Can banks regain their money-making touch?
January 28, 2016
Banking is currently one of the most challenged sectors in the economy.
Already grappling with regulatory upheaval and long-depressed margins, banks are now facing the full impact of digital transformation, along with shifts in customers’ expectations and low-cost FinTech competition.
Customers want ease, speed, convenience and intuitive user interfaces. But the traditional banks have to compete on price with low-cost, higher service new entrants, potentially requiring as much as a 30% cut in operating expenses at a time when capital and liquidity demands are adding to banks’ costs. Furthermore traditional banks have to meet these tough new pricing and service thresholds while still suffering from poor returns themselves, eroding investors’ already strained patience.
Catalyst for regeneration
But these sources of disruption also open the way for competitive regeneration. Smarter use of technology would enable banks to develop data-driven pricing and customer targeting models, while delivering services at a fraction of current costs. Banks could also develop a presence in new growth markets, enabling them to reach customers who’ve often been under-served by traditional banking. The underlying opportunity for banks is the chance to re-brand and break free from the overhang of distrust emanating from the financial crisis.
Standing out
So how can banks create a winning strategy for the future and what role will acquisition and restructuring play in helping them to develop the necessary capabilities?
Drawing on our experience and analysis of the emerging trends within the marketplace, we believe there are six key priorities for renewed profitability and growth:
- A stronger and more differentiated identity - Forging a clear and consistent brand message to create and cement strong customer relationships (all the more important, given the digital world we live in).
- Fostering entrepreneurialism and agility - Creating a culture of innovation and being able to move quickly to capitalise on opportunities. Acquisition can help provide access to innovations and new markets.
- Sharpening customer segmentation - Creating a more customised offering for different micro-segments and using dynamic profiling to maximise long-term value from relationships.
- Data-driven risk pricing - Using the latest analytics to develop more sophisticated risk and lifetime value pricing to optimise new business and retention. There will be opportunities to buy-in leading edge capabilities by acquiring or partnering with start-ups.
- A new benchmark for cost - With margins tight and growth constrained, achieving target returns requires much deeper cost reduction. Technology and culture are set to play key parts in this. Consolidation, where possible, is also likely to be important in boosting economies of scale.
- Evidential compliance - A more systematic and demonstrable approach to compliance can help to bolster regulator confidence in banks, and hence allow banks to operate and innovate with greater freedom.
As banks look at how get on the front foot it’s important that they think about the trends that are likely to have the biggest impact on them and how they can turn them to their advantage. As in all times of transformation, the market is opening up, which presents unmissable opportunities to put clear blue water between banks, old and new alike.
