Poor customer experience costs Big 4 UK banks billions

11 February 2016 Consultancy.uk

The value of excellent customer services experience can be considerable. In the UK, the largest four banks – Barclays, HSBC, Lloyds and RBS – may be missing out on an average £3.7 billion between 2015 and 2018 due to the lacklustre experience offerings. Prioritising six key pillars in the customer experience journey may provide a means for the banks to pick up their game and hold onto the loyalty of their current 77% market share of customers.

Creating an excellent customer experience is becoming more and more important across a range of businesses as cross-channel competition heats up. Companies that can provide compelling services that put customer experience first, as well as disclose ethical business practices aimed at improving the situation of the respective customers, are able to differentiate their offerings, which ultimately will drive up revenues and profits.

The art of delivering excellent customer service is changing however, and not every institution has acted upon the changing times, as, for instance, technology trends and the millennial generation comes of age. Particularly the large banks in the UK are not meeting customer expectations, and thereby potentially losing out on billions of lost sales.

In a new report by KPMG Nunwood*, titled ‘2016 Banking Sector Briefing: Banking the Customer Experience Dividend’, the consultancy explores (global) customer experience trends with an eye on the banking sector. The survey for the report examined the performance of 927 brands across three continents. In the past six years, over one million consumer evaluations were collated to provide an in-depth assessment of what sets the top performers from their peers.

Customer Experience Excellence rankings 2015

Top 100 
The research highlights that customers have started taking a sector independent view of customer experience. Customers have good examples of high quality customer experiences, and expect brands across industries to replicated or improve on those experiences. The bar therefore, has been set high by select brands. In the UK a number of banks in the cross-sector ‘Top 100 Customer Experience Excellence Index’ performs relatively well, including First Direct (2nd), Skipton Building Society (7th), M&S Bank (12th), Nationwide (23rd) and, thanks to a transformational performance over recent years, Santander (at 53rd). Many of the brands have seen increases on 2014, with only First Direct, Nationwide and Halifax seeing drops.

The index finds however that the UK’s largest four banks, the Big 4, Barclays, HSBC, Lloyds and RBS, do not make the top 100. These four banks manage 77% of UK current accounts. The consequence is according the authors that the large majority of the UK’s banking customers are being underserved in the customer services arena.

sector revenue growth comparison

Added value
The research further explores the effect between Customer Experience Excellence and revenue growth over the past three years. The analysis, when comparing sector revenue growth to FTSE peers, finds that improved customers experience scores on KPMG Nunwood’s index for the financial services industry are correlated with revenue growth of 14.2% compared to an average of 5.4% – representing a 163% higher than the sector average for the FTSE 100.

rapid growth trajectories for big 4 banks

As part of the analysis the researchers studied the effect that poor customer services experiences may have on the long term revenue growth outlook of the big four banks. The growth multiplier developed to reflect the revenue growth of brands operating in the top 100 index for customer experience, applied to the growth rate of the largest banks in the UK, suggests that improvement to customer experience may add an additional £9 billion to revenues per year by 2018, up from the business as usual combined revenues of £101 billion to combined revenues of £110.3 billion. In terms of the period between 2015, it would equate to an average additional revenue of £3.7 billion to each bank.

six key pillars

Key customer pillars
The research further explores the areas in which banks in the UK can make strives to improve their relationship with their customers. The analysis identifies six ‘key pillars’ that define customer excellence and are the key to unlocking more rapid growth for the banking sector. These pillars include personalisation, by better understanding customers’ needs; integrity, by providing services in an honest and transparent manner and without international fraud; expectations, meeting the and exceeding the expectations of customers; resolution, being focused on improving customer experiences; time and effort, creating seamless easy to use services for customers; and empathy, understanding the situation of customers and the large impact a minor change in services can have on their situations.

* KPMG Nunwood was established following the acquisition of Nunwood by KPMG in May 2015.



The business and operating models of digital-only banks

04 April 2019 Consultancy.uk

In recent years, several digital-only banks have successfully managed to nestle themselves in the banking landscape, with their popularity continuing to increase. Looking at it from the customer’s point-of-view, there is little difference between these FinTech unicorns; looking at the bigger picture, however, reveals significant variation in their business models. Matyas Fekete, a consultant at KAE, explores some of the main similarities and differences in digi-bank business and operating models. 

What about the profit?

Unlike in the UK, in most of continental Europe, bank accounts and corresponding banking services are historically paid-for services. The fact that digital banks offer most of their services free of charge has undoubtedly helped them build a large customer base. On the other hand, despite comparatively low set-up and minimised operational costs compared to that of traditional banks, and given the lack of revenue stemming from the typically no-fee model, profitability has proved difficult to achieve. Monzo, for instance, recorded a net loss of £30+ per customer in its most recent financial year. 

In the start-up world, it is customary to focus on expansion rather than profit – see the case of Uber, for instance. Still, while profitability might not be their number one priority in their early stages of development, it must be a long-term goal of any business. With their ever-growing customer base, digital banks are increasingly under pressure to turn their business from loss- to profit-making. 

Credit where credit is due

Digital banks pride themselves on their fair (often meaning “free”) proposition and have so far stayed clear of offering loans (including credit cards & overdrafts), traditionally amongst the most lucrative products for traditional providers. Though somewhat reluctantly, newcomers are also realising that offering lending products is one of the most straightforward ways to offset losses made on their free, often high-cost services (e.g. overseas ATM withdrawals). Monzo, N26 and Starling have recently started offering credit products to their customers, with their loan offering expected to be extended to a wide range of services, from mortgages to overdrafts. Correspondingly, creating a lending portfolio can also pave the way for launching an interest-paying savings offering – a proposition seen as a basic banking product that is yet to feature in most digital banks’ portfolios. 

The business and operating models of digital-only banks

The premium customer

While most digital banks offer most of their products for free, some have extended their offering by paid-for premium services in order to create a revenue stream. As these premium features – including different types of insurance, unlimited free transfers/withdrawals, faster payment settlement or concierge services – are often offered in a subscription format, customers are typically prompted to pay for the full package rather than just the desired service(s), providing a significant revenue stream for the bank. Revolut, for instance, was amongst the first digital banks in Europe to break even earlier this year, a feat largely due to revenue from its premium subscription.

SMEs like digital too

Traditional banks typically service small and medium sized businesses under their retail rather than corporate banking arm. Having their product offering tested with consumers, and consequently gaining a reasonable customer base, digital banks have also identified SMEs as an ideal segment to extend their target audience to. The five FinTechs profiled have already gone, or plan to go, down this path by following up their consumer solution with a business account. While both propositions are typically built on similar features, some providers charge businesses a monthly subscription (e.g. Revolut), while others apply additional fees to specific services (e.g. TransferWise), banking on the expectation that businesses are more likely to be willing to pay for banking – something they are already used to doing. 

The marketplace model

While most digital banks offer a wide range of banking services, some of these tend to come from partnering with third-party providers. For instance, Starling Bank’s only proprietary product is its current account, which serves as a basis for the provision of ancillary services, ranging from loans to insurance, to investment opportunities. Instead of developing these services in-house, Starling enables a select group of partnering financial service providers access to its platform in exchange for a fee. In effect, Starling is using its customer base to create a market for its partners, charging a commission for each acquired customer. 

In such cases of digital banks applying this marketplace model, the majority of their income often comes from partners rather than customers. Naturally, only banks with a large enough customer base can be successful in this set-up, underlining the current intensity of competition amongst digital banks.

Banking as a Service

While customer-centricity is heralded amongst the main USPs of digital banks, some are looking beyond offering consumer-facing services to diversify their revenue streams. Starling, which is among the few digital banks built on its own proprietary platform, has recently leapt into the Banking as a Service (BaaS) industry, making its technology available to other start-ups looking to launch a digital bank. Naturally, this raises the question whether the two offerings could threaten each other’s success. Generally, as long as such partners operate in different markets, the two business lines should be able to thrive alongside each other. Further along the line, however, such partners could easily end up expanding their banking solution into the same market(s) as they aim for global success, and by doing so, becoming direct competitors. 

Different approach, same result?

It is fair to say that consumers in Europe looking to bank with a digital-only provider would have a difficult time finding relative advantages/disadvantages amongst the leading players in the industry. Still, despite the limited surface-level variety, exploring the business models of leading digital banks reveals different approaches to the challenge of making money. Alongside the more straightforward method of offering paid-for premium features/subscriptions, some are banking on the value that access to their customer base offers to third-parties, while others outsource their technology to neobanks wanting to focus on the Fin rather than the Tech. With competition amongst digital banks heating up, it will be interesting to see which business model(s) prove to be the winning formula in the long term.