2022 was a year of extremes in retail banking across Europe. Interest rates rose for the first time in a number of European countries, troubles of the pandemic were in the rearview, and revenue and profits hit record highs. With this being said, 2023 has been the opposite with some larger commercial banks failing, signalling that turbulent times are ahead.

So what does this mean for the retail banking sector for the rest of 2023? Those who can successfully balance digital and physical banking are set to reap the rewards and continue strong performance experienced in last year. Success in 2023 will be dependent on banks’ abilities to create a competitive edge with an omni-channel strategy. But what lessons can we take from 2022?

Productivity up, but costs on the horizon

Findings from Kearney’s latest European Retail Banking Radar show that in 2022 the total income of banks covered reached €317 billion, a 7% rise from 2021, with UK Banks showing the strongest growth in income with a 16.5% rise.

This rise in income is impressive when contextualised against the changes in operations and processes many banks have strived to implement over recent years, due to changing customer behaviours and expectations. Indeed, many banks have invested in technologies and digitalisation to enable increased productivity despite reducing staffing levels. Productivity per employee has almost doubled while productivity per branch has nearly tripled, all whilst overall headcount has declined by 16%.

Many banks, however are yet to see this reduction in costs translate into increased profits, with costs actually rising from €172 billion in 2008 to €188 billion in 2021. This is due to the cost of implementing these technologies paired with the burden of higher regulatory costs.

Banks must work diligently to lower these costs, especially with rising inflation and potential economic slowdown forecasting dark clouds over the banking sector for the foreseeable future. Having said this, banks’ work is not yet done and they can navigate these headwinds with a comprehensive omni-channel strategy.

Consumer habits, die hard

Digital banking was certainly boosted over the course of the pandemic, with government restrictions limiting access to physical channels. In 2020, 33% of consumers were using digital channels to purchase their banking products, rising to 45% in 2023.

However, these 2023 figures – following our emergence from the pandemic – are actually a slight drop on the peak digital banking use seen during the height of lockdowns. For instance, in France digital channels were used for 51% of all bank product purchases at the peak of the pandemic, but this dropped to 29% in 2022.  

Whether pre- or post-pandemic, one key driver of consumer banking behaviour is trust in their banking provider. Indeed, in our 2023 research, 29% of respondents in France and 27% in Spain selected trust as their main reason for using physical banking channels.

And trust is rising up the agenda in 2023 as, with the collapse of Credit Suisse and some American banks earlier this year, consumers are again on high alert when watching the stability of the wider banking sector, and the impact this could have on their finances. In response, banks must continue to foster and maintain consumer trust and this should be front and center of the agenda for the year to come.

Balancing digital channels and human interaction

So, the direction of travel is very much toward digitisation – even if the pace of this movement can fluctuate. Banks are driving the change in order to reduce costs and consumers are driving the change for ease of access and from pandemic-inspired habits.

However, not all consumers are as flexible and, for some, the importance of trust prevents them from ever using digital channels. Every 12th person who uses a branch says they are not ready to switch to digital channels for anything, according to our most recent research, and banks must rightly acknowledge the lack of willingness by some customers to change their financial habits.

This makes an omni-channel strategy a must to overcome the pressures of the wider economic climate, whilst still providing the banking service customers need. Banks must combine superior digital capabilities and human interaction with personal advice—and be good at both.

The implementation of such an omni-channel banking strategy, however, comes at no small cost.

On the one hand, banks will need to bolster their digital offerings and services, requiring foresight in regard to evolving customer banking preferences and smart and timely investment in digitisation. On the other, many customer interactions are still taking place in branch, so it’s up to banks to find the best format—one that will be a draw for high-value activities, meaningfully manage the skills and time of branch staff, and educate consumers to support their transition to digital channels.

Those banks who can properly balance their strategy are set to lead the sector in 2023 benefitting from acknowledging and reacting to changing customer behavior. Those that fail to do some could lose their competitive edge, with customer experience and service levels reducing in quality.

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• Source: https://www.finextra.com/blogposting/24526/omnichannel-strategies-key-in-the-continuation-of-strong-bank-performance-in-2022?utm_medium=rssfinextra&utm_source=finextrablogs