, supportable numbers instead of closely calculated ones. This approach does not compromise the facts or the messages. It starts from where we are now, only occasionally looking back, usually to see the unintended consequences - why did we do that?
If important opportunities do exist for banking improvement, they can only become evident from reviewing, analysing and challenging the basics, and adjusting and changing some of them. Banks try to do this as a habit, usually driven by budgetary disciplines such as imposing a 5% budget reduction across the board. This process is a driving enabler behind centralising, distributing, outsourcing, off shoring, automating, merging, acquiring, divesting, reorganising and the many smaller activities. With such actions, the anticipated results can usually be calculated and are generally achieved; the more so as banks emulate their competitors' successful changes, thus further derisking the process. In the main, these changes are safe and strongly biased towards the internal performance of the bank. There are many examples of organisational and departmental improvements over the years where manual work has been automated, and merged and duplicated operations rationalised, thus reducing costs.
Such changes as mergers, acquisitions and automation decisions are usually clear and unambiguous opportunities. There are certainly strong, strategic overtones, but it is tactics to us. The basics with the most promise for an established bank are the more pervasive issues. Actions to address pervasive issues can improve the entire bank in a substantial way by fundamentally strengthening its abilities to compete in the market, as judged by the public at large, and by significantly improving its cost structures.
Opposition to such changes is abundant and comes from all parts of a bank. Such change suggestions have been 'no-go' areas because they are agreed to be 'can't do' initiatives. It is no surprise when the various parts of the bank close ranks to ward off major disruptions. But it is now precisely these pervasive basics that need to be considered and addressed. Sorry about that.
The evidence that some, at least a few, of the pervasive basics must change to effect a step improvement comes from almost every other industry, but rarely comes from the industry leaders. Step improvements have come from fundamental change within many industries, and the key drivers have been new, customer-focused businesses. Somehow the majority of retail banking has deterred or deflected such change.
To banking customers, other than for certain account types and those often kick-started by government/taxation influences, the products and services that banks offer today are much the same as they were five, ten or even twenty years ago.
From the inside of a bank looking out, it might well seem like the last decade has been dramatic. Indeed, many hundreds of branches and many thousands of jobs have gone, as examples. But it does not seem so dramatic to customers looking in from the outside. The benefits of these significant efforts have not been shared with the customers in important, obvious and tangible ways. To the contrary, there are fewer branches, a growing confusion with product choice and bottomless interactive voice response units. The benefits of these changes have largely been private - for the bank itself and its investors/owners. There is nothing necessarily wrong with that, but as the customers see it, there have been few important benefits.
The customers will ultimately decide what is better, or worse. Whether they choose to do anything about it is a wholly different matter. Slow improvements have not made for many memorable customer benefits. Banks seem reluctant to improve the customer value propositions except in the face of competitive threats or regulatory requirements. New mortgage types, credit card rates, the payment of interest on current accounts, facilitating the transfer of accounts between banks and not charging for ATM transactions are all examples where the large banks have grudgingly 'given' customers an improvement in the last five years or so - spurred by competition or, at the industry level, by the regulators.
1.2 SCIENCE AND ENGINEERING
Of the many facets to retail banking, surprisingly few directly concern serving customers, or indeed the customers themselves. The majority of the facets, however complex, are all operationally, mathematically, procedurally, legally, regulatorily or otherwise precisely defined. They are handled successfully through controls, procedures, processes and experience, and occupy the majority of all the staff time. We view these facets as the science and engineering of banking (Figure 1.1). Customers see a bank and are happily unaware of the majority of the science and engineering behind it. As far as it goes, that is as it should be.
But customers want to see the art of banking, to see the finished picture, with themselves in it. If they are unaware of what is behind the bank, they are not much wiser as to what is in the front of the bank either, be that a branch, the telephone, Internet or mail. What most customers usually discern is brusqueness, an absence of real help - a choice of 'take it or leave it'. Banks usually project their art poorly, but the art is what the customer wants to see more of.
Few can associate retail banking with art. How could you today? But real retailers most definitely practise art. A retail store is some combination of a stage set, an experience, a pleasure and a purpose. Otherwise it is going out of business. There are those consumers, no names, who can have a good day shopping without buying anything! Is this art from the retailers, or what?
A small number of the ill-defined facets of art exist in bank management, and present unusual, unexpected and random difficulties. How can we help a customer? Is there something that they would like to discuss? Are we approachable? On a larger scale, bank management is deciding on what the bank should do, and why, how and when they should do it. These decisions are not easily handled, and the consequences of mishandling them can be huge. Banking history, over the last ten years in particular, shows that to tread new paths, to be creative, to have new ideas and to be original is always difficult and can be dangerous. But without using these freedoms, how else will we prosper in the overall market? By contrast, retailers at large, shops to you and us, are quite the opposite, with new formats pushing the old to one side.
1.3 SCIENCE, ART AND ENGINEERING
So, banking is no longer just science and engineering (Figure 1.2). Not if a bank is in retailing.
The science challenge in banking is largely wrapped up, and the regulators themselves rely in part on the science. There are innumerable books on the subject and its many topics. Bank product management is primarily based on the science of returns, risks, economics, demographics, and so on.
In the interests of expediency, engineering then fits it into the status quo of the engineering infrastructure. The engineering aspect of banking is well understood too, usually coming under the word operations. Bank operations include technologies of many kinds. These technologies are raw materials for banks, as important as iron, steel, steam and bricks were to the Victorians. In fact, many great 'works' have been the result of an engineering operational capability or technology push. We can think of bridges, roads, railways, buildings, ships, aircraft, water mains and countless other engineering achievements, all based on various technologies. In banking, the branch network, ATM and EFT/POS networks, payments and clearing systems are great works and are visible to customers. The back office processing, invisible to customers, is a staggering achievement, as measured by the many millions of transactions being processed daily, error free. But we can also think of many engineering monstrosities. Engineering does tend to push itself towards its greater usage. It relies heavily on the science, but it does not always produce the desired outcome.
In banking, the engineering influence ranges widely, from customer interactions with the bank and the daily operations, through to mergers and acquisitions, and indeed divestments. On the one hand, customers unknowingly depend on the engineering and take it for granted. On the other hand, the forms to be completed, the correspondence received, what is allowed and what is not allowed, and most other frustrations experienced have their roots in the engineering. The engineering is in a continuous state of slow change (Figure 1.3).
The art of banking is where this book is aimed. Fundamentally, art is a maverick that should pull in the science and engineering to support it. Entrepreneurs have art, banks do not do art. The framework for action in banks hinders or precludes effective entrepreneurial responses to opportunities.
Bank management has total freedom to practise the art of banking as it sees fit, assuming that the engineers (sales, service, operations and IT staff) and the scientists (mathematicians, economists, lawyers, actuaries, statisticians, demographers, taxation specialists) in turn, can support the 'work'. Banks can influence their art more easily than their engineering, and they have to live within the science and quasi-science anyway.
The central point is that to provide better banking, which in turn will inevitably mean to excel at banking, will require a step change from where most banks are today. Extraordinary customer growth and product sales in retail banking will not come through adding rococo work on to what is there already.
Most bank staff are paid to directly or indirectly fulfil engineering roles. Yes, they are. Simply helping a customer fill out a form is primarily in order to 'feed' the engineering requirements; back office staff resolve problems that the 'system' cannot handle; others pore over reports from the system. A high proportion of the staff are, in effect, system operatives. We use the word system throughout the book to mean the total banking system - the way things get done around here.
Much of this staff, perhaps a half of the total, are back office and support staff, invisible to customers and feeding data into the system and responding to its outputs. These activities do not add value or increase productivity. That is, it is not something that customers are prepared to pay for. One definition of productivity is the amount by which the value of the raw materials used is increased. These functions do not increase the value. The branch staff that helped the customer fill out the form may have added some value, but the back office and support staff did not.
Few staff are paid to fulfil art roles, although it must be said that half of the entire staff do bring elements of art into their jobs. The helpful and knowledgeable branch employee can be an important piece of the little art that the customer actually does see.
Engineering improvements are difficult and expensive to implement, and are becoming fewer and farther between. They will continue, but there are diminishing returns, if not limits, to squeezing, optimising, standardising, reorganising, and so on. Increasingly, banks will want to look into the opportunities of improvement through addressing the art of banking and fundamentally changing the way that they do business.
Introducing an improvement in performance, specifically visible to the bank customers, will require a greater emphasis on the art of banking, simply because customers cannot decide what is better if they cannot see or experience it. Whatever this mysterious thing called 'service' is, it is a poor substitute.
We need to understand what our bank should be doing, not only what it must do and what it can do.
1.4 A BRIEF LOOK BACK, AND THE CULTURE OF RETAIL BANKING
The history of banking is a fascinating subject, but not for this book. Still, let's understand a little of why retail banks behave the way they do, and the challenge of the change facing them. It will only take a few paragraphs.
Banks, as we now know them, come from two main gene pools. The first was what we would today call commercial banks. Often, these started with agriculture, lending to their farmer clients, hence the banking characterisation of an overdraft as being 'from seed time to harvest'. They started to take deposits and issue local bank notes. With industrialisation, they widened their business into the towns and took deposits from, and loaned money to, commerce and industry. They enabled businesses to pay each other, that is, to clear cheques, often through a branch or bank in London, hence the expression clearing bank. Over time, they amalgamated and became national institutions.