Unlocking Retail Banking Success: Four Pillars for Future Growth and Differentiation

Despite recent record earnings and returns on equity surpassing pre-pandemic levels, many industry experts caution that these gains in retail banking might be unsustainable. These successes often represent tailwind-driven results rather than deep-seated competitive advantages.

A recent report by McKinsey & Co. suggests that retail financial institutions will experience dramatically different futures, categorizing them into four distinct groups. The core message is clear: some will thrive, while many others risk falling significantly behind.

Understanding the Shifting Landscape of Retail Banking

McKinsey segmented financial institutions based on their strategic responses to four critical industry trends:

• Fragmenting Customer Primacy: The average number of financial institutions used by a customer globally has increased from approximately 2.5 in 2021 to 3.0 by 2023. This unbundling of offerings gives customers more choices but erodes traditional banking relationships, challenging incumbent banks’ ability to maintain primary customer connections.
• Mobile Dominance and Tech Innovation: Mobile banking now boasts three times the active users and 50 times the touchpoints compared to physical branches. Innovations like open banking and artificial intelligence (AI) are reshaping financial service delivery. Banks are increasingly orchestrating customers’ entire financial lives, embedding finance into retail experiences, and even expanding into non-finance services through super applications.
• Escalating Cost Pressures: Operating costs for banks are rising approximately 6% annually, outstripping inflation. Specific factors contributing to this include higher funding costs due to shifts towards fixed-term deposits, as well as increasing rates of delinquency and fraud, alongside heightened credit risk.
• Rise of Tech-Native Competitors: New, technology-driven competitors often promise—and deliver—a more profound understanding of client needs. These agile players can launch innovative solutions faster and operate with more efficient cost structures, posing a significant threat to traditional banks.

The Four Strategic Pillars of High-Performing Retail Banks

To identify the drivers of superior performance, McKinsey analyzed over 500 variables from both proprietary and public data sources. Their findings highlight four strategic pillars that allow institutions to outperform their rivals:

1. A Distinctive Value Proposition

This pillar is crucial for combating customer primacy fragmentation. It involves engaging and enchanting customers, ensuring ownership and monetization of relationships. A strong brand connection attracts new clients, while high customer satisfaction ensures existing ones fulfill their daily banking needs. The ultimate goal is to deepen relationships, leading to improved profitability.

2. Mobile-Orchestrated Distribution

Responding to the shift in consumer channel preferences and the rise of mobile banking, this pillar focuses on seamlessly orchestrating experiences across both digital and human channels. Banks must offer and distribute services where and how clients prefer. This begins with an outstanding mobile user experience for daily banking, enabling easy digital product sales and specialized service delivery.

3. Operational Scalability

Maintaining efficiency and balancing revenue against costs is vital for addressing rising cost pressures and ensuring profitable growth. Banks with low marginal costs can attract and acquire new customers cost-effectively. Operational scalability also encompasses best-in-class credit and fraud management capabilities, minimizing delinquency rates while generating significant revenue from each additional resource invested.

4. “Tech Company DNA”

To compete effectively with tech-native rivals, banks need a cloud-based ecosystem powered by AI. This enables efficient data capture and leverages insights for personalized, real-time decision-making. A robust technology foundation also helps attract top talent and cultivates a ‘test-and-learn’ culture of innovation, which permeates throughout the bank’s entire operating model.

Four Banking Archetypes: Divergent Futures

McKinsey’s analysis identified four universal banking archetypes, each with distinct performance characteristics. Two of these—Digital Superstars and Rewired Leaders—are poised to outperform their peers in growth and profitability, emerging as market leaders.

• Digital Superstars: These are digital-first banks that redefine customer experience and value propositions. They target pain points in traditional banking, rapidly growing their customer bases. Their challenge lies in building deeper customer primacy and expanding product portfolios to better monetize their distinctive offerings while scaling without compromising customer experience or unit costs.
  • ROE: 30-40%
  • Gross Income Growth: 55-65%
  • Customer Satisfaction: 60-80%
  • Cost-to-Income Ratios: 35-45%
• Rewired Leaders: Established banks that have successfully reinvented themselves for the digital era. They initiated their tech and talent transformations ahead of the curve, excelling in distinctive value propositions and possessing “Tech Company DNA.” They also show strengths in mobile-orchestrated distribution and operational scalability. Their next step is to accelerate digital transformation and double down on orchestration to build difficult-to-copy distribution advantages.
  • ROE: 20-30%
  • Gross Income Growth: 5-15%
  • Customer Satisfaction: 30-50%
  • Cost-to-Income Ratios: 35-45%
• Sleeping Giants: Large, once-dominant banks now at risk of falling behind. While strong in operational scalability, they are losing ground across other pillars. These institutions need to define clear, compelling value propositions to achieve differentiation and market traction.
  • ROE: 10-20%
  • Gross Income Growth: 5-15%
  • Customer Satisfaction: 30-50%
  • Cost-to-Income Ratios: 45-55%
• Question Marks: Digital banks still searching for their strategic edge and unique value proposition beyond simply being digital. They possess strong “Tech Company DNA” and lead in mobile experience and cost-to-serve. These banks must reprioritize value proposition strategies around a few anchor advantages that resonate with target audiences and build strong brand identities.
  • ROE: 15-25%
  • Gross Income Growth: 30-40%
  • Customer Satisfaction: 40-60%
  • Cost-to-Income Ratios: 45-55%

A Three-Stage Playbook for Sustainable Transformation

McKinsey recommends a three-step transformation process to drive lasting change, starting with assessment and progressing through execution and scaling:

1. The Value Creation Plan Stage

This initial stage involves targeted sprints to identify strengths, gaps, and opportunities across all business areas, viewed through the lens of strategic distance. The outcome is a comprehensive understanding that illuminates clear “North Stars” for the institution’s future, alongside defined workstreams and solutions to achieve them. It demands an honest assessment of current capabilities, a realistic evaluation of competitive standing, and a clear-eyed identification of gaps across all four strategic pillars.

2. Frontrunner Execution and Transformation Backbone Development

This stage charts a path to market leadership by capturing rapid value from low-effort opportunities while simultaneously laying the groundwork for long-term transformation. It accelerates execution with front-runner initiatives, drives quick wins, evolves capabilities, plans subsequent waves of change, and implements foundational elements to sustain growth and impact.

3. Full Value Capture and Scale-Up

The final stage focuses on igniting sustained growth by driving value creation through structured waves. This involves leveraging robust performance infrastructure and rigorously tracking progress to deliver measurable results. Initiatives are scaled and aligned across the organization to maximize their overall impact. Institutions must continuously monitor performance, analyze key metrics, and adjust strategies as necessary, understanding that this is an ongoing capability, not a one-time exercise.

Source: thefinancialbrand.com