Although Return On Equity will not achieve the high rates it did before the crisis any time in the next few years, there are still many things banks can do to improve their bottom line.
Implementing Banking Strategy in Growth Market
The banking industry is under pressure in today’s business climate. Banks have been through big changes. There is opportunity, but there is also increasing competition. To be the preferred bank means changing “good enough” into a unique value proposition. And that means changing the way people have always done things…
Trends
There are four main areas of pressure for banks:
1. Tighter Macro-Economic and Regulatory Environment
Economic growth is slowing down in mature markets, more than expected. Higher growth is expected to come from emerging markets – Russia, CIS, Turkey, the GCC - for the next years and banks there are looking into further expanding their activities.
The pre-crisis ROE rates of 20% will not come back in the foreseeable future. Capital and liquidity requirements are higher. Stricter regulations have been imposed, and there is more regulation to come. Banks are challenged to find a new balance between acceptable risk and return on equity.
Each bank has had to re-examine its business model and transform itself. Some have more cash and capital to support their transformations. But all are faced with a big challenge to implement change in an industry culture that doesn’t like change.
2. Competition will get tougher than the banks are used to
Competition is heating up. There is overcapacity in the industry, and interest spreads are decreasing. The industry is consolidating as smaller or failed banks are bought up. Assets on bank balance sheets are growing slower than before. There is limited access to interbank funding. Banks in growth markets are in a favourable position, with healthy balance sheets, strong domestic demand, and government support. There are huge opportunities for emerging new players to expand and take a bigger global role, if they can adjust their business models to global competition
What has become clear is that a real competitive strategy is needed. In the banking world, you must either be a very efficient, low-cost provider offering convenience and scale, or you must offer premium products and services that are perceived by your clients to be truly distinguished. Middle-of-the-road players will not do well in the coming years. A universal bank that consists of a collection of activities does not stand out with a clear brand or customer value proposition.
As competition increases, banks who do not distinguish themselves will lose ground to the banks that stake out a clear value proposition and then deliver it.
A new competitive landscape for banks
3. Clients will demand more and get it (from someone)
Among private customers, small business owners, and larger corporate customers, loyalty to “their bank” has diminished in the last three years. Customers are increasingly switching banks, or diversifying their holdings across several banks. The main reason is dissatisfaction with service levels and increasing fees with no visible increase in benefit to the client. The second most important reason is frustration with confusing or inadequate product offers. Clients want faster service, and better human contact when they want advice or to discuss their needs. They expect multi-channel access, simplicity and convenience in their transactions. They expect transparency and straightforwardness in the products and services they use. They would like to be able to trust their bank. Businesses and individuals can have cycles in their financial situations; they expect banks to be flexible. There is a growing segment of middle class and affluent clients with more money to spend and higher expectations on service levels. At the same time, there is money to be made through services to mass segments that are under-banked.
Banks must segment their customers and develop the right value proposition for key segments. Banks miss business opportunities by focusing too much on the profitability of each transaction, without thinking about the overall value of their customers. If banks cherry-pick only the business they want from their customers, customers will then cherry-pick only the services they want from each bank. For example the average retail customer uses products and services from three different banks. If banks treat customers badly when they are just starting out, or when they are going through a down cycle, customers will remember it when they make money to deposit. Some private banking customers are also business owners and vice versa; banks often neglect to make the connection. A complete and lifetime view of the customer’s value will set some banks apart from the rest.
4. Retaining and developing your most talented employees is critical
Even as some banks are shedding employees, there is still competition for attracting, developing and retaining the best talent. Banks need the right people to manage operations effectively, solve problems, and win back and serve the most desirable customers. Fewer graduates are going into banking careers, as the field is losing some of its appeal to young people who seek purpose and a better work-life balance than the previous generation. At the same time, there is pressure to keep workforce costs under control. Many banks are looking for more creative ways to keep and engage their employees than the standard bonuses, inflated titles and pay increases.
A segmented approach can work well. A scalable low-cost approach to developing and engaging the most valuable employees, combined with a more personalized and high-investment approach to gain the loyalty of high potential talent that will be required to fill future senior leadership positions.
As banks expand and internationalize, more professional management skills will be needed at all levels. Especially as banks implement new strategies and change, effective leadership and management will be essential getting strategies implemented.
Often front desk employees are low-status, have minimal power and motivation. Yet these people interact every day with customers, and will become increasingly important as the fight for customers intensifies. Some investment here, particularly in a time of change and efficiency drives, will help banks to support a real customer value proposition.
∧ Consequences for Banks
Although Return On Equity will not achieve the high rates it did before the crisis any time in the next few years, there are still many things banks can do to improve their bottom line.
Improve Income
There is a lot of opportunity to improve income. Each opportunity requires adaptation for the bank that wants to pursue it. The future will be ruled mainly by big banks that can scale up their value proposition (and a few niche banks, some owned by bigger banks).
Grow by acquisition
Some banks are buying up troubled or smaller banks or assets at home or abroad. Their challenge is to effectively integrate their acquisition and ensuring that the promised value is captured. Lack of integration can dilute strategy.
A heavy-handed approach from the acquiring company without understanding the acquired bank’s market, customers, or culture can destroy value and lose business.
Grow by expansion
Banks which are able to fund expansion of their operations into new markets need an effective expansion strategy to capture value and recover investments.
Grow by partnership
Innovating services and creating something really new for customers can be achieved through innovative partnerships. For example, Orange and Barclays Bank teaming up to deliver mobile payment services.
Grow organically
Banks need to grow back their customer bases and deepen their relations and share of wallet. They must reverse the attrition of their existing customers, and try to generate new business by selling more products to existing customers and attracting new customers.
This requires an innovative approach in order to be the preferred bank for target customers. Banks are re-examining their portfolios and customer segments. They are identifying the customer segments they want to serve and where they think they can be competitive.
More than ever, they will have to understand each segment and build a pragmatic and convenient customer value proposition relevant to that segment. More than ever, banks will have to focus on the long term value of a customer, not just immediate transactional value.
Some opportunities for creating value with your customer base:
Customer
- Give customers reasons to trust you. Not just once, but repeated over time
- Make customers happy, make their lives easier (not more complicated)
- Segment customers and develop value propositions for target segments, based on needs and behaviours
- Measure and improve customer loyalty, across product lines
Process
- Rethink processes from a customer experience perspective and create a superior customer experience
- Optimize processes to present a seamless face to the customer across all products and channels
Channel
- Rethink branch operating models and branch network footprint
- Incorporate all channels into an integrated customer experience.
- Use technology to provide multi-channel, more convenient access to products and services
Product
- Create more transparent products (for assets, liabilities, off-balance products)
- Offer the right products to the right customer segment based on their risk profile
- Bundle products and services relevant to a target segment to reward customers for keeping more products with you
- Build a strategic pricing framework that drives relation deepening and customer loyalty
- Train front staff to be able to describe products simply and clearly, rightly target them and take new clients properly on board
Service
- Improve service operation excellence. Train and incentivize staff to delight your target customers
- Develop personalized relationships with your most valuable customers. Redirect front staff time to relationship-building with most valuable customer segments; automate standard transactions through remote channels to gain efficiency
- Align the service model with the value that customer segments bring
- Innovate your sales systems; improve cross-selling and retention rates
Improve Efficiency
The future will also be ruled by banks that can simplify their product lines and processes. Many banks have high cost structures. They can improve their bottom line, decrease costs by improving efficiency, while increasing service levels and the quality of the customer experience.
- Focus on a clear customer value proposition. Stop trying to do everything at once
- Align processes, systems, structure and key projects to the overall strategy
- Streamline systems and processes across functions and product lines. Introduce end-to-end process simplification for key processes.
- Use technology to measure and improve operational efficiency and productivity
- Improve efficiency and effectiveness of people by engaging them and reducing attrition of your best talent
Optimize Allocation of Capital
- Adapt to new regulations - capital, risk, liquidity
- Deleverage balance sheets where needed
- Obtain more reliance on fee income and balance loans to deposits ratios
- Manage operational risks: trading, reputation, product, workforce, and cyber-security. The challenge is to manage these risks with minimal constraint to customer convenience and minimum impact on capital
- Allocate capital across business lines, investing in the best customers and the business lines important to them
Leading Implementation of Strategy and Change
The banking industry is a vital player in the health of the global economy, and its future will be decided by the actions of today’s senior managers. Will they leave behind a legacy of change and renewal? Will they be remembered as the industry captains that simplified complexity, innovated valuable new services, built a reputation as trusted advisors to customers, improved the banking experience for everyone, and attracted a new wave of young talent to the industry?
Whenever a change has to be made, the key to success lies in successful implementation. This means change for the way the bank operates and the way people work. It upsets the status quo for some senior managers. It will be a challenge to adapt a product centric culture to a new customer-centric way of working.
Change on this level requires strong leadership. It cannot be achieved with a simple directive or surface adjustment in people policies. It requires an innovative rethink of the entire management system, in a strong partnership between bank leaders and their change agents. New systems and policies must support the strategy to be successful. The real test of a good strategy implementation plan is whether the people understand the strategy, are motivated and enabled to implement it, and actually start achieving its goals.
∧ Talk to MCE about Implementing Banking Strategy
MCE Senior Associates have over 20 years of senior management experience, and we have a dedicated team of associates who come from senior international careers in the banking industry. They have led strategy implementation and change in difficult circumstances. They can help you partner with your leadership team in implementation of strategy, not just from theory but from what works in real life, in different contexts.
Our Senior Associates can work with your bank at all levels, helping to align different departments and divisions to your corporate strategy and customer value proposition.
MCE enables individual managers and management teams to deliver on strategic goals. 60% of strategic success is about implementation and people alignment. Therefore, people are at the core of everything we do to help you get your strategy implemented.
We enable you to deliver your strategy through people, by providing them with the functional and cross-functional capabilities they need to measurably improve performance, in function of your strategy.
For Individual Managers
Executive Mentoring & Business Coaching
Individual managers may benefit by one-on-one mentoring and coaching. MCE senior banking associates can offer more than a standard coach. They have been bank leaders themselves for many years and can act also as a mentor and advisor.
Workshops for Individual Managers
MCE offers workshops for individual senior managers to plan their strategy implementation through people, and improve their leadership skills. In these workshops, you can interact with a small but diverse group of managers from different functions and geographic regions, who are all struggling with implementation of strategy. In this richly diverse environment, managers can work on finding solutions. They will benefit from the guidance of an MCE Senior Associate who is an experienced senior leader from the banking industry.
Retail and Private Banking
SME/Corporate Banking
Payment Systems
Risk Management and Business Functions
Treasury, ALM and Balance Sheet Management
Financial Modelling
Asset Allocation, Investment Portfolios and Fund Administration
Treasury and Investment Products
- Overview of Treasury and Investment Products: Money Markets and Bonds, FX, Derivatives, Forwards and Futures, Swaps, Structured Products
- Interest Rate Derivatives: Structuring, Use, Valuation, Control and Risk Management
- Credit Derivatives: Instruments, Valuation and Risk Methodologies, Contractual Standards
- Fixed Income and Debt Instruments: Characteristics, Risks, Trading, Valuation, Hedging Risks
- Interest, FX, Equity, Commodity and Exotic Options: Mechanics and use, Valuation, Risks and Strategies
- Equity Derivatives and Structured Products: Markets, Applications, Trading, Portfolio and Risk Management
Development for Middle Managers and High-Potentials
For Teams, Divisions, Organizations
Consulting
An MCE senior associate with banking experience and expertise in your market and/or management issue can advise your management team on clarification of strategy, strategy implementation through people, aligning processes, metrics and projects.
Business Transformation Programmes
We help you plan your strategy implementation through people, projects and key processes and metrics, from A to Z. Together with you, we plan a series of initiatives to clarify strategy, get alignment at the senior level, and then align the rest of the banking organization.
Strategy Implementation Programmes
MCE custom-designs with you and delivers programmes to enable your managers to understand your strategy and its implications. We then help them plan how they will lead and implement it through their people.
Corporate Learning & Development
Experienced MCE associates can design and manage your development curriculum for your high potential talent on an outsourced basis.
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