How big banks should take advantage of the royal commission to reinvent their business model

As the dust settles on the final report into the banking royal commission, executives of the ‘Big 4’ banks not embroiled in criminal charges may be thinking they’ve escaped with a slap on the wrist – albeit a forceful one. While the report delivered some scathing comments on their conduct, it stopped short of making any structural changes to the industry or removing vertical integration. This has caused some commentators to proclaim that the Big 4 will flourish in the brave new world of banking.

This, however, is a Panglossian view. While the major banks do have a reason to feel fortunate about the final report’s recommendations, a short-sighted response to new market conditions could instead serve to slow the rate of innovation – sending banks out of the frying pan and into suspended animation.

Here we’ll be running through how the Big 4 Banks should respond to the three fundamental shifts impacting the market in the wake of the Hayne report.



The predictable approach
Currently, around two thirds of all turnover in home loans goes through mortgage brokers. But mortgage brokers will soon need to comply with new professional standards, possibly lose their trail commissions, and potentially move to a ‘user pays model’. If, as expected, all of this forces a large number of mortgage brokers to leave the industry, the amount of churn and competition will be significantly reduced. Equally, we can expect second tier and challenger banks, with weaker proprietary distribution networks, to  be significantly impacted. So with less externally-driven competition, the obvious choice would be for banks to revert to price based competition – e.g., honeymoon rates for home loans, interest free periods on credit cards–  to entice customers away from competitors.

The road less travelled
While the easy, yet dangerous response would be to continue with a transactional relationship with customers by rewarding them for making the jump, the alternative, more strategic response is to reward loyal customers over the long term instead. Overinvesting in the customer relationship across the breadth of the lifecycle will deliver more return on investment and cement brand loyalty.

To do this effectively, banks should start by first evaluating the needs, personas and preferences of each of their customer segments. Then, look to map out customer journeys based upon specific interactions that each customer will have – honing in on the moments that matter most to them. Once these are identified, banks will then be better able to leverage available data to tailor and pre-emptively suggest relevant offers to customers.

It’s also vital that data is connected to inform a 360 degree, holistic view of the customer journey. While the same customer often touches several business units within a bank, it is critical that their experience is seamless, so that it feels like they are interacting with one organisation. By meeting more needs throughout their customers’ lifecycle, banks can improve the ‘stickiness’ of the relationship, reward loyalty with more competitive pricing, and ultimately drive customer retention.


The predictable approach
The biggest potential danger faced by banks from the royal commission was that some form of break up of the vertically integrated model or other structural changes to the market would be made. This, however, did not eventuate. Therefore, the natural reaction would be to take advantage of these fortuitous circumstances by driving for greater customer share of wallet and hang on to margins across the value chain.

The road less travelled
Banks can no longer afford to take a lackadaisical approach to innovation and new product development. By doing so, Big Banks risk ceding market share to Fintech disrupters, many of which offer greater transparency and sophistication – particularly in what has just been heralded as the biggest year for Fintech yet.

A better response for banks would be to disrupt themselves. By thinking like a new entrant in the market and identifying areas of unmet need – e.g., providing small business credit, or solving the customer experience challenges around gaining credit approvals –  they can take new offers and experiences to the market and remain relevant.

The predictable approach
One thing was crystal clear in the wake of the Royal Commission: regulatory bodies will get much tougher and much more vigilant. With a strengthening of the twin peaks model we can expect ASIC and APRA to exercise their new powers at will. ASIC has already announced they will adopt a litigate-first approach to clamping down on potentially criminal malpractice (although they may face some hurdles). Additionally, APRA has been granted greater responsibilities to oversee culture, governance and remuneration activities in the banks.

Predictably, banks have already moved to invest heavily in risk and compliance projects – with CBA announcing that they will spend 64% of their investment in this space. These projects will help protect banks from litigation but will likely reduce responsiveness as employees work through a series of new complex procedures to comply with policy.

Ironically, we have seen this movie before, when the FOFA changes brought scrutiny to the wealth management industry, leading to more onerous compliance requirements, and a ban on conflicted remuneration. That story ended with millions spent on compliance projects but the persistence of many of the questionable practices that have come to light in recent scandals.

The road less travelled
But what kind of an employee experience will the heavy compliance approach generate? If the Big Banks start relying on onerous top-down procedures enforced by armies of risk and compliance staff, innovation and customer-centricity will inevitably be smothered, and the outcome will be the exact opposite of what was intended.

Instead, banks need to take a multi-pronged approach to resetting the culture. First, they need to reconnect with their purpose – especially at a senior leader, frontline banker and first line manager level – and share that message throughout the organisation from the top-down.

Secondly, Big Banks need to invest in developing customer-centric values and behaviours within the frontline, so that staff instinctively make the right decisions based on the customer’s best interest.

Finally, they must embrace diversity of thought.  While progress has been made on some dimensions of diversity, the reality is that the senior leadership in banks tend to have grown up ‘in the system’ and be homogenous in their mindset. Bank leaders need to hire, develop and promote people, preferably from outside the industry, who are fundamentally different to themselves, and then give them the resources and decision rights to change the system.

While executives may have breathed a momentary sigh of relief upon reading the final report’s recommendation, the truth is that the Big 4 Banks are at a strategic inflection point. In a new environment with tighter regulation, emerging competitors and no forced break up of their vertical structure, the Big Banks can embrace innovation and customer-centricity for long term security. But if they take the predictable approach, they risk meandering into strategic drift or, worse still, sinking.

Click here to read the first blog in this series on the royal commission – Fundamental reform or business as usual? The real impact of the banking royal commission.

​Written by Abhik Sengupta.

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