1. The current banking environment of low interest rates combined with high charge-offs and delinquencies is making it difficult for banks to generate revenue in traditional ways.
2. In October 2009, the Cisco Business Solutions Group (IBSG) conducted a survey of 1,055 U.S. consumers to explore the evolving financial priorities, expectations for services from banks, and interaction preferences.
3. While consumers have faced significant financial strain due to a deteriorating job outlook and dwindling asset values, they have also embraced new technologies, including mobility and video, and adopted online behaviors, such as social networking, at an astonishing rate. These trends are particularly true for younger consumers.
4. The survey clearly shows that the rise of younger generations will have a profound impact on retail banking, providing the next opportunity for revenue growth:
4A. Younger customers need help. Generation Y (also known as “Millennials” and defined for the purposes of this survey as consumers born between 1980 and 1992) and Generation X (consumers born approximately between 1960 and 1979) are under financial pressure. Both groups need and want advice about how to manage their day-t0-day finances, such as getting out of debt and saving for the future. This focus on personal financial management (PFM) is central to emerging revenue growth opportunities for banks.
4B. Younger customers trust banks to help them. Despite challenges caused by the economic crisis, Gen Y and Gen X customers still trust their banks and want them to be their primary providers of advice.
4C. To be successful with younger customers, a new approach to retail banking is required. Younger customers want banks to address their needs using the tools they and their peers have adopted, including mobile devices, video, and social networking – and they are willing to switch to banks that embrace these technologies.
5. This si good news for banks that have struggled to scale cost effectively the delivery of advice to market segments beyond high-net-worth (HNW) individuals.
6. Cisco IBSG tested 3 related concepts to better understand their appeal with different consumer segments and to help banks focus on the right approach:
6A. Automated advice, such as PFM capabilities, to help customers gain control of their finances
6B. High-quality video interactions to provide on-demand advice in branches and at home
6C. Community-of-interest and social networking venues to offer virtualized, on-demand advice.
7. As a result, Cisco IBSG has identified an integrated value proposition that incorporates the concepts of self-service as well as virtual and community-based advice to address the needs of Gen Y (and, to a large extent, Gen X) consumers.
8. The potential of this approach is significant. In fact, Cisco IBSG estimates retail banks can increase revenues by 5% to 10%. This figure is mainly driven by an increase in the cross-sell ratio. It also takes into account greater deposits resulting from highly targeted offers that are derived from better customer intimacy and the status of being a “bank of choice.” Finally, the figure considers an increase in customer acquisition rates.
9. Recent public results from the retail banking industry have shown that users of PFM tools are more profitable, have higher balnace,s consume mroe products and services, and are less likely to leave for another bank. For example, PFM users at SAFE Credit Union were found to be 3 times more profitable, had balances of $14,500 versus $8,300, and average 5.7 accounts as compared to 3.6 for all households. It is interesting to note that these figures were also much higher between PFM users and online banking users.
10. In addition, Cisco IBSG further validated its estimate of revenue gains using customers that pay their bills online as a proxy. Public statistics from SunTrust indicate that the attituion rate for online bill payers is less than half that of averge customers. In addition, thes customers own 1.5 times more products and carry 1.6 times higher balances.