Capgemini: Perfect banking – Jean Lassignardie
Retail banks face a broadening and complex range of challenges. Global economic growth remains slow while bank regulations and capital requirements become more onerous. Customers, meanwhile, are changing behaviour and warming to non-bank competitors by using social media to amplify their lack of trust in banks.
The combination of these outside forces is causing banks to radically rethink their strategic approach. Rather than remain heavily invested in all facets of the retail business, today's environment requires banks to identify a speciality and develop a long-term strategy around building and refining it. No longer can retail banks afford to be everything for everyone.
Lean operations required
Retail banks develop products, create and manage delivery channels, oversee risk and run the internal systems required to keep the entire operation going.
In an environment characterised by low economic growth, heavy regulation and less loyal customers, banks must seek to reduce their complexity by adopting much leaner operations.
Three streamlined business models are emerging for the future - product leader, distributor and utility/processor. Retail banks should begin working now to assess their capabilities around each of these areas, and the steps they would need to take to become true specialists. They should evolve gradually towards one or a combination of two models (Figure 1).
Each of the emerging future models emphasises different skill sets. Product leaders invest heavily in best-in-class customer onboarding and cross-selling technology, and price products dynamically, based on each customer's risk profile. They are innovative product developers, drawing on customer segmentation tools, while considering macroeconomic, technological, regulatory and market trends. They emphasise risk management, using real-time risk assessments based on 360° customer views.
To become a product leader, banks must change their risk models to accommodate customer views and strive to simplify product sets across fewer customer segments. Given changing capital requirements, they should also introduce products that better fulfil new capital and liquidity needs; for example, they might offer transaction accounts that include investment capabilities, with the beneficial treatment of stable funding. Or they could offer product bundles that combine financing and deposits.
Distributors specialise in channel management and have a strong customer relationship management infrastructure. Seamless integration and organised business-process flow between all channels offer customers a common user experience, regardless of the channel used.
To become more efficient distributors, banks need to improve channel integration and their ability to serve customers seamlessly between channels. They should upgrade their use of channel analytics so they can better migrate customers to the most appropriate channels. And they should develop a proficiency in quickly rolling out products and services that are optimised for specific channels.
Utilities/processors excel in cost-effective transaction processing. They operate their internal systems at optimum transaction speeds and capacity levels, with the ability to scale up to meet future processing needs, locally, regionally or globally. They employ best practices in business-process engineering to achieve lower total costs and improved operations performance. They also instil consumer trust by meeting or exceeding security standards and operating at close to 100% uptime.
To become more proficient processors, banks need to drive operational excellence while controlling costs and maximising capacity and scalability. They need to identify and offer services that take advantage of the data they possess. Finally, they must achieve certificate-level compliance and security.
Build on strengths
Identifying core strengths and building new business models will become defining characteristics of the leading future institutions. Traditional methods banks have used to maintain profitability are no longer valid in today's constrained environment.
Fee income is a prime example. Banks have relied heavily on it to boost profits, but now they have been severely restricted. New regulations eliminated fees related to checking-account overdrafts and cards. With consumer awareness of fees now very high because of protest on social media, any bank effort to raise fees is likely to cause customers to consider low-cost, low-fee competitors such as retailers and non-profit credit unions.
For years, banks also turned to mergers and acquisitions as a tool to expand market share, cut costs and ultimately increase profits. But increased capital requirements and future uncertainty are dissuading banks from acquisitions. European regulators in particular are preventing banks from expanding geographically by mandating that banks build their capital bases from internal sources.
Raising capital, another fallback solution, is also a significant challenge in the current economy. Banks, particularly in Europe, are already scurrying to comply with new capital rules. And with anxiety over the industry's health riding high, banks seeking to raise capital are finding investors either scarce or in demand of hefty discounts.
Reducing costs, always an option, may be the most effective traditional response. But this alternative does not always create a strategic long-term position. In the short term, banks could face higher costs as they invest in automation and information technology to increase efficiency. They must embrace a new strategy for long-term viability as pressure and restrictions mount. Identifying a core competency and building capabilities around it lets banks differentiate themselves in a highly competitive environment, while also preserving capital and boosting profits by shedding non-essential businesses.
Most banks today have not proven their ability to excel in any of the three emerging-model areas of product leader, distributor or processor. Yet many are planning to adopt a 'do-everything' strategy requiring them to have superior skills in all three areas.
Capgemini's 'World Retail Banking Report' found that more than a third (34%) of banks expect to target an end-to-end model in the future, up from 23% currently. This 'do-everything' approach, requiring a large investment across all three functional areas, is likely to become increasingly difficult to maintain in the current environment of depressed profits and increased economic and competitive pressures.
With most banks possessing minimal capabilities, the industry appears to have missed the mark by spreading its investments across a large number of areas, but achieving excellence in none. Maintaining their across-the-board investments may hold retail banks back from building the differentiated capability required to excel in the future. Rather than seeking to make improvements across the board, banks should consider more focused investments.
Retail banks able to identify their core areas of strength and build on them will be best positioned to be leaders. Those that continue to follow an unfocused and undifferentiated approach may find themselves as laggards.