From 2000 to 2007, the developed economies’ top-performing banks had an average return on equity of 26 percent. Today, many of these same banks are looking at returns of 4 percent to 5 percent—if they are still in business.
The post-crisis challenges these banks face are indeed enormous. They are operating under tighter supervision at a time when they are also trying to restore declining customer trust. The securitization surge that fueled revenues and propelled balance sheet expansion before the crisis has slowed to a trickle. And disruptive digital technologies are strengthening the competitiveness of new entrants.
Not all banks will succeed. However, having analyzed more than 150 institutions worldwide and having interviewed more than 30 of their leaders, as well as private equity experts and other industry watchers, Accenture believes that those banks that make bold decisions about their businesses and operating models in 2009 will rebuild their returns on equity to 15 percent or even higher within the next three years 1.
Shifting industry structure
Among the survivors, different banks will pursue different strategies, depending on their markets. But all players will be much more focused. The handful of global banks likely to be flourishing in 2012 will owe much of their success to having significantly scaled back the complexity of their operations.
For these big global institutions, the challenge will be to become simpler and more specialized. If they have deep roots in specialized businesses, they may choose to concentrate on those franchises. This is already happening at Citibank, which is reemphasizing its traditional strength in global corporate and transactional banking. Others may choose to refocus on wealth management and private banking.
By 2012, most banks will be retail and commercial banking institutions serving regional or local markets. Some big banks with strong regional franchises will divest loss-making divisions and instead focus on their core markets and customer segments. We anticipate that many European players may eventually fall into this category.
However, a few existing global banks—Barclays and BNP Paribas, for example—are taking advantage of the financial crisis to increase their overseas presence. Similarly, several Japanese financial services groups are selectively expanding internationally, among them Nomura Holdings, which has acquired defunct Lehman Brothers’ European and Asian assets.
New economic model
Few of the bank executives we have interviewed are comfortable with the more intrusive regulation that will inevitably accompany greater government involvement in the industry. Yet most recognize the need for new and more effective internal approaches to managing risk.
Indeed, soundness and solvency, balanced with generating returns, are the banking industry’s new imperatives. And we believe that most commercial banks in developed markets will settle for lower risk and moderate growth in their quest to achieve high performance by 2012.
A few banks—notably in Spain—were managing risk at the board level before the crisis. By 2012, we believe all successful banks will view risk as an enterprise-wide business responsibility. Merging market and credit risk, for example, will make the whole business of risk management more portfolio-driven, and risk management will be integrated across product lines and business units.
We estimate that at least 30 percent of the banks’ cost base will be variable by 2012, as successful banks use alliances, shared services and sourcing to manage noncore capabilities more competitively. For example, shared services arrangements with telecommunications companies and energy utilities could improve economies of scale (for both partners) and lower costs.
Many such alliances are already in place. BCB is a payment transaction services company—founded in 2004 by Germany’s Deutsche Postbank—that provides payment services for four of the country’s five major banks; it now accounts for more than 20 percent of the German payment transaction processing market.
Technology will play an increasingly important role in the industry’s transformation. So-called cloud computing, which leverages the Internet to enhance speed and flexibility, will enable banks to dramatically consolidate and rationalize IT costs—as will the creation of “virtual” shared IT utilities, which are likely to proliferate among smaller banks.
Indeed, Internet-oriented computing is a disruptive technology with the potential to redefine the future operating model for all banks. By acquiring software as a service, banks will not need to develop and manage their own systems; this will lower costs while improving productivity.
Low-cost and aggressively priced business models also offer a way to win market share. CheBanca!, a high-tech, low-cost retail bank, launched in 2008 by Italy’s Mediobanca, offers a good developed-market example of such an initiative. In Kenya, M-PESA is leveraging cell phone technologies to provide financial services in rural areas (see sidebar).
The impact of technology will go well beyond improving cost-effectiveness. By 2012, successful banks will embed new capabilities of all kinds into their operating models—risk analytics, customer analytics, pricing optimization and industrialized management of nonperforming loans—so they can pursue marketing more effectively.
Such capabilities will help deliver more personally relevant products and services based on customer needs. They will also enhance pricing management and the new customer propositions, like low-cost, aggressively priced banking, that will define success in the industry.
Accenture research indicates that even before the current crisis, only 25 percent of bank customers believed their bank was acting in their best interests. In our 2008 global survey of customer satisfaction, 42 percent said they had switched banks because of poor service.
Successful banks in 2012 will have responded to the erosion of customer trust by going back to basics. They will become more transparent in their approach to service. They will also greatly simplify their product offerings. A customer-needs-based approach will replace the current product complexity typical of many large banks today.
Product innovations like so-called green mortgages, which offer discounts for energy-efficient homes, will address consumers’ growing environmental and social concerns; surveys indicate, for instance, that customers are prepared to pay a premium for products and services that help cut carbon emissions. These and similar customer- and community-focused product initiatives will not only create new income streams but also provide banks with the opportunity to build and improve customer relationships.
For example, microfinance (providing financial services to low-income customers and small- and medium-size enterprises, mostly in the developing world) is a low-volatility lending model with limited risk that more banks are likely to adopt. Currently, between 50 percent and 80 percent of adults in many developing countries have inadequate access to financial services, along with up to 10 percent of the population in developed economies, according to The World Bank. So the extension of services to the bottom of the pyramid represents a market with significant growth potential.
Another example of an emerging new business: Islamic banking, the provision of financial products and services in compliance with Sharia law, which prohibits charging interest. The Asian Development Bank estimates that the combined global value of Islamic assets held by governments (including sovereign wealth funds), financial institutions and individuals is approaching $1 trillion and growing at an annual rate of 10 percent to 15 percent.
By 2012, the world’s banks will be managing profitability and growth under significantly higher capital, risk, liquidity and balance sheet constraints. They will also be competing with some strong emerging-market players—banks from Brazil, Russia, China and India that have performed better during the current crisis and that will leverage the higher growth of their domestic and regional markets over the next three years to consolidate their strengths.
To be successful, all players will need to redefine their business scope—bolstering core businesses and finding optimal exit strategies for the rest. This will demand exceptional post-merger integration skills for the next three years and beyond (see sidebar).
Beyond 2012, we foresee a fundamentally reconfigured banking industry: an environment of technology-enabled banking “ecosystems,” where non-bank players and peer-to-peer networks will compete with mainstream providers to service the needs of ever more demanding consumers. The high performers will be those that can overcome the immediate challenges and maximize the opportunities presented by the dramatically changed banking landscape of 2012.
In the more distant future, the new banking virtues—sustainable profitability, renewed customer-centricity and a more realistic approach to risk—will be more important than ever.
For Further Reading
“Can a new business model save investment banking?” Outlook, June 2009
“Computing in the clouds,” Outlook, May 2008
About the authors
Noel Gordon, managing director of the Accenture Banking industry group, has worked for and consulted with some of the world’s largest and most diverse banks for more than 30 years. His experience includes organizational transformation, strategy, merger integration, back-office rationalization, and credit and risk reengineering. Previously, Mr. Gordon worked at major US and UK banking groups, where he led a range of retail and corporate banking teams. He is based in London.
Piercarlo Gera is the Milan-based managing director of the Accenture Strategy service line in financial services. Mr. Gera has more than 25 years’ experience working with clients in Europe, North America and the Asia Pacific in mergers and acquisitions, corporate transformation, corporate strategy, and sales and service transformation. He has worked extensively with banking and insurance clients on projects including transformation planning and execution, merger integration, marketing strategy planning and new business unit launches.
Andy Tinlin, a senior executive in Accenture Strategy, leads the company’s global Mergers & Acquisitions group. With nearly 20 years’ experience in consulting, Mr. Tinlin currently works with the boards of leading clients to help address their strategic and operational issues in areas such as growth strategy, M&A and business transformation. He is based in London.
Alberto Verga is a London-based senior manager in Accenture’s UK Financial Services group. For more than 10 years, Mr. Verga has worked with leading financial services institutions in the United Kingdom and mainland Europe across banking, insurance and capital markets. He has helped clients with large-scale business and systems transformations, organization restructuring, change management and merger integration.
This article is based on Accenture’s Banking 2012 research project, which included extended interviews with executives from 35 financial organizations in Europe, the Americas and Asia Pacific.
"CheBanca! and M-PESA: New business models for a new era"
Low-cost, aggressively priced products and a keen local focus will be two of the hallmarks of successful banking in 2012. These traits already distinguish pioneering players starting to reshape the industry landscape in developed and emerging markets alike.
Last year, Italy’s leading investment bank, Gruppo Mediobanca, launched CheBanca!, a new retail banking venture that offers customers attractively priced yet innovative products via the channel of their choice. In its first year, CheBanca! (which means “What a bank!”) has proven so popular, especially among younger Italians, that it has opened 170,000 accounts, attracted €5.3 billion in deposits and is selling, on average, 2,000 products a day, including mortgages, savings accounts and a so-called portable account, which can be used as a current account, at an ATM or as a credit card.
The majority of those new accounts originated online, and the bank recently introduced a home banking option via the iPhone as an additional channel for the digitally savvy. Internet banking penetration in Italy is still only about half the European average, so CheBanca! is also expanding its branch network—it opened 50 branches in June 2009 and has plans to open 110 more by 2011.
While CheBanca!’s direct channel access has kept costs low, its simple, stylishly designed branches have offered a strong complementary service for customers. CheBanca!’s branch model is also designed to be highly efficient, emphasizing self-service and paperless options that allow for minimal staffing. Branch employees are trained to pull customers in rather than push products out. The branches also keep retail hours, which are more convenient than traditional banking hours. Customers can also access their accounts via self-service counters in shopping centers.
In many emerging markets, of course, banking facilities of any kind are in woefully short supply, particularly in remote rural areas where traditional banking services are too expensive to serve low-income customers. To help address this, a joint venture made up of Vodafone; Safaricom, Vodafone’s Kenyan affiliate; the UK Department for International Development; the Nairobi-based Commercial Bank of Africa; and Faulu Kenya, a local microfinance organization, launched a service in 2007 that allows Kenyans without bank accounts to make money transfers and payments via their cell phones.
Called M-PESA, which means “mobile money” in Swahili, East Africa’s lingua franca, the service already boasts more than 6 million customers. Many are urban migrant workers who want to send money to their families in the countryside. But because M-PESA is safe, swift and cost-effective, it is also attracting plenty of small businesses—strong evidence that mobile telephony can help boost GDP growth in the developing world.
Vodafone plans to expand M-PESA to other African markets and India. Meanwhile, the company has launched a similar service, M-Paisa, via its local affiliate in Afghanistan. Because literacy in that country is below 30 percent, Vodafone is testing out an interactive voice response technology for handsets that can enable markets with lower literacy levels to take advantage of the service as well.
"Happily ever after: Successful M&A in the new banking landscape"
By Andy Tinlin and Alberto Verga
Consolidation will be an important feature of the emerging banking landscape. Yet in Accenture’s experience, as many as half of all bank mergers fail to add value. They fail, for the most part, because the acquiring bank’s rush to capture cost synergies often takes precedence over the need to maintain customer confidence—now more of a priority than ever as the banking industry struggles to rebuild (see main story).
Given that the bar for success in M&A will be significantly higher in the post-crisis industry, this is especially worrisome. To create economic value, Accenture estimates that acquirers will need to cut twice as much in operating costs through synergies (20 percent, on average) than in the past.
Accenture research shows that cost synergies and customer-centricity don’t have to be in conflict when banks merge, however. On the contrary, by focusing on seven catalysts of effective execution, newly merged banks can resolve the complexities of post-merger integration and help build sustainable profitability and high performance.
Effective execution is not only about traditional cost synergies (sourcing rationalization, IT integration, consolidation of business and group functions, transfer of best practices, and overlapping products and services). It also includes a more transformational agenda spanning which business units or assets to sell, restructure or close, and which noncore capabilities to outsource.
Post-merger integration typically can be divided into two distinct phases. The first, which can last for up to three months, concerns deal closure and mainly involves mobilizing and planning activities, hence the organizational nature of its three catalysts:
Effective governance and fast decision making. This is essential to balancing the conflicting priorities of multiple stakeholders—including customers, whose views should be represented on every relevant board and committee. Lines of accountability must be clear and coherent as well, and transparency and consistency are critical to maintaining the trust of all stakeholders.
A well-defined target operating model. The model should be designed pragmatically and by a small, central team. Key decisions on the business side should focus on business unit selection and boundaries, distribution channels and how to manage overlaps, product range simplification and acceleration of the overall integration agenda. On the operations side, the industrialization agenda and the rapid setup of shared services are now more relevant than ever.
The “keep list” and migration approach. Companies that pragmatically forced themselves to agree to a ”keep list” before the closure of the deal by means of an independent, specific and multifunctional task force reporting to top management achieved a faster, more efficient integration with better chances of success. This demands early decisions about which brands, products and core systems to keep and which to eliminate, divest or migrate. Sticking to those decisions will help deliver cost synergies and enable more effective integration planning.
Four additional catalysts help determine the success of the core integration delivery phase, which typically takes between 12 and 18 months after the deal is closed:
Targeting and implementing achievable quick wins. This is critical to building and sustaining momentum. Focusing on pricing, procurement, property and credit control—concentrating on accounts receivable—has been shown to deliver cost synergies early, without affecting the overall speed of integration.
Effective customer retention programs and alignment of skills. Most customers have a fundamentally negative view of bank mergers. Customer churn rates may go up by 50 percent. In the current environment, changed customer attitudes and issues of trust and savings and investment security must be addressed by the right products and services, and delivered by people with the right training and understanding.
Effective management of country and regional differences. Bringing together the cultures of two organizations is a major challenge and requires up-front preparation, strategic planning, regional and local knowledge, and execution expertise. It is important to make organizational decisions as soon as practical and manage internal communications with care.
Engagement and training of employees to serve a new customer base. This requires the commitment of frontline staff, in particular, as a key determinant of customer satisfaction and loyalty. Frustrated and confused employees frustrate and confuse customers. So it’s essential to be clear with the workforce about goals and expectations, however unwelcome or disruptive, and to communicate changes early and often.