Ceo briefing 2014 the agenda for banking

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 D

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CEO Briefing 2014: Banking Industry

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.”

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 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

do 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 do

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

FIGURE 1 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?

FINANCIAL

SERVICES

BANKING OVERALL AVERAGE

PHARMACEUTICALS

/BIOTECHNOLOGY MANUFACTURING CONSUMER GOODS ENERGY, OIL AND GAS

39%

30%

26%

19%

Source: CEO Briefing 2014, Economist Intelligence Unit, January 2014

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 2 BANKING RESPONDENTS - GROWTH PERSPECTIVE FOR EMERGING MARKETS

EMERGING OPPORTUNITIES

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 do business; it’s not necessarily harder to do good business, but it’s harder to do marginal business.” Higher leverage is no longer an option for increased profitability This leaves companies in need of a new approach

MAJOR EMERGING

MARKETS WILL

EXPERIENCE

STRONG OR

STABLE GROWTH

62%

MAJOR EMERGING MARKETS WILL EXPERIENCE

A SLOWDOWN

38%

Source: CEO Briefing 2014, Economist Intelligence Unit, January 2014

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

deposit-taking 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

government-guaranteed 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 do 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 3 DOMESTIC MARKET GROWTH STRATEGIES

Selling new products/services to existing customers BANKING

45% 32%

AVERAGE

Selling existing products/services to new customers

Selling existing products/services to existing customers

Selling new products/services to new customers

18% 19%

29%

8%

36%

13%

Source: CEO Briefing 2014, Economist Intelligence Unit, January 2014

DIGITAL CHALLENGES

AND OPPORTUNITIES

A CRITICAL TOOL FOR

BANKS IN ADOPTING

THIS NEW

CUSTOMER-FACING 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-to-peer lenders, banks need to respond

“Digital technology is changing customers’

behaviour and the way they interact with the bank,” says Marta Marín, head of multi-channel 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 4 IMPORTANCE OF DIGITAL BUSINESS TOOLS TO THE BUSINESS

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 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

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.”

CLOUD

53%

61%

53%

45%

BANKING OVERALL AVERAGE

DATA ANALYTICS

52%

47%

MOBILE

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 do that or you die.”

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

“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