In addition to a range of other industry-specific challenges, both the retail banking and retail trade sectors faced continued cost pressures and increasingly stiff competition for customers.
Against this background, both sectors are striving to develop the quality of their range of products and services to respond more flexibly to changing market conditions and to overcome business risks. Existing business processes are continuously reviewed to identify possible scope for optimization. IT-based hardware products, software and IT services have a crucial role to play in achieving these objectives. Increasingly, business processes are being automated and moved over to a customer self-service basis. With a view to keeping their integration and coordination costs as low as possible, these sectors tend to prefer manufacturers that can offer everything from a single source. Investments are evaluated over the entire life cycle of the hardware and software. As well as the actual purchase price, these investments cover the costs incurred for operation and the maintenance of availability (total cost of ownership or TCO). As a result of the increasing complexity and more challenging control of business processes, a trend has emerged toward the outsourcing of specific subprocesses, such as IT operations and IT management, to external service providers.
From a regional perspective, both the retail banking and retail trade sectors face distinctive competition in the established markets of Germany, Western Europe and North America. Positive economic developments in these regions favor and accelerate investment in existing sales channels. Both sectors are also expanding their operations, extending their business models and investing in the fast-growing regions of Eastern Europe, Asia, the Middle East and Latin America.
During the fiscal year under review, the global retail banking sector successfully consolidated its position and attractiveness as a stable source of earnings within the banking industry. An international study of 41 retail banks (16 in the Eurozone, 15 outside, five in China and five in North America) carried out by the consultancy firm Capgemini highlighted the growing importance of Internet-based sales and service concepts. It also confirmed the strong position held by branches in the proactive marketing of products for which customers require more detailed advice.
According to the survey, more and more customer services are being transferred to the Internet. Equally, the ATM, which was at the forefront of the drive to rationalize branch activities, has maintained its vital role in presenting information about banking services and offering new services.
The challenge faced by the retail banks is how to expand their business strongly while keeping costs under control. In many countries, they also have to compete with specialist providers such as direct banks or consumer credit banks. These organizations have specialized in particular core aspects of the retail banking business. They offer a range of inexpensive core products and are able to keep their operating costs down since they have either a small branch network or no network. Especially in the U.S. and Western Europe, the number of “off-premises” providers offering independent, self-service banking at busy sites is growing rapidly.
Traditional retail banks have responded to these challenges by expanding their range of products and services through their existing sales channels. In some countries, this expansion has led to a reduction of the branch network. Customers’ requirements are handled instead through alternative sales channels and self-service arrangements. Given the intense competition, however, most retail banks still regard the branch as a key factor that distinguishes them from other providers. Many banks have begun to invest in their branch networks and reposition them with a stronger sales team geared toward personal contact with customers (a form of “branch renaissance”). This is particularly the case in Western Europe and North America. The aim is to exploit their existing customer base to generate more potential business (cross selling). This involves examining and providing for the customer’s entire range of requirements through all the bank’s sales channels (multichannel integration). According to a market study by Capgemini, 88% of the banks surveyed plan to invest substantially in staff training in order to promote this type of proactive selling, while 85% intend to continue with the automation of existing business processes to reduce costs and a further 50% aim to expand their existing branch network.
It is also worth noting the banks’ investments in the expansion of their alternative sales channels and the low charges for their use. This is intended to help win over customers to these methods of providing services.
A study of 865 banks throughout the world, conducted by the consultancy firm Accenture in collaboration with the e-finance lab at Frankfurt University, also reveals that branch business is regarded as increasingly important when it comes to capturing new market share. There is a particular emphasis on the benefit of personal contact. Banks are focused on optimizing current working processes in order to disburden their branch staff. Equal importance is given to the integration of all existing sales channels to obtain a more holistic view of potential customer requirements. According to a study conducted by Accenture, retail banks still operate at high vertical integration to provide their range of services. The study outlines potential savings within this area, citing the automotive industry as an example of reducing vertical integration.
According to a study of trends about IT investments in the delivery channels of the retail banking sector, conducted by the market research firm IDC, the retail banks’ total spending in this area in 2006 will reach approximately US$26 billion (on hardware, software and IT services in North and Latin America, Western Europe and Asia/Pacific). It is estimated that in 2006 around 47% of this volume will go toward investments in branch process automation, 19% toward investments to ATMs, 19% toward call centers and approximately 15% toward Internet selling.
Developments in the retail trade continue to be dominated by globalization, competition for market share and price wars. The need to be cost-efficient, provide better customer support and offer new products and services is becoming increasingly important as retail firms strive to distinguish themselves from their competitors.
IDC predicts overall average annual growth in IT investments for the worldwide retail trade of 6% between 2006 and 2010. It expects to see average annual growth of 4.9% in hardware, 7.6% in software and 6.0% in IT services. It believes total expenditure on IT in 2006 will be US$59.2 billion, with US$20.6 billion being spent on hardware, US$14.6 billion on software and US$24.0 billion on IT services.
The tough competitive environment entails the introduction of more automation and self-service solutions. Many large retail firms are actively seeking new concepts that will allow them to implement self-service systems in the checkout area (self-checkout). Various approaches are being tried in the different regions and across sales channels. In contrast to the U.S., where the scan & bag solution (a form of self-checkout where the goods are packed into bags once they have been scanned) is preferred, no single self-checkout solution has yet come out on top in Europe. In addition, mobile solutions are being deployed.
The continuing trend toward software that can be used in an international context and across the whole range of a company’s operations is now expanding to include more and more small and medium-sized businesses, with a particular focus on the central management of a range of branch processes. At the same time, these branch solutions must be capable of expansion to include central management and communications components.
There is also an increasing trend toward process standardization in the field of cashless transactions, especially as a result of the European Union’s SEPA (Single Euro Payment Area) initiative. SEPA aims to create a single, Europe-wide payment zone in which there are no differences between national and cross-border payments. In response to this initiative, Wincor Nixdorf has developed a standardized and flexible international payment interface (O.P.I. – Open Payment Initiative) to implement the concept. Using O.P.I. reduces dependence on checkout and payment solutions to a minimum and therefore offers considerable flexibility in view of changing market demands.
The issue of security is becoming increasingly important with regard to payment transactions. Chip & PIN solutions – a method of payment that is secured by means of a chip and a PIN – have been particularly successful in the U.K.: payment involves transferring the data from an integrated chip on the card and entering a PIN. Following the example of the banking industry, where biometric identification has already been undergoing assessment for many years, German retailers have now tested similar methods for use in payment transactions, e.g. fingerprint identification.
The supply and removal of cash also involve significant security risks. Because the process is very cost-intensive, increasingly more retail companies are testing and expressing an interest in cash management solutions. The aim of cash management is to optimize the movement of cash from the checkout to the bank.
In Germany, new legislation on one-way deposit systems (the prohibition of arrangements whereby the retailer will only take back its own goods) is creating strong demand for reverse vending machines. This area is also expanding internationally with Scandinavia leading the way in recent years.