Retail banking study 2035: adaptability and new advisory approaches key to future success

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• Stability and attractiveness: The banks regard Switzerland as a stable and attractive place to do business, but with challenges: over two-thirds (70%) of retail banks expect margins to continue to fall in the long term.
• Technological innovation: Eight out of ten retail banks (82%) expect innovative technologies to intensify competition in the medium term. Although they believe the impact of innovative technologies such as AI is overestimated in the short term, they could influence value creation in the long term.
• Societal responsibility: Swiss retail banks recognize the importance of trust and regional responsibility, particularly in relation to sustainability, but face challenges in implementing it. For more than half (58%) of participants in the study, sustainability does not generate any material added economic value.
• Retail banking and advice: The tried and tested business model in retail banking remains successful, but banks need to stay vigilant and modernize their approach to providing advice to continue as a customer’s trusted principal bank. The financial literacy of customers is becoming more important. Customers also expect a seamless integration of channels and bank branches will still be needed in future.
• Attracting and developing staff: In light of demographic change and the shortage of qualified staff, it is crucial for banks to attract and retain talent through purpose-driven work and development opportunities.

Zurich, 19 September 2024 - With over CHF 1,000 billion in mortgage loans, around 22 million debit and credit cards issued, more than 160 million card payments and over 12 million cash withdrawals monthly, retail banking is central to the Swiss economy. The auditing and consulting firm EY has published a study with the University of St Gallen summarizing the views of 33 retail banks on 10 central propositions on the future of retail banking in 2035. The study investigates the main challenges and opportunities facing the industry. Prof. Andreas Blumer, chairman of EY Switzerland and co-author, says of the study: “We are delighted that all the main retail banks in Switzerland took part in our study again. Swiss retail banking is regarded as robust and adaptable. But even if the banks do not expect any fundamental upheaval in the medium term, they remain vigilant, and rightly so. Resting on their laurels would be dangerous with continuing pressure on margins, uncertainty about the medium-term impact of innovative technology, a shortage of qualified staff and rising regulatory and societal pressure.”

Margins in retail banking set to decline in the long term

Against the backdrop of geopolitical tensions, survey participants continue to view Switzerland as stable and believe it will remain attractive in the future. Nevertheless, more than two-thirds (70%) of the retail banks taking part in the survey agreed with the thesis of a gradual erosion of margins driven by the interest rate environment, rising customer expectations and fiercer competition, partly due to new technologies and platforms. Despite the growing influence of new providers and other challenges, the industry remains confident, however. The banks continue to believe in the value of central features of retail banking, such as closeness to the customer and advisory quality. Markus Schmid, professor at the Swiss Institute of Banking and Finance at the University of St. Gallen and co-author of the study comments: “Attempting to maintain stable interest income, retail banks’ core business, by expanding volumes may not be a viable model going forward. In the strategically important investment business, too, margins could fall further and may not be compensated by additional volumes.”

Innovative technology increasing competition

There were different views on the impact of innovative technologies on competition, but overall the impact was thought to be overstated. The high level of agreement between study participants (82%) on this question reflects the fact that all the banks are in the same boat. Every bank is working on new technologies, but according to the study, genuine innovations with material implications for value creation are rare. Artificial intelligence (AI) and quantum computing could potentially change this in certain areas over time. Fintech and big tech companies are seen as catalysts for innovation and the epitome of convenience, but not as direct competitors – as long as they do not gain control of the customer interface. In the view of survey participants, the tech multinationals do not see entering the Swiss market as worthwhile due to its small size, at least at the moment. The Swiss-specific regulatory hurdles also make it more difficult for them to enter the market.

Pressure on retail banks from regulators and society remains high

Trust is banks’ most valuable asset, and therefore the image they convey of themselves is all-important. Given their central role in the economy and the societal and regulatory challenges, almost all of the financial institutions taking part in the survey (88%) expect societal and regulatory pressure to remain high. Swiss society expects retail banks to be rooted in their region and responsibility to society is an important issue for banks, but its implementation remains somewhat diffuse, for example with regard to sustainability. Managers' salaries and fair interest rates remain issues that provoke considerable public anger. In addition, the banks will be dealing with demographic developments as a megatrend for a long time yet.

Ambivalent view on regulation: On the one hand, banks view regulation positively as a mark of quality that connects the expectations of society and financial policymakers with operational requirements and is thus in the interests of the financial center and the individual institutions. However, they are critical of disproportionate regulation and the cost implications, particularly as a result of the UBS takeover of Credit Suisse.

No added financial value for the banks from sustainability

There is agreement that while sustainability initiatives have become a standard, sustainability is only a differentiator if it is shown to make a difference at a regional level. According to 58% of the banks taking part in the survey, an ongoing, strong customer need, significant earnings potential and the associated economic value added are largely absent. On the other hand, stricter regulatory requirements and societal expectations increase reputational risks. Banks sometimes feel that they have been pushed into the role of the “sustainability police” and are unhappy that they are expected to conduct climate policy with their customers’ money. Two-thirds of the participating banks (66%) see producing sustainability reporting as the biggest challenge, particularly since there is little of significance in these reports.

Traditional retail banking remains a successful business model

Retail banks remain the main partners for financing, saving and investing. There will always be a need for these services: two-thirds (63%) of the banks surveyed see the traditional business models as a guarantor of success. However, a quarter of institutions (25%) disagree. The conversations with the experts show that it is less a question of the business model per se, and more how it is structured and developed from here. Roman Sandmeier, partner at EY Switzerland, study head and co-author, emphasizes: “The focus on traditional services does not absolve the industry from constantly adapting.” Banks need to remain agile, for example with regard to macroeconomic developments, revenue diversification, positioning in the financial ecosystem, cost management and customer orientation.

New approach to advice needed

Retail banking is considered to be down-to-earth and reliable, but needs a breath of fresh air in its approach to providing financial advice. A majority of 81% of the banks taking part in the survey are in favor of new methods. Retail banks need to approach customers more proactively, as well as making more active use of life events and using data to identify them in time. Customers should be supported throughout the entire lifecycle. The banks’ aim must be to become the customer’s trusted principal bank. To achieve this, financial advice must offer more holistic added value for the client; personal communication founded on trust remains crucial. AI will not change this for the time being, but will support client advisors in the background and make processes more efficient. Roman Sandmeier says: “There is room for improvement compared to other sectors, for example regarding the use of customer data and its analysis – a resource that is still waiting to be tapped. It is well known that all the banks have been trying to expand their advisory services and make them more customer-focused for years, so the question is why they have not yet achieved this.”

Do retail banks have to transform themselves into integrated financial services providers?

Survey participants confirmed the demand for advice, particularly as part of the expansion of the banks’ offering to cover all life phases and events. Financial planning is often mentioned as the basis for this advice. Matching the offering with customer needs is sometimes difficult, however, because many customers lack basic financial literacy and have to have things explained to them first. An even bigger product range outside the expanded offering would make advice and processes more complicated. Around half (53%) of the study participants see their future as being an integrated financial services provider. But around a third (31%) are critical of this idea. The discussions with industry experts showed that the answer to this question depends primarily on whether insurance services are included or not. A look at the insurance sector gives grounds for skepticism about bancassurance: when it comes to tie-ups involving insurance, past failures, the complexity of the business, regulation and a reluctance to cooperate have led retail banks to hesitate.

High customer experience expectations leading to rising costs

Customers have high expectations of their interactions with banks. They want the same convenience of other areas of everyday life from banks, as well as availability around the clock on all channels, preferably without interruptions and yet with interoperability – they do not want to be asked the same thing again when switching channels, for example from online to bank advisor. However, implementing all customers wishes is expensive, especially due to outdated and complicated IT infrastructures. The good news for customers is that branches remain very important channels and are central to a high market share in the regions. Banks will continue to refine the ways in which branches are used. This proposition had the highest level of agreement in the study. Almost all of the banks taking part in the survey (91%) see the high customer experience expectations going hand in hand with rising costs.

Vertical integration will increasingly differ

There is no doubt that processes in, and the design of, the value chain need to be reassessed. However, the banks do not like handing over their own activities to third parties. Although there are activities the banks would be willing to consider outsourcing, the fear of risks and of losing control is great, and the potential for cost savings is often too low; the customer interface is in any case non-negotiable. Due to the comfortable situation of the retail banks, the pressure to do something is simply too low overall. However, if outsourcing did nevertheless become necessary in the future (e.g. due to a shortage of skilled workers or as a cost-cutting measure), this would have to be prepared in detail, as numerous interfaces have to be created. Two-thirds (66%) of the banks surveyed agree that the vertical integration of the retail banks will increasingly differ.

Today’s employee profiles are inadequate to meet tomorrow’s requirements

When it comes to recruiting suitable employees, banks face the challenge of adapting existing job profiles to future requirements. Nearly two-thirds (60%) of retail banks in the study agreed with this proposition. On the other hand, almost a quarter of the banks (24%) disagreed. A realignment of job roles is required, especially in technical areas. Continuing to train older employees, and training and developing younger employees are critical. Demographic change will exacerbate the shortage of qualified staff in the future. In order to remain attractive for talented individuals, banks also have to offer their employees a sense of purpose and good development opportunities alongside flexible working time models.

How likely are disruptive changes?

Finally, looking back at the ten propositions in the study, it examined what probability the participating banks attach to disruptive changes. In the medium term, the likelihood of disruptive changes is seen as low, with an average probability of 17%. Unsurprisingly, the chances of disruption are seen as higher in the long term, with an average probability of 45%. But when is a development no longer evolutionary but disruptive? Markus Schmid, professor at the Swiss Institute of Banking and Finance at the University of St. Gallen and co-author of the study sums it up in this way: “Switzerland is still an oasis of well-being for retail banking with room for (almost) everyone. Despite a downward trend, margins still have a comfortable safety buffer. The banks still do not expect a tectonic change in the competitive environment, at least not in the medium term.” They are certain that retail banking will still be around in ten years’ time. Nevertheless, the participants basically agree that many things are in flux and that the banks will themselves have to stay keep moving to be able to react flexibly to change or even drive change forward themselves.

For further information and a full report, please contact daniele.mueller@ch.ey.com.

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About the study

The team of experts from the Swiss Institute of Banking and Finance at the University of St. Gallen and banking consultants and auditors from EY began by analyzing the current situation and went on to derive ten propositions for the study based on this analysis. These propositions are intended to draw out issues that will be of particular importance for the development of the retail banking business in Switzerland up to 2035. Many banks have a shorter strategic planning horizon of three to five years, but as the business changes on an evolutionary basis and relevant trends generally develop over longer cycles, the study was based on a longer planning horizon of around ten years. These ten propositions formed the basis for the third step, the survey of experts, which was carried out in spring and summer 2024. For each proposition, the results of the interviews were summarized to reflect the experts’ market views. CEOs and other senior representatives from 33 retail banks in Switzerland agreed to take part in the study.