9 minute read 14 Oct 2021
Jet ski in water

How FIs can drive growth with a long-term value strategy

Authors
Aaron Byrne

EY-Parthenon Financial Services Leader

Focused on advancing the client's capital strategies and future vision. Adept in building enterprise strategy determining strategic options and establishing inorganic strategy approaches.

Sara Elinson

EY Americas FinTech M&A Leader and EY Americas Payments M&A Leader, Ernst & Young Capital Advisors, LLC US Financial Technology Investment Banking, Senior Managing Director

FinTech strategist and ecosystem builder. Helping FinTech companies and incumbents advance digital financial services through investment, M&A and partnerships.

Josephine Noah

Senior Director, Strategy & Transactions, Financial Services, EY-Parthenon, Ernst & Young LLP

Enhancing long-term value for financial institutions. Reducing the execution timeline and cost to implement.

9 minute read 14 Oct 2021

Financial institutions that meet the needs of all stakeholders can create sustainable business models and position themselves for success.

In brief
  • Long-term value creation, with its emphasis on stakeholders, society and sustainability, has become one of the strategic imperatives for financial institutions (FIs).
  • Firms that prioritize the needs of customers, employees and community usually outperform those that pursue traditional shareholder-first approaches to creating value.
  • FIs can accelerate their pursuit of long-term value by reframing strategies around four pillars: customer, financial, people and society.

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Across corporate America, the definition of success has changed. Short-term financial results remain important for attracting higher valuations and investment capital but are no longer considered the primary strategic objective. Increasingly, firms are under pressure to take a more expansive approach to building value — one that goes beyond share price appreciation and benefits all stakeholders.

FIs are not immune to these expectations; the financial nature of the business often adds to the scrutiny. To date, however, their efforts at addressing stakeholder needs have met with mixed success. The industry, by many measures, ranks near the bottom relative to other industries on key measures like customer trust¹ and employee satisfaction.² At a time of rapid change, many FIs struggle to find a well-integrated purpose³ that can appeal to a broader base of constituents and help drive financial results.

A long-term value strategy is, by definition, comprehensive, involving all parts of the organization, internal and external. It is about understanding what can drive enduring success in a fast-changing environment and building the culture, mechanisms and products to compete.

For FIs, it can include an asset management firm creating environmentally friendly investment products or new employee training opportunities to a bank bolstering its financial inclusion efforts. It can also include an insurer factoring the risks of climate change into its underwriting while still serving areas at high risk.

Shifting to a long-term value mindset can be challenging, but it also offers FIs a path to enhanced reputations, increased loyalty, operational resiliency — and greater profitability. A growing body of research shows a correlation between doing well financially and doing good by stakeholders.⁴

To thrive in this more purpose-driven environment, FIs can reframe their strategies holistically around four long-term value pillars: financial, customers, people and society. Moving forward, long-term value creation can be the foundation of strategy.

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Chapter #1

Defining long-term value

Long-term value creation has been gaining steady acceptance over the last decade.

The idea has been fueled by a growing interest in environmental, social and governance (ESG) principles, sustainable operating models and the stakeholder capitalism movement. All these ideals are rooted in the notion that corporations should be forward-thinking stewards of resources and forces for positive change in a complex world, but there are nuanced differences between each ideal.

ESG focuses on enhancing a firm’s relationship with the world around it, while stakeholder capitalism emphasizes the need to be responsive to non-shareholder constituents, including employees and the community. Long-term value embraces these ideals and acknowledges that corporations still need to generate financial results and growth to contribute in a broader way.

While shareholders might no longer be at the front of the line, their appetites for ESG-themed investments continue to grow.⁵ Evidence is mounting that a focus on creating value for other stakeholders, such as lowering a company’s carbon footprint or committing to greater workplace diversity, community engagement and better-governance practices, can enhance a firm’s financial results.⁶

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Chapter #2

Where FIs are today and how we got here

FIs seek to rebuild trust lost during the financial crisis of 2008–09.

As FIs have struggled, digitization has opened the door to new competitors, including FinTech firms. According to EY 2021 NextWave Consumer Finance research,⁷ more people today list a FinTech firm rather than a bank as their most-trusted brand.

This could be the tip of the iceberg — an indication of a broader deterioration of the relationship between FIs and their stakeholders that threatens to eat away at the foundation of the business. As climate change, COVID-19, social justice and other societal challenges have gained higher profiles, FIs have come under greater pressure from investors, regulators, customers and employees to proactively develop more of a purpose — to stand for something beyond making money and clearing compliance hurdles. Those that don’t adapt quickly enough to the changing expectations risk becoming irrelevant.

To date, the financial services industry’s embrace of long-term value is widely dispersed, with many continuing to take a wait-and-see approach. We have identified five predominant approaches that most FIs fit into:

  • Leadership: Their brands are distinctive in their approach to long-term value, creating new markets and behaviors through incentives, actions and fostering alignment around a shared purpose. An example includes JPMorgan Chase.
  • Strategic: These FIs, such as Bank of America, integrate long-term value into core business strategy, anchoring their strategies to a purpose and focusing on delivering value to all stakeholders.
  • Maturing: While not proactive, these FIs respond to the expectations of key stakeholders by piloting initiatives and implementing ESG strategies.
  • Compliant: Many FIs embrace check-the-box, policy-based approaches to meet regulatory demands while integrating minimal ESG requirements.
  • Defensive: The most prevalent group, these FIs deny the existence of problematic practices or responsibility for addressing them.

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Chapter #3

Refocusing strategy around four value pillars

The objective of long-term value is acting on the foundational building blocks of value creation.

The idea is that by acting on those building blocks — customer, people and society — financial value will follow. Supported by meaningful metrics and a fit-for-purpose business model, this stakeholder-based approach can create a virtuous circle where all four pillars feed off each other, leading to stronger customer relationships, more engaged employees and a socioeconomic playing field that provides greater opportunity for growth and profits.

Customer value

Digitization and the COVID-19 pandemic have stressed the customer journey and accelerated the push toward customer-centricity as the industry strives to build trust. FIs are responding with initiatives that demonstrate a commitment to key market segments and underserved communities.

For example, Citi in 2020 launched a three-year, $1 billion initiative⁸ to help close the racial wealth gap and increase economic mobility. The effort supports homeownership and affordable housing options for people of color, procurement opportunities for Black-owned business suppliers and dedicated investment capital for Black entrepreneurs.

People value

Employees are the heart of the organization. Flexible work policies and investments in training and development opportunities to support their career aspirations in differential ways can inspire loyalty and effort, which can ultimately trickle to the bottom line.

For example, PayPal has launched initiatives to promote workers’ financial wellness. These initiatives include financial coaching, efforts to reduce worker health care costs, increased equity grants and the introduction of more specialized training programs.

Societal value

At a time of increasing scrutiny, shaping an organization’s value proposition to fit societal goals is becoming critical to fueling economic growth and a larger playing field. The list of potential initiatives is broad and includes those related to confronting climate change and promoting financial inclusion, social justice and transparency. Finding quick wins can create momentum.

For example, the MetLife Foundation is a founding partner in the Common Cents Lab.⁹ The initiative seeks to leverage behavioral science in designing financial products and services to help low- and middle-income customers decrease expenses, manage debt and boost savings.

Financial value

The days of emphasizing shareholder returns above all else may be fading, and that can be disorienting. Reframing strategy, capital allocations and business models around customers, people and society can fuel positive results and lead to FIs being viewed as more attractive investment opportunities.

For example, 92% of Vanguard’s stock funds outperformed their peers over a five-year period,¹⁰ forming a foundation for long-term client returns and growth. The ability to deliver measurably beneficial value propositions is critical to overall ESG success.

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Chapter #4

How to pursue long-term value creation

Long-term value initiatives can be both foundational and strategic.

Key actions to consider in building a value-driven approach include:

  • Reframe corporate strategy. How will you reshape strategy to deliver value to different stakeholders? FIs can assess stakeholder wants and needs and use that information to develop goals and a narrative for creating value along different pillars. A baseline comparison of the institution’s long-term value positioning relative to competitors can help leadership understand gaps and the strategic actions required to establish a broader stakeholder vision as a differentiating asset.
  • Create an implementation road map. How will you deliver a long-term value strategy? FIs can develop an implementation plan, establish governance to guide the transformation and prioritize value-creation initiatives. The balance of stakeholder interests will differ by institutional priorities. Focusing on low-stake, quick wins can give the process momentum.
  • Identify needed capabilities. What differentiated capabilities and skills are required to meet stakeholder needs? FIs can assess whether it makes sense to build, buy or partner to gain a capability and build the talent and operating models to execute the strategy. Developing a narrative around value to guide capital allocation is critical. There is no one-size-fits-all recipe for FIs.
  • Enhance measurement. Which metrics will you use to gauge success? Embracing appropriate metrics around such factors as customer engagement, employee satisfaction and progress on climate-related initiatives — and their impact on financial results — can set a direction and facilitate accurate tracking of progress. What gets measured gets done.
  • Motivate the workforce. How will you reinforce the importance of long-term value to employees? Adding incentives to reward the achievement of outcomes that benefit customers, people and society can set the necessary tone.

Summary

The definition of corporate success has changed, and many FIs are late to the game. Pursuing an enterprise strategy that prioritizes meeting the expectations of four stakeholder pillars — customer, financial, people and society — is critical to creating long-term value and positioning the institution for sustainable success.

About this article

Authors
Aaron Byrne

EY-Parthenon Financial Services Leader

Focused on advancing the client's capital strategies and future vision. Adept in building enterprise strategy determining strategic options and establishing inorganic strategy approaches.

Sara Elinson

EY Americas FinTech M&A Leader and EY Americas Payments M&A Leader, Ernst & Young Capital Advisors, LLC US Financial Technology Investment Banking, Senior Managing Director

FinTech strategist and ecosystem builder. Helping FinTech companies and incumbents advance digital financial services through investment, M&A and partnerships.

Josephine Noah

Senior Director, Strategy & Transactions, Financial Services, EY-Parthenon, Ernst & Young LLP

Enhancing long-term value for financial institutions. Reducing the execution timeline and cost to implement.