EY - Transforming banks, redefining banking

Global banking outlook 2014-15

Transforming banks, redefining banking

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Five years after the global financial crisis, many aspects of the banking industry are unrecognizable when compared to the pre-crisis era, despite a global economic recovery that seems finally to be gaining traction.

In this environment, banks have been struggling to restructure themselves and rehabilitate the industry at large without neglecting the changing expectations of customers and shareholders.

Regulation will remain the primary driver of reform for the foreseeable future, but it is not the only one. We believe five unstoppable forces will drive banks to change over the next few years. Overlaying all of those forces will be a fluctuating and unpredictable economy.

Banks’ responses to those forces will be severely constrained by regulation in all its forms. But with “wait and see” no longer a viable strategy, we expect to see more banks transition from planning to execution, and those responses will coalesce around four themes.

Five forces for change

Regulation: global and local 

  • New global standards challenge the profitability of business lines, particularly within corporate and investment banking divisions
  • Resolution plans and ring-fencing require wholesale structural reforms, with regulators prioritizing stability over growth
  • National regulations threaten viability of global banking model
  • Uncertainty remains, but tactical responses no longer viable

Customer: demands and expectations

  • Retail customers require greater transparency, personalized products and seamless transition between channels
  • Business customers expect banks to replace outdated systems and processes and to focus on solutions instead of “product push”
  • Markets forcing changes to product and service mix
  • All customers increasingly concerned about data privacy and cyber security

Technology and innovation: enabler, differentiator, disruptor

  • Siloed, legacy systems struggling to cope with scale of regulatory change and an increasingly digital business environment
  • Exponential growth of data collection, analysis and storage requirements
  • Disruptive technologies challenging old models and providing customers with a greater choice of services and providers

Competition: old and new 

  • Regulatory requirements intensify the battle for scale and market leadership
  • Increased product competition from shadow banks as they exploit new technology and banking regulation
  • New entrants bring service and experience innovation to a range of banking, payment and lending products, threatening primacy of traditional banking relationship

Society: politicians, citizens, activists

  • Industry damaged by the cumulative impact of regulatory and compliance failures
  • Banks struggling to embed cultural and behavioral change
  • End of “caveat emptor” as consumer protection legislation shifts full burden of responsibility for product suitability onto banks
  • Shareholder pressure to implement business models that deliver sustainable returns and reward investors

Four strategic responses

Business model: redefined  

  • Shift from product-centric to customer-centric models as banks strive to restore confidence
  • Further exits of business lines and geographies as banks streamline operations and strengthen balance sheets, leading to fewer genuinely global banks
  • Emergence of strong regional institutions, particularly across rapid-growth markets
  • Increased focus on scale and efficiency by banks in both developed and emerging markets
  • Universal banking redefined as more organizations explore alliances and partnership opportunities to deliver growth

Customer relationships: refreshed/restored 

  • Greater targeting of defined customer segments that align with a bank’s competitive advantage and offer revenue growth opportunities
  • Focus on rebuilding trust; new performance goals and reward strategies that reflect a more customer-centric culture
  • In recognition of balance sheet constraints, further collaboration with institutional customers to combine their funds with banks’ loan distribution and credit risk capabilities
  • Transition to a “digital first” strategy, harnessing new technology that enables customers to personalize solutions while ensuring data security

Organizations: restructured (and simplified?)

  • Tactical fixes replaced by integrated reforms that are transformational and cut across the organization
  • Group structure, location strategy, booking models and legal entities reconfigured to reduce costs, comply with resolution requirements and optimize efficiency of capital and liquidity allocation
  • Silos and duplicative structures dismantled to improve customer focus and operational efficiency; further right-shoring likely
  • New processes and procedures to monitor successful embedding of cultural and behavioral changes and to minimize risk of further conduct issues

Infrastructure: redesigned, shared

  • Processes redesigned and “lean-manufacturing” techniques adopted to deliver standardized systems and procedures across the bank
  • Data systems reconfigured to meet regulatory challenges and provide business lines with customer data analytics
  • Additional outsourcing and greater sharing of non-core infrastructure across the industry to reduce costs and improve efficiency
  • Further investment in digital channels to reflect customer preferences; rationalization of physical real estate footprint