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Although retail banks globally have reacted to the COVID-19 crisis with speed, dexterity, and purpose—while remaining true to their environmental, social, and corporate governance goals—further challenges await in their quest to enhance revenues, upgrade digital capabilities, and build a strong, stable future, according to a new report by Boston Consulting Group (BCG). The report, titled Global Retail Banking 2021: The Front-to-Back Digital Retail Bank, was released yesterday.

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This latest in a series of comprehensive BCG studies of the retail banking sector explores the following: potential revenue scenarios based on how the COVID-19 pandemic continues to evolve; the ways in which a rapidly growing number of customers are seeking and expecting digital solutions; a new paradigm for managing costs; how banks can identify and capture new, digital value streams; and how banks can develop a stacked operating model that will position them optimally for the future.

“Building digital capabilities takes time,” said Sam Stewart, a Sydney-based BCG managing director and senior partner, coauthor of the report, and leader of the firm’s global work in retail banking. “Most banks have already embarked on the journey and significantly invested in digital in recent years, but most struggle to reap the benefits. By breaking the challenge down to the 10 to 15 most important value streams, and by digitizing each of these in a comprehensive way, from front to back, banks can move faster and with fewer missteps.”

Revenue Pressures. The report plots three potential revenue scenarios—a quick rebound, a slow recovery, and a deeper impact—using different global GDP forecasts. Under the first scenario, retail and private-client revenues globally would rise by 2.8% to $2.59 trillion in 2024 from $2.25 trillion in 2019. Under the second, revenues would rise by 1.0% to $2.37 trillion. Under the third, revenues would fall by 1.1% to $2.13 trillion. The most profound revenue declines are expected to be in Western Europe and North America. From a product standpoint, revenues from consumer finance loans and other lending will take the largest hit. The positive impact of e-commerce will be partially offset by a decline in consumer spending, especially on big-ticket items. Nonperforming loans will weigh on the ability to generate future growth. The expected long-term run of rock-bottom interest rates will affect both deposit holdings and returns.

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An Increasingly Digital Customer Base. The pandemic is incentivizing customers’ shift away from traditional branches to digital channels. According to BCG’s most recent retail-banking survey, an average of 13% of respondents in 16 major markets used online banking for the first time during the pandemic. An average of 12% were new mobile-banking users. In some markets, the percentage is substantially higher. Cashless payments are also receiving a major boost during the crisis. More than 20% of respondents said that they have increased their use of digital payment solutions.

“The shift to digital channels is likely to be permanent,” said Thorsten Brackert, a Frankfurt-based BCG partner and director and coauthor of the report. “Based on our survey, we expect a further net increase in mobile banking adoption of 19% and a further net reduction in branch usage of 26% after the pandemic. Less digitally adept banks may therefore soon find that both new and more-experienced users choose online banking over visiting branches. Digitally aware customers may defect to more digitally advanced incumbent competitors or to nimble and innovative challengers.”

A New Cost Paradigm. The successful retail bank of the future cannot operate with the cost structure of the present and remain competitive. BCG’s analysis shows that the operating costs of the best banks are already about 40% lower than those of the typical bank, and they have roughly 50% fewer employees. These banks make larger and more sales, and they do so with branches that are less transaction focused. Specifically, the top banks open 69% more accounts per branch full-time equivalent and conduct 80% fewer branch transactions per customer, compared with the typical bank. Banks that are not planning now for a major step change in their cost structure will find themselves at an unsustainable competitive disadvantage—perhaps sooner than they think.

Digital Value Streams. Retail banks can achieve their goals by focusing on their key value streams—a series of value-adding activities that they can undertake to produce a result that customers want—and by redesigning and digitizing them from front to back. Successfully implementing an integrated approach requires the following: bold business goals, reimagined end-to-end customer journeys, simplified and automated processes, improved risk controls, transformed technology, and integrated teams.

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A Stacked Operating Model. By digitizing their main value streams, banks will fundamentally change the way all functions operate, including distribution, relationship management, risk and compliance, and IT. Banks can accelerate the impact and optimization of select capabilities, such as customer engagement, but they will fully address their revenue, cost, and control challenges only with an operating model that is based on front-to-back value streams and built around new capabilities and ways of working.

“After banks successfully digitize all major value streams, a new operating model will emerge,” said Muriel Dupas, a London-based BCG retail-banking expert and coauthor of the report. “The resulting front-to-back digital operating model will be stacked, much like technology architecture, and it will allow a bank’s capabilities to work together much more effectively.”

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