• by Judy Warner , December 27, 2006

As customers demand "right here, right now," services and plenty of sources are ready to offer them, retail banks need to protect and expand ownership of their customer relationships.

The No. 1 business driver in the New Year will be managing profitability--and more innovative products are needed to do it, reports the TowerGroup in its forecast of the retail banking climate for 2007.

Tower notes that car companies now offer credit cards, Yahoo offers a bill-paying service, and an increasing number of online bankers provide a full array of retail banking products at increasingly competitive prices.

"Customers have recalibrated their expectations for banks, and the onus is now upon banks to meet the best practices of many diverse industries. Banks no longer have the luxury of comparing themselves solely with other banks," the report notes. This incursion of competition from both new and traditional sources will require banks to do a better job of protecting and expanding the customer relationship.

Unless banks begin "thinking more like retailers in many respects, banking could become a 'powered-by' environment competing for business on a per-transaction basis," the consulting group warns.

As customer expectations increase and loyalty decreases, the report also notes, consumers are more likely to judge service based on technology, comparing banks' online capabilities with those of their favorite Web-based booksellers and banks' call centers to those of their favorite retailer.

More consolidation in U.S. banking is also forecast as financial companies look to compete against Bank of America--now one of the first truly coast-to-coast banks in the U.S. While global banking is more common outside America, more and more banks will seek to gain access to the U.S. market.

"Already, the Royal Bank of Scotland, the Santander Group, and TD Bank Financial Group own major stakes in U.S. retail banks. ABN AMRO, HSBC, and Royal Bank of Canada also have a presence in the United States. It is not unreasonable to surmise that more large European banks will be buying into the U.S. market or that mergers of equals will occur between large U.S. and foreign banks. Asia in particular will be an attractive region of growth for many established banks looking to leverage their expertise and grow into a relatively green field market," the report states.

More than a third of all U.S. households have turned to the Web for most of their banking needs, and that is expected to continue to increase into 2007 and beyond.

The report concludes that "today's retail banking industry can be summed up with one word: opportunity. But unlike opportunities in the heady days of unexplored territories in banking, today's opportunities are realized only through efficient use of resources and a focus on improvement rather than on new tricks.

"With society changing faster than ever and non-bank industries creating best-in-class products and experiences," the report adds, "retail banks globally are having to respond with innovation in the way they perform and the way they offer, price, and deliver products and services to consumers."