The banking industry is emerging from a long crisis with its core business attacked from all angles, and it’s only going to get worse. Yet banking remains at the heart of the economy, critical for future wealth creation. What is required is strong industry leadership and a clear vision of what banking should look like in the long term.
The banking industry is emerging from a long crisis with its core business attacked from all angles.
Regulators are trying to fight the perceived failings of the industry, but end up constantly adding additional hurdles, or forcing even further commoditisation and standardisation in the product, with little sense of whether there is any real customer benefit.
Agile new entrants continue to emerge at the margins, based on asset-light models with the potential to cherry pick the best customers, while risking leaving incumbents with the cost of the core services and underlying infrastructure they piggyback off.
Customers have major doubts about the value added by banks and at best consider them to be a necessary evil; they are more receptive to alternatives than ever, while remaining highly demanding with little brand loyalty.
Shareholders still have not recovered from the harm that the industry has imposed on them, while employees in general are demotivated and many remain fearful about their long term job prospects.
Governments who had to bail out most of the players are suspicious of any major move from within the industry, and will not back any non-traditional game.
Overall, Western Europe remains a low growth, low interest rate environment with squeezed margins.
As if all that wasn’t enough, in the coming years, banks will be exposed to even greater challenges, on top of those they already face:
- A high likelihood of increased levies on banks, making the profit environment even more difficult.
- A huge further shift towards digital interaction: while many banks are announcing reductions in their branch networks, the real question is not “what to do with the existing network?” but “what should the future distribution and representation model be?”.
- Technology finally risks opening up the real prospect of highly disaggregated banking models based on ‘everything as a service’, where even previously core banking functions such as deposit- taking, lending and payments are becoming available as standardised services to anyone that wants them.
- A shift in where the value lies towards the customer interface; successful customer-facing businesses will be those who are able to offer a stand-out customer experience.
- A supplier landscape that is likely to become much more fragmented and complex, with some areas such as payments moving faster than others, particularly where regulatory change is breaking down historically protected business models and other silos.
- The need to both compete and co-operate with non-traditional players who are inherently more customer-centric with no legacy infrastructure to pay for, such as Apple (payments), Google (consumer credit), Amazon (merchant credit) and literally hundreds of emerging fintechs.
- A pace of change in all the above that remains highly uncertain.
Yet the banking industry remains at the heart of the economy and is a major lever to put the global economy back onto a significant growth path.
The main reason for this disconnect between an industry that seems in crisis and one that is critical for future wealth creation is lack of leadership in the industry; specifically, lack of a clear long term vision for banking.
In our view what is needed are leaders with such a vision of the future direction of travel that is, at the same time, flexible enough and responsive enough to not become quickly out of date, and who can communicate this effectively and use this insight to steer their organisations over the long term, rather than just focusing on the next quarter’s results or investor guidance.
It is now time to move past working on the legacy portfolio, cost optimisation and initial efforts to become more customer-centric. Banks need to put these important activities into perspective and mobilise all relevant stakeholders to develop a long term vision and ambition for themselves as well as for the industry as a whole.
There are at least six fundamental questions that must be answered:
- What will be the raison d’être of a bank for its clients in 10+ years from now?
- What is the vision for banking and its environment out to this long term horizon?
- Where and how should banks defend their position in traditional business lines in the face of new types of competitors, where should they aim to co-operate, and where must they cede ground?
- What new battlegrounds or service lines should banks make pre-emptive moves into?
- What is the corporate story and corporate journey over the next 10+ years to communicate to stakeholders?
- How can individual banks achieve this vision, given their starting points, without putting short term revenue at risk?
In answering such questions, it is also critical to remember that banks do not exist in isolation, but are an integral part of a broader environment that itself is undergoing rapid change in many areas. A minor anecdote makes the point: at a payments conference late last year in the US, a debate was sparked over whether banks would be forced by the card brands to upgrade legacy municipal parking meters from magstripe swipe to EMV card, at high cost. Any awareness that physical meters are already being rendered obsolete by phone apps (and in the longer term, a shift to a new mobility paradigm based on autonomous vehicles will mean no-one actually needs city centre parking in any case), seemed completely lacking.
In the face of so much change and uncertainty in the financial services space and beyond, and given the recent tumultuous history of banks, all banks’ stakeholders need a compass to guide the future direction of their own organisations and the industry as a whole, to help re-energise personnel, create confident line management, engage shareholders and last but not least, rebuild customer trust.
CVA is currently assisting a number of leading banking and insurance groups in working through exactly such long term vision and ambition thinking, and more importantly, translating it into concrete actions to take tomorrow, to set them on the right path.
To talk about whether CVA can help you and your organisation develop its own long term vision and roadmap to get there, please feel free to contact the authors, who will be happy to discuss this further.