CEO Briefing 2014: Banking Industry Written by: THE CEO BRIEFING 2014: BANKING INDUSTRY IS AN ACCENTURE REPORT, WRITTEN BY THE ECONOMIST INTELLIGENCE UNIT TO PROVIDE A BLEND OF MACRO-ECONOMIC, STRATEGIC AND GLOBAL BUSINESS INSIGHTS THE REPORT DRAWS ON THE VIEWS OF MORE THAN 1,000 C-SUITE EXECUTIVES – INCLUDING 115 FROM THE BANKING SECTOR – ON PROSPECTS FOR THE GLOBAL ECONOMY AND THEIR COMPANIES, AND EXPLORES HOW DIGITAL TECHNOLOGY IS TRANSFORMING INDUSTRIES AND CHANGING THE WAY BUSINESS OPERATES IN AN INDUSTRY WHERE ANY POSITIVE SIGNS CONTRAST THE TUMULT OF RECENT YEARS, BANKERS ARE IN AN OPTIMISTIC MOOD HOWEVER, RE-REGULATION IS FORCING SWEEPING CHANGES ON THE INDUSTRY AT A TIME WHEN BANKS NEED TO ADAPT TO AN ERA IN WHICH THE CUSTOMER IS IN THE DRIVER’S SEAT The question is whether banks have the bandwidth to handle these demands while also capitalising on the growth they see in emerging markets and embracing fully the digital technologies that many believe could transform the sector This is becoming more urgent as corporations in other sectors such as retail, telecoms or software enter segments of traditional banking While economic data and industry experts point to continuing challenges for the sector—from stagnating returns to changes in consumer behaviour and competition from new players—a sense that the worst is over appears to be driving an upbeat mood Among respondents to The Economist Intelligence Unit’s survey for CEO Briefing 2014, many are positive about their prospects, with more than 70% expecting increases in profits and revenue in the coming year.1 “There’s cautious optimism,” says Charles Murphy, professor of management at New York University’s Stern School of Business and a former investment banker “They’ve been beaten back so badly in the past five years that anything that looks like a sunny day is going to make them feel better.” FIGURE SECTORS VOTED TO HAVE THE BEST GROWTH PROSPECTS OVER THE NEXT 12 MONTHS WHICH INDUSTRIES ENJOY THE BEST GROWTH PROSPECTS IN THE NEXT 12 MONTHS? 39% 30% 29% 25% FINANCIAL SERVICES BANKING MANUFACTURING Given the continuing challenges facing the industry and the mountain of new regulations to which banks must adapt, their enthusiasm should be viewed with caution Still, as new rules governing the industry emerge, institutions can focus more on designing their next business models and less on fighting fires “The regulatory environment is becoming clearer,” says Mr Cowles “Banks are doing a better job of getting themselves in a strong position to comply with those new regulations.” The question is whether bankers will move faster than their new competitors 30% 20% PHARMACEUTICALS /BIOTECHNOLOGY Banker respondents are more bullish than most about their own industry’s prospects, with 72% expressing optimism about the 12 months ahead for their industry (slightly more than the 69% overall) However, their favourable perception of the state of their industry is not matched by the view of senior executives in other industries When asked about which industries were likely to best in the next 12 months (Figure 1), banking respondents cited their own sector in far higher numbers (39%) than average (19%).1 This places banking as one of the sectors most likely to see itself more optimistically than its peers 26% 25% 19% Asked about the global economy over the next year, more than half (51%) the respondents from the banking sector expressed optimism (compared with 44% overall).1 “The good news is that the US and UK are coming through with growth of around 3% and while growth in emerging markets is more subdued than in recent years, many emerging-market countries will still realise mid- to upper single-digit growth,” says James Cowles, CEO for Europe, the Middle East and Africa at US bank, Citi CONSUMER GOODS 19% ENERGY, OIL AND GAS OVERALL AVERAGE Source: CEO Briefing 2014, Economist Intelligence Unit, January 2014 EMERGING OPPORTUNITIES IN TERMS OF OPPORTUNITIES FOR EXPANSION IN THE NEXT FEW YEARS, THE CONTINUED GROWTH OF EMERGING MARKETS WILL BENEFIT THE INDUSTRY AS A WHOLE By 2017 these markets will account for 31% of banking-sector assets, according to forecasts by The Economist Intelligence Unit We estimate that in 2013 some 77% of bank assets were located in rich-country markets, with just 23% in developing countries.1 “You have millions of people whose real incomes are increasing, and that’s allowing a growing amount of consumers to buy cars, televisions, mobile phones and washing machines,” says Nathaniel Karp, chief economist at BBVA Compass, a US-based subsidiary of Spain’s BBVA “Clearly on the financial side of that, this opens new doors that were non-existent before.” FIGURE BANKING RESPONDENTS - GROWTH PERSPECTIVE FOR EMERGING MARKETS MAJOR EMERGING MARKETS WILL EXPERIENCE STRONG OR STABLE GROWTH MAJOR EMERGING MARKETS WILL EXPERIENCE A SLOWDOWN 38% 62% Source: CEO Briefing 2014, Economist Intelligence Unit, January 2014 Mr Cowles agrees “In emerging markets, often the growth of the financial services sector is one-and-a half to two times greater than real GDP growth, which is encouraging for the sector,” he says Survey respondents from the banking industry share this enthusiasm, expressing more confidence in emerging markets than others respondents Some 62% predict strong and stable growth for these markets (Figure 2) and 75% believe that changes to monetary policy in the developed world will not damage the outlook in these markets.1 Recent turbulence in several developing markets suggests that there will be volatility, but so far a wholesale slowdown appears unlikely However, prospects for banks in the coming years vary widely by region, and many banking firms will face more difficult conditions than other types of industries In one sense, their portfolios are unbalanced: their financial activities and assets are overwhelmingly concentrated in developed countries, which are mature markets experiencing sluggish economic growth, and in some cases ageing or declining populations In addition, developed-world incumbents will find it hard to take advantage of growth overseas because of restrictions in those markets, new regulatory regimes and their own, frequently still-poor financial health This is before confronting often highly competitive local champions “You have a financial services sector that’s more highly capitalised, more highly regulated and less profitable,” says Ian Ewart, an executive committee member and head of products, services and marketing at Coutts, a UK-based private bank “The upshot of that is that it’s harder to business; it’s not necessarily harder to good business, but it’s harder to marginal business.” Higher leverage is no longer an option for increased profitability This leaves companies in need of a new approach 5 SHIFTING BUSINESS MODELS IN THE POST-CRISIS ERA, BANKING EXECUTIVES HAVE REALISED THAT THEIR COMPANIES CANNOT BE EVERYTHING TO EVERYONE “Banks are going through the process of deciding which businesses they want to be in, who the clients are that they want to serve and where they have a competitive advantage versus their peers, and are really focusing on those parts of the business,” says Mr Cowles Many banks have refocused on traditional service delivery, concentrating on deposittaking and simple commercial and household lending Others are targeting wealthier market segments, “They are more aggressively moving into private wealth management and asset management because that’s where they see the future business model,” says Professor Murphy Meanwhile, fewer firms will dominate risky, sophisticated capital markets activities, which will be increasingly walled off from traditional banking and governmentguaranteed deposits This is likely to lead to consolidation in the industry, something that many view with trepidation In the survey, consolidation emerges as the second-biggest concern for those in the banking industry, with 32% citing this as a top risk.1 Not all bankers believe that this process is a bad thing for the industry, however “You may have consolidation in terms of market share with fewer players,” says Mr Cowles “But by definition those should be the strongest players to compete.” Meanwhile, new non-traditional players— from supermarkets to online companies such as Amazon, Google and PayPal— are entering the business of providing financial services Such developments raise another concern for survey respondents Among banking executives, 30% point to competition from new market entrants as the greatest risk that their organisation faces in the next 12 months.1 For some, the strategy involves giving up global ambitions and pulling back to domestic markets In this environment, banks are cementing existing relationships at home While many respondent companies (36% of respondents in all sectors) have the ambitious strategy of selling new products and services to new customers in their domestic markets, only 29% of those in the financial sector say that this will be their strategy (Figure 3) Instead, they favour selling new products and services to existing customers, with 45% saying this will be the case (compared with 32% overall).1 This is part of a wider endeavour to regain customer trust and deepen their client relationships This extends to greater transparency and public communication Indeed, in the survey, the number-one means of increasing transparency for bankers (45%, compared with 33% overall) is more frequent communication with customers.1 However, Brunon Bartkiewicz, head of retail banking international, rest of Europe, at Dutch bank, ING, sees the evolution of the relationship with customers as going far beyond transparency He predicts that the internet, technological innovation and the accessibility of information will lead to a “tsunami” of change that could potentially be “bigger than any changes relating to the economic crisis or to changes in the regulatory environment.” While many of the changes relate to industry consolidation and the presence of new market entrants, Mr Bartkiewicz says that banks also need to adapt to a world in which “customer centricity” is the common denominator behind widespread transformations in the way banks business “The asymmetry of knowledge in the relationship between banking and customers is changing dramatically,” he says “Either people in banking change their mind-set and adjust their business model to changing customer needs or they will start to suffer.” FIGURE DOMESTIC MARKET GROWTH STRATEGIES Selling new products/services to existing customers BANKING AVERAGE 45% 32% 18% 19% 29% 36% 8% 13% Selling existing products/services to new customers Selling new products/services to new customers Selling existing products/services to existing customers Source: CEO Briefing 2014, Economist Intelligence Unit, January 2014 DIGITAL CHALLENGES AND OPPORTUNITIES A CRITICAL TOOL FOR BANKS IN ADOPTING THIS NEW CUSTOMERFACING APPROACH IS DIGITAL TECHNOLOGY AS COMPETITIVE PRESSURES GROW, TECHNOLOGY IS BOTH A CHALLENGE AND A SOLUTION With customers increasingly demanding banking services that resemble those offered by companies such as software giants, niche online providers or peer-topeer lenders, banks need to respond “Digital technology is changing customers’ behaviour and the way they interact with the bank,” says Marta Marín, head of multichannel banking and innovation at Spanish bank, Santander “We need to adapt to where our clients are—and it’s an ‘anywhere, anytime’ concept.” Financial-sector executives certainly see digital technology as transformative, with 58% of respondents agreeing (compared with 52% of survey respondents overall).1 Much of this transformation FIGURE IMPORTANCE OF DIGITAL BUSINESS TOOLS TO THE BUSINESS 53% DATA ANALYTICS 61% 53% MOBILE 52% 47% BANKING OVERALL AVERAGE Note: Proportion of respondents saying “extremely important” and “moderately important” Source: CEO Briefing 2014, Economist Intelligence Unit, January 2014 For bankers approaching these challenges, cloud computing and digital analytics are seen as key business tools While 45% of all respondents surveyed say cloud computing is “extremely” or “moderately” important to their business, this rises to 53% of those in the financial sector (Figure 4), with fully 30% saying this technology is “extremely important” (versus 19% overall) When it comes to data analytics, 61% of surveyed bankers also see this as critical (versus 53% overall), with 34% citing it as “extremely important” (versus 24% overall) Given the data-centric nature of the business, one needs to wonder what the remaining 39% of banking executives are thinking.1 Respondents also favour mobile technology slightly more than other industries, with 52% of bankers citing it as important against 47% overall.1 CLOUD 45% has started to take place Financial activities are increasingly conducted not in bank branches, but via mobile devices or in new locations such as inside supermarkets, while bill payments and stock trading take place digitally For Mr Karp, mobile technology presents huge opportunities to offer services to the unbanked and underbanked in developing countries without the need to build infrastructure such as branches “With new technology such as mobile banking, it’s a completely different ball game—you’re jumping a development stage,” he says “Instead of developing branches, all these people have a mobile phone and suddenly they become bankable.” CAPITALISING ON DIGITAL’S PROMISE Given the shifting demands of existing customers and the opportunities to service the unbanked, financial institutions need to become more agile and ready to adapt to shifts in the marketplace This means embracing new business models, such as branchless banking, increasing internal innovation and embarking on joint ventures or informal alliances Yet despite the potential for digital technology to help banks secure new customers, particularly in emerging markets, many in the sector still see it principally as an efficiency tool Most respondents in the banking sector (70%, compared with 59% overall) point to digital technologies as a means of enhancing operational efficiency, with only a minority primarily focused on growth.1 “Innovation has not been a centre point of our industry,” says Mr Karp “Products like the plastic credit card and the cheque book have been with us longer than we can remember.” Compliance is one reason that banks appear slow to adopt new technologies and business models For example, when it comes to social media, rules on how banks communicate with customers and clients means that they have to tread carefully Unlike many consumer-facing industries that can capitalise immediately on new technologies, banks must first surmount regulatory hurdles “The challenge is how to accomplish what market trends and technological change would lead you to develop in an environment that almost goes against many of these features,” says Mr Karp “Because you have to convince the regulators that what you’re doing is safe, so you have to test it and ensure there is no foul play—but that takes time and it’s costly.” This means that, despite the rapid advance of developments in technology, banks exercise caution “Part of the problem is that a lot of new products fizzle out pretty quickly as a consequence of the continuous state of advancement in technology,” says Professor Murphy “So many banks are taking a more conservative tack to see which one wins out before they decide to change their business model.” Added to this, institutions face various organisational obstacles In the survey, change management emerges as the biggest barrier to implementing digital technologies in the financial sector Other barriers mentioned include lack of funding, skills shortages, lack of senior-level support, low customer demand and internal silos (each cited by roughly one-third of respondents) However, the difficulty of managing change stands well above these, highlighted by 52% of surveyed bankers.1 This is something that Mr Bartkiewicz argues financial institutions need to overcome “It’s about changing the mind-set—we need to create more connected companies and collaborative circles within our companies,” he says “And you that or you die.” “PART OF THE PROBLEM IS THAT A LOT OF NEW PRODUCTS FIZZLE OUT PRETTY QUICKLY AS A CONSEQUENCE OF THE CONTINUOUS STATE OF ADVANCEMENT IN TECHNOLOGY.” CHARLES MURPHY, PROFESSOR OF MANAGEMENT AT NEW YORK UNIVERSITY’S STERN SCHOOL OF BUSINESS For many institutions, however, this will prove challenging simply because they are adapting to change on so many fronts While complying with new regulations and rebuilding customer trust, banks also need to work out how to respond to new competition from non-traditional players and bolster their domestic businesses as they scale back their global ambitions 10 CONCLUSION Given this difficult environment, it is perhaps surprising to find that many in the industry believe they will well in the year ahead and appear unconcerned about their industry’s dramatically changing landscape However, this may also explain why banking respondents’ approach to technology has tended to be defensive, focusing on increasing efficiency rather than prioritising growth In this environment, banks want to play to their strengths before moving into new territory While strengthening their base as they recover from a difficult era is essential, banks must also explore new ways of delivering services and alternative business models Some innovation is already taking place, particularly in emerging markets where, for example, institutions are working with telecom companies to provide mobile banking services But further opportunities lie in rethinking the way that banking services are delivered Perhaps even a future in which bank accounts are portable, just as mobile-phone numbers are, or when digitally personalised investment services are available to the masses Given the regulatory constraints, the sector clearly has to tread carefully Still, if banks are to continue to expand their markets and prevent new market entrants from stealing their business, they need to use technology and innovation for more than just cutting the cost of errors and reducing operational risk Given the new landscape in which demand is rising in emerging markets for financial services and, in mature markets, meeting changing customer and client demands is a priority, banks that want to be successful had best move quickly 11 Reference CEO Briefing 2014, Economist Intelligence Unit, January 2014 About Accenture Accenture is a global management consulting, technology services and outsourcing company, with approximately 289,000 people serving clients in more than 120 countries Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments The company generated net revenues of US$28.6 billion for the fiscal year ended Aug 31, 2013 Its home page is www.accenture.com About the Economist Intelligence Unit The Economist Intelligence Unit (EIU) is the world’s leading resource for economic and business research, forecasting and analysis It provides accurate and impartial intelligence for companies, government agencies, financial institutions and academic organisations around the globe, inspiring business leaders to act with confidence since 1946 EIU products include its flagship Country Reports service, providing political and economic analysis for 195 countries, and a portfolio of subscription based data and forecasting services The company also undertakes bespoke research and analysis projects on individual markets and business sectors More information is available at www.eiu.com or follow us on www.twitter.com/theeiu Stay Connected Join Us https://www.facebook.com/ accenturestrategy https://www.facebook.com/accenture Follow Us http://twitter.com/accenture Watch Us www.youtube.com/accenture Connect With Us https://www.linkedin.com/ groups?gid=3753715 Visit our CEO Briefing 2014 site to learn more www.accenture.com/ceobriefing The EIU is headquartered in London, UK, with offices in more than 40 cities and a network of some 650 country experts and analysts worldwide It operates independently as the businessto-business arm of The Economist Group, the leading source of analysis on international business and world affairs Disclaimer This document is intended for general informational purposes only and does not take into account the reader’s specific circumstances, and may not reflect the most current developments Accenture disclaims, to the fullest extent permitted by applicable law, any and all liability for the accuracy and completeness of the information in this document and for any acts or omissions made based on such information Accenture does not provide legal, regulatory, audit, or tax advice Readers are responsible for obtaining such advice from their own legal counsel or other licensed professionals Copyright © 2014 Accenture All rights reserved Accenture, its logo, and High Performance Delivered are trademarks of Accenture 11-8822 / 14-2997 [...]... liability for the accuracy and completeness of the information in this document and for any acts or omissions made based on such information Accenture does not provide legal, regulatory, audit, or tax advice Readers are responsible for obtaining such advice from their own legal counsel or other licensed professionals Copyright © 2014 Accenture All rights reserved Accenture, its logo, and High Performance... Accenture collaborates with clients to help them become high-performance businesses and governments The company generated net revenues of US$28.6 billion for the fiscal year ended Aug 31, 2013 Its home page is www.accenture.com About the Economist Intelligence Unit The Economist Intelligence Unit (EIU) is the world’s leading resource for economic and business research, forecasting and analysis It provides... to the masses Given the regulatory constraints, the sector clearly has to tread carefully Still, if banks are to continue to expand their markets and prevent new market entrants from stealing their business, they need to use technology and innovation for more than just cutting the cost of errors and reducing operational risk Given the new landscape in which demand is rising in emerging markets for. .. strengthening their base as they recover from a difficult era is essential, banks must also explore new ways of delivering services and alternative business models Some innovation is already taking place, particularly in emerging markets where, for example, institutions are working with telecom companies to provide mobile banking services But further opportunities lie in rethinking the way that banking. .. More information is available at www.eiu.com or follow us on www.twitter.com/theeiu Stay Connected Join Us https://www.facebook.com/ accenturestrategy https://www.facebook.com/accenture Follow Us http://twitter.com/accenture Watch Us www.youtube.com/accenture Connect With Us https://www.linkedin.com/ groups?gid=3753715 Visit our CEO Briefing 2014 site to learn more www.accenture.com/ceobriefing The EIU... It operates independently as the businessto-business arm of The Economist Group, the leading source of analysis on international business and world affairs Disclaimer This document is intended for general informational purposes only and does not take into account the reader’s specific circumstances, and may not reflect the most current developments Accenture disclaims, to the fullest extent permitted... find that many in the industry believe they will do well in the year ahead and appear unconcerned about their industry’s dramatically changing landscape However, this may also explain why banking respondents’ approach to technology has tended to be defensive, focusing on increasing efficiency rather than prioritising growth In this environment, banks want to play to their strengths before moving into... and impartial intelligence for companies, government agencies, financial institutions and academic organisations around the globe, inspiring business leaders to act with confidence since 1946 EIU products include its flagship Country Reports service, providing political and economic analysis for 195 countries, and a portfolio of subscription based data and forecasting services The company also undertakes... Reference 1 CEO Briefing 2014, Economist Intelligence Unit, January 2014 About Accenture Accenture is a global management consulting, technology services and outsourcing company, with approximately 289,000 people serving clients in more than 120 countries Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s ... optimism about the 12 months ahead for their industry (slightly more than the 69% overall) However, their favourable perception of the state of their industry is not matched by the view of senior... transformations in the way banks business The asymmetry of knowledge in the relationship between banking and customers is changing dramatically,” he says “Either people in banking change their... players—a sense that the worst is over appears to be driving an upbeat mood Among respondents to The Economist Intelligence Unit’s survey for CEO Briefing 2014, many are positive about their prospects,