Financial Services Undergoing ‘Secular Shift’

Four forces will fuel the shift to a slow-growth, high-cost operating environment, analysts predict.

March 1, 2012

The financial services industry is undergoing a secular shift in which it’s transitioning from a high-margin business to a low-margin undertaking.

That’s the word from Booz & Co.’s 2012 Financial Services—Retail Banking Industry Perspective.

Fueling the shift into a new slow-growth, limited-income, high-cost operating environment are four forces:

  1. The economic climate, with high levels of unemployment, low interest rates, and a feeble housing market;
  2. Consumers who are borrowing less;
  3. Regulators who are both curbing fee-based income and increasing the cost of compliance; and
  4. Technology, which is enabling nontraditional, low-priced competitors in areas such as payments.

As significant as these secular shifts are for profitability, they’re not the only forces reshaping the retail banking environment, Booz reports.

Over the next five years, the company predicts two megatrends will force retail financial institutions to rethink their operating models: Digitization and rising consumer expectations.

Meeting these expectations and solving longstanding consumer “pain points” will require financial institutions to invest in cloud computing, analytics, broadband, and social tools, Booz reports.

Five critical questions

Navigating this difficult environment and achieving future growth will require retail financial institution leaders to address five critical questions:

1. How will we compete in this new customer demand-driven environment?

With limited avenues for growth, the banking sector will be hypercompetitive for the next three to four years. In this environment, each institution must be clear on how it will compete and win in the market.

The winners will retain their profitable customers and capture a bigger share of their wallets. Adroitly targeting specific customer segments, creating products that go beyond deposit and checking accounts, and delivering those products through highly competitive (physical and virtual) sales forces will be competitive necessities.

As the financial institution value chain rapidly digitizes, providers will need to raise their game in technology and partner to provide differentiation.

Specifically, financial institutions need to significantly improve the user interface and experience by leveraging analytics in the front office and partnering with retail and technology firms to personalize offers, market to customers, and build loyalty.

2. What capabilities do we have to build?

Financial institutions have traditionally focused on financial management, human capital management, risk management, operations, information technology infrastructure, and acquisition/integration capabilities to differentiate and win in the market.

The financial crisis and the current competitive environment are quickly making these capabilities table stakes. For a sustainable “right to win,” financial institutions must differentiate themselves.

Investing in certain capabilities will allow providers to address common consumer pain points, such as impersonal and time-consuming service, and the lack of customer empowerment.

Four capabilities financial institutions can develop to address these pain points and outperform competitors:

  • Seamless multichannel experience: Deliver an end-to-end customer experience;
  • Analytics-driven decision making: Drive fact-based decision making and anticipate needs using deep insights from customer data;
  • Customer-focused value proposition: Deliver highly tailored product and service offerings that include standardized and individualized solutions; and
  • Internal and external collaboration: Work across organizational boundaries to deliver enhanced customer experience.

Next: Drive out costs

3. How fast can—and should—we drive costs?

Those who believe the industry's current challenges are cyclical will drive out some costs while maintaining the same operating model. But for those who believe, as we do, that a secular shift is under way, a more aggressive approach is necessary.

Investing in new capabilities will be expensive, and funding will have to come from wringing costs out of the operation. Financial institutions must continuously focus on expense control—on how work gets done as well as what work to do—using lean, technology-enabled process redesign to build more flexible, responsive operating models.

In the process, financial institutions should use emerging technologies to drive out complexity and improve the customer experience while also reducing costs—recognizing that these seemingly divergent objectives can now be simultaneously achieved.

Financial institutions must become nimbler and reduce bureaucracy in decision making by optimizing their organizational structure through a re-examination of roles, spans of control, and management layers.

4. How can we get short-term revenue?

Given the challenging revenue climate, many financial institutions are tempted to raise fees on customers to compensate for the shortfall. But imposing new or higher fees without extreme care is a recipe for trouble.

First, and perhaps most obviously, higher fees risk alienating customers. Large banks’ attempt to raise debit card fees offers indisputable proof of this danger. The outcry was intense, from both consumers and politicians.

The inclination to raise fees can also reveal a narrow, transactional view of the interaction that too often fails to take into account the value to consumers. Additionally, it overlooks existing and emerging ways financial institutions can—and will—need to make money in coming years.

Financial institutions need to evaluate ways to create new revenue streams by leveraging their existing information, expertise, and distribution capabilities and assets.

Companies ranging from Amazon to American Express have converted capabilities originally built to drive core businesses into new revenue sources. In these times, every financial institution should do the same.

5. How do we sustain the change?

The Booz report cites four “pillars” to sustainable transformation:

  • Senior direction and sponsorship, with a focus on augmenting capabilities in concert with cutting costs;
  • Ongoing performance management, including a shift in efficiency philosophy toward one that emphasizes continuous improvement;
  • Redesign of core processes via strategic planning and investment prioritization to address sustainability requirements and track progress; and
  • Leadership behavior to ensure leaders set the right example and close skill and competency gaps.

Click here for more information on Booz & Co.'s 2012 Financial Services—Retail Banking Industry Perspective.