Bcg Banking Report

The Road to Excellence

Report

Global Retail Banking 2010/2011

The Boston Consulting Group (BCG) is a global manage-ment consulting firm and the world’s leading advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep in sight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable compet-itive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 71 offices in 41 countries. For more infor-mation, please visit www.bcg.com.

The Road to Excellence

Global Retail Banking 2010/2011

bcg.com

Andy Maguire

Vincent Chin

Laurent Desmangles

Huib Kurstjens

Reinhold Leichtfuss

Reinhard Messenböck

Tim Monger

Nicole Mönter

Steven Thogmartin

André Xavier

December 2010

© The Boston Consulting Group, Inc. 2010. All rights reserved.

For information or permission to reprint, please contact BCG at:E-mail: [email protected]: +1 617 850 3901, attention BCG/PermissionsMail: BCG/Permissions The Boston Consulting Group, Inc. One Beacon Street Boston, MA 02108 USA

The Road to Excellence 3

Contents

Executive Summary 4

The State of the Nation in Global Retail Banking 6Financial Stress 6Stricter Government Regulation 7Changes in the Competitive Landscape 9Changes in Customer Behavior and Expectations 10The Shifting Roles of Products 10

Operational Excellence: Becoming a Process and Productivity Leader 12The Profile of a Process and Productivity Leader 12Different Ways of Differentiating 14

Customer Excellence: Reaching the Highest Level 17The First Step: Remaining a Near-Perfect Retail Bank 17Completing the Journey: Achieving Truly Perfect Customer Excellence 18

Appendix: From Global to Local—Trends in Specific Retail-Banking Markets 22

For Further Reading 29

Note to the Reader 30

4 The Boston Consulting Group

The retail banking industry has been bat-tered by the global financial crisis. But in many markets its resilience has helped enable a turning of the tide that began in 2009 and continued into 2010.

Overall, retail banking is on track to resume its sta-tus as a reliable and profitable backbone for univer-sal banks.

Although the nature and impact of current industry ◊ dynamics vary by market, banks have generally under-gone significant financial stress, owing to margin pres-sure, sharp rises in loan loss provisions, and declines in asset volumes, revenues, and profits. Banks have also had to cope with stricter government regulation aimed at mitigating risk and beefing up consumer protection. Such regulation has been implemented in many coun-tries and is on the horizon in others.

The overall retail-banking landscape has undergone ◊ measurable change, altering the competitive position of many institutions. Customer behavior and expecta-tions have also changed, with a greater premium being placed on trust and reliability. The roles of traditional products are shifting.

In order to respond to the new environment in retail ◊ banking, institutions will need to push their perfor-mance to the next level along two broad dimensions: operational excellence and customer excellence.

Banks must utilize three key levers in order to achieve operational excellence and become process and pro-ductivity leaders. They must streamline the organiza-tion, develop efficient and effective processes, and improve end-to-end performance.

In the best banks, a large majority of employees are ◊ dedicated to customer-facing sales and service activi-ties. Processing is centralized in a small number of centers across regions. Leading banks embrace a high level of industrialization, characterized by simplified, standardized processes that maximize the number of new accounts and loan decisions per operations full-time equivalent. They focus on end-to-end sales and service effectiveness, applying a holistic approach to streamlining processes and interfaces across the front-line and operations.

Although no retail banks have been able to achieve ◊ operational excellence in all areas, the scope of the op-portunity is vast and has led many banks to embark on multiyear efforts to raise their game. Banks that ac-celerate these initiatives and invest wisely to reach a high level of operational excellence will reap signifi-cant benefits.

In the wake of the financial crisis, retail banks must commit themselves to achieving a far higher degree of customer excellence in order to win a greater share of their customers’ business. They must combine sales and service excellence with low costs, take mul-tichannel excellence to the next level, and create a truly differentiated customer experience. These ini-tiatives are critical to showing customers that they need only one bank to meet their financial-services needs. Many banks are aware of the need for a re-newed focus on such goals, but their execution and attention to detail are frequently insufficient.

Banks often hurt themselves by providing poor overall ◊ customer service and setting expectations that they cannot consistently meet. To address these shortcom-

Executive Summary


ings, they must be more actively supportive of their customers—for example, by warning them of poten-tial overdraft scenarios and helping them figure out whether they can afford the car or house that they cov-et without overextending themselves. Such support can be offered only if the bank captures comprehen-sive customer information, updates it continually, and understands it in a holistic way that builds in under-writing risk and appropriate pricing. By developing such integrated insights, banks can make every service opportunity a sales opportunity and vice versa.

The primary checking or current account is clearly the ◊ anchor of the customer relationship. Because of the cross-selling opportunities these accounts present, cus-tomers who hold them are up to 10 times more profit-able than those who do not—and are up to 25 percent less likely to have overdraft or default difficulties.

Multichannel excellence goes beyond making sure that ◊ channels are not competing with each other and that access to customer information is open and unified. It also means monitoring channel usage and using that information to drive more high-quality interactions with the customer. It means shifting from a passive ap-proach—merely displaying products “on the shelf”—to proactive, sales- and service-oriented, multichannel lead management.

Many, if not all, retail banks are genuinely afraid of ◊ regulatory intervention. Yet customer excellence may be the ultimate defense. Banks that take the time to capture and maintain their customers’ profiles—such as their demographic characteristics, attitude toward risk, product history and preferences, channel behav-ior, and financial boundaries and limitations—may find themselves less troubled by regulation because they really do know their customers and act in their interests, which is what regulators care about most.

About the AuthorsAndy Maguire is a senior partner and managing director in the London office of The Boston Consulting Group and the leader of the global retail-banking practice. You may contact him by e-mail at [email protected]. Vin-cent Chin is a partner and managing director in the firm’s Kuala Lumpur office. You may contact him by e-mail at [email protected]. Laurent Desmangles is a partner and managing director in BCG’s New York office. You may contact him by e-mail at [email protected]. Huib Kurstjens is a senior partner and manag-ing director in the firm’s Amsterdam office. You may con-tact him by e-mail at [email protected]. Reinhold Leichtfuss is a senior partner and managing director in BCG’s Dubai office. You many contact him by e-mail at [email protected]. Reinhard Messenböck is a partner and managing director in the firm’s Berlin of-fice. You may contact him by e-mail at [email protected]. Tim Monger is a partner and managing director in BCG’s London office. You may contact him by e-mail at [email protected]. Nicole Mönter is a proj-ect leader in the firm’s Brussels office and the manager of the global retail-banking segment. You may contact her by e-mail at [email protected]. Steven Thogmar-tin is a partner and managing director in BCG’s New York office. You may contact him by e-mail at [email protected]. André Xavier is a partner and managing director in the firm’s São Paulo office. You may contact him by e-mail at [email protected].


There is no doubt that the retail banking in-dustry has been battered by the global fi-nancial crisis. Yet even in the darkest days of the recession, there was a silver lining: the fundamental strength and resilience of

the industry. This resilience has helped enable a turning of the tide in many markets that began in 2009 and con-tinued into 2010. Overall, retail banking is on track to resume its status as a reliable and profitable backbone for universal banks.

But a full recovery will be neither easy nor without pit-falls. Over the past few years, the retail banking industry has witnessed upheaval in five principal areas:

The industry has endured significant ◊ financial stress, owing to margin pressure, sharp rises in loan loss pro-visions, and declines in asset volumes, revenues, and profits.

Stricter ◊ government regulation aimed at mitigating risk and beefing up consumer protection has been imple-mented in many countries and is on the horizon in others.

The◊ overall retail-banking landscape has undergone measurable change, altering the competitive position of many institutions.

Customer behavior and expectations ◊ have changed, with a higher premium being placed on trust and reliability.

The ◊ roles of products are shifting.

The exact nature and impact of these dynamics vary from market to market. (See the Appendix for brief sum-

maries of the trends specific to individual markets.) In-deed, the crisis generally hit mature markets harder than developing ones, and it hit the United States—which con-tinues to face serious difficulties—perhaps the hardest of all. These forces form the backdrop to the overall state of the global retail-banking industry today.

Financial Stress

The margin pressure that has long plagued retail banks is gradually becoming less severe. Asset margins have wid-ened from unsustainable lows, and pressure on liability margins, while still intense, has on average eased up from the depths of the crisis. New mortgages are being sold at higher spreads than were possible for many years, as a significant percentage of existing mortgages come up for repricing—and are rolled over at better margins. Retail banking customers in most markets are less able to refi-nance regularly, extending the lives of loans. Many back-book mortgages that were not repriced are now earning better margins owing to slightly better, blended funding costs than were possible in 2008 and 2009.

On the liability side, the expensive fixed deposits and high-interest-rate savings accounts—combined with the flat interest-rate curve—that weighed banks down during the crisis have begun to run their course and represent less of an undue burden. However, the vicious fight for savings is continuing in most markets. The still relatively high interest rates offered on deposits are resulting in continued downward pressure on liability margins and upward pressure on asset margins.

When it comes to asset volumes, the crisis obviously had a marked effect. Overall sales declined, with the extent

The State of the Nation in Global Retail Banking


varying across specific markets. Initially, the pressure on credit supply was driven by banks trying to reduce risk in their portfolios and shore up their balance sheets. Later, restricted funding possibilities became a factor. Today, de-spite the fact that funding constraints are less severe, a recovery in asset volumes has not yet occurred because of the overall economic climate—which is keeping de-mand low in most countries of the Organ-isation for Economic Co-operation and Development. In several countries, al-though balance sheets are generally in bet-ter shape and funding is available, new-asset volumes remain sluggish because consumer and small-business demand has not yet recovered. On existing mortgages, volume is naturally declining in markets where relatively short-term loans are the norm, remain-ing stable in markets where long-term mortgages are more typical.

Deposit volumes remain positive as many consumers, in a shift from precrisis behavior (especially in countries where savings ratios have been low or negative), are tend-ing to save more. This change is being driven by a gener-al sense of uncertainty about the future and, especially among older people, by uneasiness over the sustainabil-ity of various national pension programs.

The trend toward deposit rather than investment prod-ucts is resulting in a decrease in fee and commission in-come for banks in developed countries. Indeed, up-and-down capital markets during the crisis prompted many people to reallocate their money away from complex, high-margin investment products into savings vehicles. Banks contributed to this trend, focusing on attracting de-posits in an effort to bolster their balance sheets. At the same time, many consumers have drastically curtailed shifting money among investment products, resulting in further losses of fee and commission revenues.

Nonetheless, despite the combination of margin pressure, sluggish growth in new assets, and the decline in fee in-come, retail banking revenues overall have been relative-ly stable throughout the crisis. The fact is that people al-ways need basic banking services, and the retail segment is traditionally less volatile than either the corporate banking or the investment banking segment. Conse-quently, universal retail banks, having been exposed to less dramatic attrition, weathered the crisis in revenue

terms better than highly diversified banks—with the no-table exception of the U.S. market, where retail earnings have turned positive only relatively recently. The retail share of all global banking revenues rose to 52 percent by the end of 2009, compared with 49 percent in 2006, with ample variation by region. (See Exhibit 1.)

When it comes to overall profitability, the industry is still recovering from the depths of the recession. On the cost side, the long-term downward trend in cost-to-income ratio has resumed, following a blip during the crisis driven by thinning margins. The impact of efficiency programs begun two or three years ago, when many banks were under severe duress, is being felt. In addi-

tion, while controls on operational costs are here to stay, some investments that were put on hold during the crisis are moving forward as many banks start to refocus on growth. Impairments are also improving, having soared during the downturn, when they helped drive profits to their lowest levels in the fourth quarter of 2008.

The combination of a revenue rebound—albeit at a shal-lower growth trajectory than in precrisis days—good news on costs, and a brighter outlook on impairments helped profits recover to 50 percent of their 2006 levels by the end of the second quarter of 2010. (See Exhibit 2.) Yet higher levels of capital, as well as more expensive capital (as required by Basel III, addressed below), will increasingly pressure return on equity. In sum, the out-look on profitability is positive, although we are a long way from the blue skies that characterized the precrisis years.

Stricter Government Regulation

In the wake of the financial crisis, regulatory complexity will add costs to retail banks in most markets. In addition to amendments to the existing Basel II regulations—known as Basel III—new regulations on customer protec-tion will be introduced in many countries.

While the principal aim of Basel II was to ensure that cap-ital allocation was efficient and that banks were well cap-italized, Basel III goes further. Not only are capital require-ments measurably strengthened, but mandatory short- and long-term liquidity standards will be introduced, as well as

When it comes to

overall profitability, the

retail banking industry

is still recovering.


a leverage-ratio requirement. Basel III will be adopted worldwide, creating a level playing field internationally. However, national regulators will have discretion to strengthen Basel III’s minimum requirements as they see fit in their local jurisdictions. For example, this is expected to happen in Switzerland, where the relative size of the major Swiss banks is seen to pose substantial risk to the country’s economy.

When it comes to new consumer-protection legislation, although emerging regulatory patterns are similar across some countries, there is considerable variation in the top-ics covered and in the strictness of the proposed controls. (See the sidebar, “In the United States, a Raft of Regula-tion.”) It is safe to say, however, that the main themes are the following:

Increased transparency on product design in terms of ◊ the description of product details and pricing (for ex-ample, to avoid fine-print surprises such as up-front commissions, hidden fees, and penalties for actions like early redemptions)

Asia,2009 [2006] (%)

Australia,2009 [2006] (%)

Europe,2009 [2006] (%)

Americas,2009 [2006] (%)

Middle East,2009 [2006] (%)

Retail share of global revenues, 2009 [2006] (%)

52[49]

59 [58]

41[42]

72[62]

53[61]

47[39]

46 [70]

54 [30]

28[38]

48 [51]

Retail revenues covered by databaseOther banking businesses

52[45]48

[55]

Retail revenues

Exhibit 1. Retail’s Share of Global Banking Revenues Grew to 52 Percent in 2009

Source: BCG Retail Banking Database.Note: Retail shares based on segment reporting of banks in BCG’s Retail Banking Database of roughly 140 banks worldwide with retail banking involvement.

In the United States, the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 aims to curb excessive interest-rate hikes and hidden fees. It is ex-pected to reduce card profits by $3 billion to $5 billion per year. The Durbin amendment aims to limit the in-terchange fees that banks earn from their customers’ debit-card transactions. Its impact on profitability will amount to about $10 billion per year. Regulation E was recently modified to require customers to “opt in” for debit point-of-sale and ATM overdraft protection on their demand-deposit accounts (also known as DDAs or checking accounts). This measure will likely reduce profits by between $12 billion and $15 billion per year. Finally, with the establishment of the new Consumer Financial Protection Board, the industry is facing the prospect of additional compliance costs and potential further curtailment of overdraft and oth-er fee sources. Overall, the combined effect of the new legislation will be a sharp reduction in banks’ return on equity.

In the United States, a Raft of Regulation


Fairer representation of products in advertising (for ex-◊ ample, by forbidding ads that quote an interest rate of-fered to only a small percentage of the customer base)

Closer supervision of banks’ delivery models in order ◊ to avoid saddling clients with inappropriate products (for example, through regulations on sales force incen-tives, relationships with third parties, and advisory qual-ity and advisor documentation in the sales process)

It is worth noting that consumer protection legislation, by making the selling process somewhat more onerous, will raise distribution costs.

Changes in the Competitive Landscape

In most major developed markets, the level of bank- versus-bank competition has actually lessened as merg-ers and acquisitions, along with the exit of standalone monoline players, has winnowed out the overall number of competitors. Although most mergers have taken place

within domestic markets, some regional or global banks have taken the opportunity to strengthen their profile on the broader stage. Examples include Santander, with its acquisitions of Banco Real in Brazil and Alliance & Leic-ester in the United Kingdom, and BNP Paribas, with its acquisition of Fortis in Belgium.

The loss of market position by monolines, such as direct banks, deposit-only banks, and pure credit-card players, is another important trend in most regions. Most mono-lines have exited the market, been acquired in a dis-tressed state, or are aiming to diversify their business models. It seems clear that in times of financial duress, a mistrust of niche players—or perhaps of foreign institu-tions in any given market—arises. The result is that many consumers tend to flock back to names they know and feel they can put their faith in.

It is also true across markets that during the crisis, banks with a strong trust link with their customers—such as co-operative banks and a number of smaller banks in some countries—often fared better than the rest. What is more,

Pretax profit performance indexRevenue performance index

BCG Retail Banking Performance Index

Q32010

Q22010

Q12010

Q42009

Q32009

Q22009

Q12009

Q42007

70

Q32007

110

Q22007

Q12007

2006

100

80 –40

–20

0

20

40

60

80

100

120

90

100

110

120

104106

78

10092 90 91 114

116 117115 114 114

111 112 111 112 112 110

3217

26 21

3950

Q42008

–1

Q32008

Q22008

7057

Q12008

581

Pretax profitperformance index

Revenue performance index (2006 = 100)

Exhibit 2. The Outlook for Retail Profits Has Turned Positive

Sources: Company reports; press searches; BCG analysis.Note: Banking performance was calculated on the basis of the aggregate total operating income of 26 leading banks in the retail banking segment. Distortions due to merger and acquisition activities and changes in segmentation were accounted for to ensure consistent measurement. Performance of banks for which Q3 results were not available was estimated on the basis of past performance and company press releases.1Excluding exceptional goodwill impairments booked in Q3 2010 to adjust for regulatory changes in the United States.


any limitations on the day-to-day operations of major fi-nancial institutions brought about by government guar-antees and shareholdings have not proved very onerous. Many governments seem to have adopted a relatively hands-off attitude, hoping that banks will work their way back to better financial health. The future divestiture of government shareholdings in some banks, particularly in Europe, may offer further acquisition op-portunities for retail banks with regional or international ambitions.

Changes in Customer Behavior and Expectations

The recent focus on transparency in bank-ing, which has benefited institutions that have managed to develop deeper goodwill with their customers, is just one facet of a more general shift in customer attitudes, behavior, and expectations. By and large, customers are more guarded, more circumspect, and more in need of clear communication and reassurance. They expect clar-ity and full disclosure. And although switching retail banks is often a burdensome process for customers—a fact that in the past has made some dissatisfied clients think twice about “voting with their feet” and changing banks—financial institutions realize that they have to raise their game in terms of overall reliability.

Indeed, in the post-recession era, deepening customer re-lationships will principally be about the fundamental is-sue of trust. The financial crisis was a crisis not just of markets but also of confidence in the banking industry as a whole. Many consumers felt disappointed, disillusioned, even exploited by their financial institutions.

The Shifting Roles of Products

Changing business models, largely prompted by the crisis, have had important implications for retail banking prod-ucts. Many institutions have shifted away from a simplis-tic, volume-driven focus on new-customer acquisition, in-stead placing more emphasis on the quality of the customers acquired and the lifetime value they create. This shift has been reflected in the roles that individual products play and how they are positioned and priced. On the asset side, in particular, there has been a notable return to “in franchise” lending, with loans reserved for

the most attractive (least risky) customers whom the bank knows well. Moreover, and needless to say, there are market-by-market nuances in the ways in which product roles are changing.

Deposit Accounts. For many years, savings accounts pro-vided wide margins from long-standing customers and

opportunities to manage margins with new customers. Funding was mainly an af-terthought. Now, with profit margins gen-erally being squeezed—although they have improved since the worst days of the crisis—savings accounts have become pri-marily a funding vehicle for the asset side of the balance sheet. Duration is rewarded much more than it was in the past (for cus-

tomers, but also internally, in the transfer prices paid on the stickiest balances).

Checking Accounts. In the past, checking accounts en-joyed standalone profitability in most countries, provided a source of new customers, and represented an anchor product for cross-selling. The key metric was volume and price realization. Today, checking accounts have become an important funding source for assets and a vehicle for maintaining long-term relationships with high-value cus-tomers. The key metric is customer quality and the depth of the relationship. These accounts are increasingly criti-cal for data gathering, credit underwriting, and providing frequent customer touchpoints. The strongest banks are investing heavily in good customer on-boarding and up-selling processes, and they are increasingly pricing for re-lationship value. Indeed, the growth of high-quality cur-rent accounts is more critical than ever to building primary, multiproduct banking relationships.

Unsecured Credit. Traditionally, cards and loans were cross-sold to checking account, deposit, and mortgage customers—at increasingly thin (and sometimes nega-tive) margins—to solidify the banking relationship.1 They were vehicles for lucrative fee-income and payment-pro-tection premiums. Today, they are a source of wider mar-gins in the core product itself, funded by the liability side of the balance sheet. Payment protection income has dis-appeared in many markets, seriously challenging the fun-

Financial institutions

realize that they have

to raise their game

in terms of overall

reliability.

1. This has not generally been the case in the U.S. market, where unsecured credit has traditionally been managed in product silos or monolines.


damental business economics. As banks attempt to rec-tify the loose credit standards of the recent past—and the havoc those standards wrought—they are placing greater emphasis on managing underwriting risk. Banks are in-vesting heavily not only in better front-end scorecards but also in more differentiated treatment of customers going through the bad-debt process.

Mortgages. In many markets, mortgages used to be a source of margin from long-standing customers and a means of acquiring new customers. Losses were minimal as housing prices escalated. Today, mortgages are a game of microsegments for new customers—constrained by funding and compromised by risk, but with wider mar-gins across the book. There are some early signs of in-creasing competitive pressure from the stronger players, but it will take several years for sufficient balance-sheet capacity to wear away today’s high spreads. Regulatory intervention and more-stringent risk processes have re-moved many of the market’s excesses. We expect this to remain the case in the medium term but are equally con-vinced that the cycle will return as memories fade.

SME Banking. In the recent past, small- and medium-enterprise (SME) banking was a transactional and lend-ing-based business with very low loan losses, low funding costs, and many options for highly profitable growth in specialized lending. The key metric was book size. Today, SME banking remains attractive as a relationship-based, full-service business. Deposit gathering is highly compet-itive, but specialist lending offers high returns in ex-change for high risk. In a balance-sheet-constrained world, skillful SME lending can be a very powerful source

of deepening customer relationships and value—both now and in the medium term. In the United States, how-ever, there are reasons to fear a rapid return of the credit cycle as banks look for scarce opportunities to gather as-sets and the most creditworthy businesses remain reluc-tant to borrow.

Obviously, Basel III will have an impact on the future characteristics and dynamics of certain retail-banking products.

In order to respond to the new environment in retail banking, the best players will need to push their per-formance to the next level along two broad dimen-

sions: operational excellence and customer excellence. In-deed, it will become increasingly critical for retail banks to have highly efficient yet flexible operating models amid continuing margin pressure. At the same time, banks will need to achieve a far higher level of customer- centricity, trustworthiness, and overall service excellence if they hope to thrive in the post-crisis environment. In the next two chapters, we explore these dimensions in detail.


The Boston Consulting Group recently con-ducted an operational-performance bench-marking of 12 of the top 30 retail banks across North America, Europe, and Asia-Pa-cific. Altogether, these 12 banks account for

roughly 450 million customers, 51,000 branches, and more than $14.5 trillion in assets.

Each bank is unique—a product of its own history and the nature of its principal markets. But a number of im-portant insights can be drawn from the ways in which these institutions approach processes and productivity and how these approaches influence their overall retail-banking strategies.

While typical operational-benchmarking exercises focus on back-office processes and metrics, our effort took a comprehensive, end-to-end perspective. This exercise, along with our client work for financial institutions glob-ally, has enabled us to identify three key levers that banks must utilize in order to achieve operational excellence. They must streamline the organization, develop efficient and effective processes, and improve overall end-to-end performance. We have also found that these levers must be supported by some core, underlying capabilities that create winning conditions.

Overall, our benchmarking revealed a wide range in per-formance among banks, reflecting the vast potential for improvement. Below, we first examine the profile of a process and productivity leader. How would such a bank look in terms of these three levers and the necessary un-derlying capabilities? We then look at two players that have used a narrow set of sublevers to push the boundar-ies of excellence, allowing them to create and export stra-tegic differentiation.

The Profile of a Process and Productivity Leader

Our benchmarking indicates that no bank has achieved excellence across all three levers and underlying capabil-ities. But top retail banks are striving for this goal.

A Streamlined Organization. In the best banks, a large majority of employees are dedicated to customer-facing sales and service activities. (See Exhibit 3.) Processing is centralized in a small number of centers across regions. Sales, product, and operations management functions are lean, keeping overhead expenses extremely low. These banks carefully investigate subscale, repetitive, and nondifferentiating activities for sustainable outsourcing possibilities. They explore in-sourcing for activities where scale provides a competitive advantage. And when reli-able, mature vendors are available, they near- or offshore some activities to low-cost locations.

Efficient and Effective Processes. Process and produc-tivity leaders embrace a high level of industrialization, characterized by simplified, standardized processes that maximize the number of new accounts and loan deci-sions per operations full-time equivalent (FTE). (See Ex-hibit 4.) Activities are shared across products and chan-nels, typically starting within product families. Processes and data flows are designed for quality assurance of in-puts, as opposed to repetitive quality-control checks. Proc- essing is channel and location agnostic.

The best banks also possess a high level of process auto-mation that features straight-through processing (STP). Up to 90 percent of new-account openings and 70 percent of consumer unsecured-credit originations are processed with STP. Such banks are capable of automated decision

Operational ExcellenceBecoming a Process and Productivity Leader


making at the point of interaction with the customer. Workflow-enabled processes with prepopulation of re-quired documentation, intelligent validation, skill-based routing, and minimized data entry are the norm.

End-to-End Performance Focus. Process and productiv-ity leaders focus on end-to-end sales and service effec-tiveness, including excellence in new-account openings and loan approvals, applying a holistic approach to streamlining processes and interfaces across the frontline and operations. (See Exhibit 5.) This approach includes using the tools and processes necessary to enable front-line staff to focus on customers (instead of on low-value administrative tasks). It also fosters efficient multichan-nel lead generation and routing, as well as scripted and systematic approaches to sales—with an emphasis on products that generate “stickiness.”

Such banks leverage common sales and servicing plat-forms, including customer relationship management (CRM) systems, to deliver relevant information succinctly and with minimal complexity. Customer service is effi-cient and effective, with consistent, high-quality, “first time

right” interactions across channels. These interactions are codified in explicit service-level agreements, differentiated by client segment where appropriate. (See the next chap-ter for a discussion of overall customer excellence.)

Underlying Capabilities That Create Winning Condi-tions. Process and productivity leaders create winning conditions inside their organizations that enable opera-tional excellence. They manage down business complex-ity in order to reduce fragmented demands on resources and systems, shorten time to market, and facilitate sales force training. They routinely examine and prune their product portfolios. They achieve a high degree of opera-tional harmonization across channels, business units, and regions.

Another way that these banks foster winning conditions is through rigorous and systematic performance manage-ment across sales and operations. The result is a produc-tivity culture within the bank that supports efficient growth. This involves setting expectations clearly and succinctly, adopting highly transparent and continuous performance monitoring, and developing incentive

0

20

40

60

80

100FTE activites (%)1

Best2

Median

Best-to-worstspread

Sales and service Operations Management

1.5x 3x 4.5x

69

82

24

10 73

Exhibit 3. At Top Banks, the Majority of FTEs Are Customer Facing

Source: BCG Retail Banking Process Performance Benchmarking 2010.Note: Totals do not add up to 100 because no one bank had the best performance in all of the three activities.1Full-time equivalents do not include corporate functions, such as risk, finance, HR, and IT.2“Best” is defined as the highest level of performance in each standalone activity.


schemes that are both simple to understand and based on aggressive yet realistic targets. Robust training and coaching are part of the culture and are tailored to spe-cific resource needs.

Different Ways of Differentiating

Achieving operational excellence using the three levers and underlying capabilities described above is a journey that all the banks in our benchmarking survey have em-barked on. They have taken varying paths and have pro-gressed at different speeds. And for all of these institu-tions, the journey is far from complete.

For example, most banks have made significant progress in streamlining their organizations. The same goes for im-proving process efficiency and effectiveness, although no banks have been able to improve consistently across product portfolios and product life cycles. In addition, while many banks have increased their focus on end-to-end performance, achieving a truly holistic balance re-mains a challenge.

One reason for this is that most banks are unable to measure end-to-end performance using current metrics, which often focus on the frontline and back office as silos. Similarly, a number of institutions have begun to estab-lish the underlying capabilities critical to success, but few

have put enough emphasis on reducing business com-plexity and pruning the product portfolio.

At the same time, a very small number of retail banks—in addition to making progress at becoming process and productivity leaders—have chosen to concentrate on a highly focused subset of these levers, using IT and opera-tions to create strategic differentiation. They have come up with a winning formula—typically developed in their home market—and applied it to their cross-border, inter-national activities, reinforcing their competitive advan-tage and creating global scale. Two examples are the “in-tegrated multichannel-sales champion” and the “CIR champion” described below.

The Integrated Multichannel-Sales Champion. This in-stitution opted to differentiate itself through superior sales productivity with strong integration across chan-nels—even though it was still catching up in terms of process and productivity performance. The bank has achieved a high level of sales channel integration, includ-ing common IT and customer-information databases, and has enabled a shared-contacts infrastructure. It places a heavy emphasis on multichannel cohesion and navigation.

What is more, this bank optimizes the division of sales-oriented value-chain steps across channels. For example, branches focus on product sales. Call centers arrange ap-

Exhibit 4. Industrialization Is Critical to Good Performance

Source: BCG Retail Banking Process Performance Benchmarking 2010.

Metric

Best

Median

Best-to-worst spread

New accounts per operations FTE in account opening (and decision making on loans) per year

Current/transaction accounts (thousands) 31 8 5x

Real estate secured loans (thousands) 0.4 0.2 4x

Consumer unsecured loans (thousands) 3 2 3x

Existing accounts per operations FTE in post-sale administration per year

Current/transaction accounts (thousands) 29 19 6x

Real estate secured loans (thousands) 3 2 4x

Consumer unsecured loans (thousands) 11 7 5x


pointments via shared calendars with branch employees and can handle sales of simple products. The online chan-nel provides product information and, increasingly, sales and servicing of core banking needs. The bank has a strong multichannel CRM infrastructure that provides comprehensive and consistent client knowledge for effi-cient contacts across all channels.

The CIR Champion. This bank has zeroed in on cost-to-income ratio (CIR), driven by IT and operations. It has become a leader in organizational streamlining and im-proving process efficiency. The bank focuses on central-ized processing. All new-account openings, for example, are processed at the Europewide (not the individual country) level. The bank concentrates its workforce in a

limited number of hubs, and its single, core IT platform supports standardized, industrialized processes across markets.

In addition, the bank’s organization structure supports this strategic differentiator. Management of IT and opera-tions is integrated under a fully empowered CIO. Global shared services across IT and operations capture syner-gies and share knowledge. The bank’s globally integrated model is rigorously replicated for every acquisition.

It is worth noting that this bank does accept a certain number of tradeoffs in implementing its centralized, in-dustrialized model. Laserlike focus on CIR can create wrinkles in the overall customer experience, such as re-

Exhibit 5. Leaders Focus on End-to-End Performance

Source: BCG Retail Banking Process Performance Benchmarking 2010.1Sales FTEs include branch customer-facing advisors and nonbranch-based sales FTEs (such as agents, hunters, and third-party and mobile sales forces).

Metric

Best

Median


New accounts per sales FTE per year1 800 400 7x

Sales conversion per inbound call (%) 10 4 5x

Customer attrition rate (%) 4.5 6.0 2x

Transaction/ current

accounts

Real estate secured loans

Consumer

unsecured loans

Time from first customer touch-point to account

readiness

Time from application to

conditional approval

Time from approval to funds available

Loans booked

(% of total applications)

Time from application to funds available

Loans booked

(% of total applications)

Best < 20 minutes < 1 hour < 1 hour 80 < 1 hour 80

Median < 40 minutes Same day > 3 days 70 > 3 days 50

Sales effectiveness and retention

Service activities

New-account openings and loan approvals

Metric

Best

Median


Teller, wait time (minutes) 2 4 4x

Call center, call wait time (minutes) 0.5 1.0 5x

Call center, call-handling time (minutes) 2.5 4.0 2x

Call center, first-call resolution (%) 95 85 1.3x


duced online functionality after an acquisition or a thin-ner product range following standardization of the port-folio. Also, a centralized, global model combined with tight cost controls can delay important strategic invest-ments across the enterprise.

The banking industry’s recent focus on managing out of the crisis proves that cost reduction alone is not enough. Succeeding in the new environment

clearly requires excellence in process and productivity. Although our experience with clients and our bench-marking survey show that none of the top retail banks

has yet become a full-fledged leader in this area, the scope of the opportunity is leading many banks to em-bark on multiyear efforts to raise their operational game. Cutting-edge banks have made such initiatives a high pri-ority, pushing them to the top of their leadership agendas.

We strongly believe that banks should continue this en-deavor. Better still, they should accelerate their efforts and investments in order to reach a high level of opera-tional excellence as quickly as possible. Those that do will not only reap vast benefits but also create the ability to sustain them.


We have already gone on the record regarding a number of steps that re-tail banks need to take in order to win in the postcrisis era. (See The Near-Perfect Retail Bank, BCG White

Paper, November 2009.) But as the industry has evolved, the need for further actions has become clear. In fact, it is not sufficient for leading institutions to be merely “near perfect” in terms of customer excellence. They must become “truly perfect”—or as close to that ideal as possible. Initiatives undertaken to achieve this goal are highly relevant not only for top-tier banks seeking to take their game to the next level, but also for second- and third-tier banks, which should analyze their strengths and weaknesses relative to leading players in order to identify best practices and key priorities for gradually raising their performance level. For leading banks, however, the first step is to ensure that they main-tain their top-tier status.

The First Step: Remaining a Near-Perfect Retail Bank

Much of what is required to remain a near-perfect bank will be familiar. What distinguishes such banks from their less effective peers in achieving customer excellence is at-tention to detail and quality of execution.

Make marketing meaningful. Effective marketing cam-paigns drive traffic to all channels and do not waste time boasting about how large, wise, international, or steeped in tradition the bank is. Best-practice banks carry out marketing that means something—sending crystal-clear messages about the benefits they can provide that will make a tangible difference in people’s lives. These ben-

efits may relate to cost, service, convenience, transparen-cy, high rates on savings accounts, or other features. Top-tier banks emphasize simple, targeted relationship propositions—the more targeted, the better. They devel-op creative marketing initiatives that focus on specific customer segments. For instance, affluent women and ethnic minorities sometimes require a specialized ap-proach to their financial needs. Relatively few institutions have developed products and services specifically de-signed for such segments, but many that have done so—and marketed their offerings intelligently—have been glad that they did. (See Leveling the Playing Field: Upgrad-ing the Wealth Management Experience for Women, BCG White Paper, July 2010.)

Optimize branch networks. There are some basics that too many banks seem to ignore. For instance, banks need to redesign and develop branch networks in order to achieve just the right density in both urban and subur-ban locales, with carefully chosen formats aimed at max-imizing visibility and attracting both established custom-ers and passersby. Interiors should be light and bright with clear, user-friendly signage. A greeter should always be on duty to welcome and direct customers, to help max-imize utilization of sales and service personnel, and to drive usage of ATMs, IDMs, telephones, and Internet points. Flexible formats with extended hours of opera-tion, sometimes staffed but otherwise consisting of digital self-service kiosks, can offer 30 to 50 percent more conve-nience to customers.

Drive sales force effectiveness. Sales force diaries should be 80 percent prebooked, with appointments con-firmed by phone the previous day. A daily process and rhythm at each branch should motivate employees to fill those diaries, to manage the “show rate,” and to develop

Customer ExcellenceReaching the Highest Level


well-thought-out sales pitches that lead to high conver-sion rates and multiple product sales at each interaction with potential customers. Highly automated pricing dis-ciplines linked to specific products, with clearly targeted returns, should be adopted—as should preapproved, easy-to-acquire offers to existing customers.

Enable seamless multichannel naviga-tion. This is a must, not a choice. And it is not exactly a new idea: many retailers have been multichannel since the nine-teenth century. But the bar is rising, and the gap between the best and the rest is widening. Customer navigation across channels—principally, branches, the Inter-net, and call centers—should, above all, be simple and easy. There should be no more than one log-in process for safe and reliable identification and verifica-tion, and one telephone number for customer assistance. Digital devices should involve a simple user interface that lends itself to intuitive navigation. Extra bells and whis-tles that can add complexity should be avoided. The key is for channels to support, not compete with, one another and for customer pathways to be obvious. Also, not every function for every product in every channel must be available 24-7.

Set clear expectations and deliver on them. Service standards that drive true satisfaction, retention, and ad-vocacy are built on deep insight regarding the touch-points for each product and process that matter most to the customer. Banks should strive for high levels of first-contact resolution (above 80 percent), while acknowledg-ing that a single handoff can be more effective for certain products. Most customers, for example, expect quick re-sponses about recent transactions or balances from their first call-center contact. They also expect to be able to shift funds between accounts in order to pay a credit card bill. But they do not necessarily expect to be able to pay down their mortgage or open an investment account without being passed on to a specialist. A defining fea-ture of top retail banks is that they set expectations with respect to service levels and turnaround times—and meet them 99.999 percent of the time (the Six Sigma goal).

Streamline the organization. Banks need to be stream-lined not only on the operations side but across the over-all organization. The best banks are characterized by a

small number of layers—seven, at most—and wide spans of control of eight or more. Such banks have relatively low overhead. This type of structure can thrive if there are energetic and motivational leaders who promote a high degree of single-point accountability and clear deci-sion rights. Local empowerment, more-direct lines of communication, and faster decision making are all criti-

cal and help reduce complaints as well as improve customer outcomes.

Completing the Journey: Achieving Truly Perfect Customer Excellence

We have observed that most leading banks pursue some of the above goals and that a handful of the very best institutions pursue them all. But in virtually ev-ery case, execution is less sharp than it could be. Indeed, the CEO of one top retail bank once commented that he’d rather have decent execution than a brilliant strategy any day.

So what must top-tier banks do to move from being near perfect to truly perfect? Acknowledging that no bank can do everything flawlessly and that some choices invariably have to be made, we believe that even the best retail banks can take steps toward significant improvement in customer excellence. Sharper execution, which we see as the great differentiator, is the key.

Combine sales and service excellence with low costs. Many banks that forged their identities by emphasizing just one dimension of the overall operational model have come and gone. For example, there was a time not so long ago when a lot of banks tried to be “sales machines” that embraced an aggressive sales culture. Others concen-trated on service and convenience. Still others flew the low-cost banner. Indeed, cost has always been something of a sine qua non for retail banks. Those that were not highly efficient could not sustainably compete. The prob-lem was that low-cost players often had high levels of churn or attrition owing to poor customer service.

Today, however, it is no longer an option to concentrate on just one piece of the puzzle. Truly perfect retail banks know that they will have to fit all the pieces together if they hope to achieve real competitive advantage. They will need to excel at sales force effectiveness, have smooth

Customer navigation

across channels

should, above all, be

simple and easy.


service processes, run efficient operations in engineered process factories, manage wide spans of control, and maintain low overhead, all at the same time—and they will have to do it all smartly.

Take multichannel excellence to the next level. Tak-ing multichannel excellence to the next level goes beyond making sure that channels are not compet-ing with each other and that access to cus-tomer information is open and unified. It also means monitoring channel usage and using the data gathered to push leads and close the loop on them. It means shifting from a passive approach—merely display-ing products “on the shelf”—to proactive, sales-oriented, multichannel lead manage-ment. Among today’s leading banks, Lloyds Banking Group does this particularly well.

In the future, banks will need to direct leads and informa-tion flow regarding sales and service transactions to their customers’ preferred points of interaction. And that means every channel—branches, call centers, mobile banking, and the Internet. It is also important to send co-herent and consistent messages via direct mail, mobile sales forces, and authorized agents, as well as through print and TV advertising.

Multichannel excellence is also about providing choice, convenience, and value for the customer—including eas-ier access, reduced purchase risk, and better price trans-parency. Banks can gain a higher share of wallet, in terms of both frequency of purchase and ticket value, improv-ing cost efficiency through higher capacity utilization across channels. A sharper brand image and better cus-tomer acquisition are part of the overall picture.

What is more, boundaries are blurring because consumers don’t typically “belong” to any one channel. They tend ei-ther to find what they are looking for online and then buy offline—or the reverse. They want to “learn, buy, and use” across several channels. Thus, a sophisticated bank will present a personalized offer of a preapproved credit card in the right channel at the right time. If the customer ex-presses interest, the bank will then offer a selection of ful-fillment channels on the basis of the customer’s historical preferences and behavior. But this approach only works if the navigation pathways are built in such a way that the customer can easily complete the process.

Take another example. If a customer downloads a mort-gage application to complete offline, the bank should make sure to capture the contact details. Then, if the form is not submitted within a certain period, the bank can contact the customer to offer help—which can also serve to deepen the relationship.

Prepare for the digital-banking deluge. Over the next five to ten years, there will likely be an explosion in digital banking built on the growing popularity and func-tionality of the latest generation of hand-sets such as the iPhone. In our view, the increasing use of these devices will not dramatically reduce traffic in branches. In fact, as in other retail industries, digital

handsets can be leveraged to attract desirable customers who need advice—especially about complex products or overall financial planning. At the very least, there could well be a big prize in terms of “prequalifying” custom-ers—making sure that they are ready to have the conver-sations about their financial needs that banks think they should be having—and thereby increasing the effective-ness and reducing the unit cost of each interaction.

That said, the growth of digital banking could significant-ly reduce volume and change the nature of interactions at call centers, and perhaps over the Internet as well. But digital banking is likely to increase the overall number of interactions between customers and their banks, so it may not lead to significant cost reduction in other chan-nels. Banks must develop a careful and far-reaching strat-egy for capturing the long-term opportunity that digital banking represents. Among current institutions, Bank of America appears to be ahead of the pack in this arena.

As for social networking, those banks that have been brave enough to embrace this trend are already reaping the benefits of rapid, candid feedback from customers. Some banks are discovering that their customers trust the recommendations of their friends more than they trust the bank—but to good effect. A few leading players are starting to experiment with location-based services, ex-ploiting the capability to pinpoint the geographic position of mobile devices.

Create a truly differentiated customer experience. The truth is that banks are generally quite similar in terms of customer service—in most cases, not very good.

Over the next five to

ten years, there will

likely be an explosion

in digital banking.


This state of affairs is often made worse by setting expec-tations that cannot consistently be met. Obviously, as dis-cussed above, knowing which touchpoints matter most to customers, keeping prices as low as practicable, and mak-ing identification and verification processes simple and easy are critically important. So are maintaining one “go to” phone number, resolving problems fast and with min-imal handoffs, and identifying and making the most of those all-important “moments of truth” that shape customer opinion.

But the truly perfect retail bank of the fu-ture will be more proactive. It will warn customers of potential overdraft scenarios. It will help them figure out whether they can afford to buy the car or house that they covet and suggest an appropriate level of savings based on their income. It will recommend moving to bet-ter tariffs or rates on its products—perhaps turning a very minor pricing issue into greater customer loyalty. It will encourage customers to plan all of their financial af-fairs in a one-stop shop.

In addition, the truly perfect retail bank will not repeat-edly ask customers for (extra) identification, proof of earnings or address, or the ages of their children, because it will have captured, calculated, and validated all the in-formation it needs to serve the customer—unobtrusively and respectfully—at the outset of the relationship. It will make decisions on the basis of the complete relation-ship—not just one product. For example, modifying an existing account or opening a new one will be as simple as a click on a handset or a yes or no at a branch or on the phone. No paperwork, no signature, no hassle.

What is more, advice—traditionally provided face-to-face or on the phone—presents another real opportunity for differentiation. In the future, we expect to see a lot more self-help. Some leading banks have successfully intro-duced opportunities for their customers to learn and even to be entertained. Such offerings can range from simple how-to guides to sophisticated comparisons with people in other demographics or professions—how they tend to save, invest, or finance their purchases most effectively.

Turn a better customer experience into a deeper re-lationship. It is only by being fair, transparent, and truly committed to helping customers that retail banks can earn the right to handle all or most of a customer’s busi-

ness and earn his or her trust. Obviously, the primary checking or current account is the anchor of the relation-ship. Because of the cross-selling opportunities these ac-counts present, customers who hold them are up to 10 times more profitable than those who do not—and up to 25 percent less likely to have overdraft or default difficul-ties. By knowing when salaries and bonuses are typically

paid in and when significant payments for mortgages, car loans, and other expenses are usually paid out, and by factoring in the pattern of everyday expenditures, banks can help customers manage their fi-nances more effectively.

Truly perfect banks will develop highly re-fined access to behavioral information via

customers’ use of direct-debit standing orders and debit cards. They will be able to observe turnover, average min-imum and maximum balances, and patterns of channel use, all of which they can leverage to make useful and rel-evant offers in a convenient and nonintrusive manner. In the past, some banks used behavioral information to their customers’ detriment, but the future will be all about improving the customer relationship.

Capture and truly leverage customer data. This initia-tive may be the most important of all. Without it, differ-entiating the customer experience and deepening custom-er relationships are much more difficult. Of course, it’s no revelation that banks possess copious amounts of data. What is less well known is that most banks struggle might-ily to glean truly valuable intelligence or insight into their customers. Banks need to capture comprehensive custom-er information, update it continually, and understand it in a holistic way that builds in underwriting risk and appro-priate pricing. Over the past decade, a handful of banks—among them, BNP Paribas—have painfully (but fruitfully) taken the necessary steps to set themselves apart in terms of capturing and leveraging customer data. They know which type of information they need, harvest it carefully, store it safely, keep it current—and, above all, use it pro-actively to cross-sell, improve the customer experience, and deepen relationships.

By developing such built-in intelligence, top-tier banks will not only know which of the bank’s own products a customer holds, but also, by analyzing payment traffic, have a fair idea of what that customer holds in other in-stitutions. Such banks will understand the customer’s

The truly perfect retail

bank of the future will

be more proactive.


preferences and patterns of channel use and be able to propose financial solutions that are reliable and trustwor-thy in the eyes of both frontline colleagues and custom-ers. One caveat is that in some markets, the extent of per-missible data collection may be restricted by regulation.

Break the tradeoff between procedures and people. In the past, some banks developed models based explic-itly on people and the roles and authority that they have—basically, a bottom-up approach. Other banks de-veloped models that were much more procedural and top-down. But as customer-centricity comes increasingly to the fore, the best banks are trying to combine the best of both models.

On the sales side, this implies highly disciplined proce-dures that guide the actions of advisors. Such procedures do not allow them much freedom to decide, for example, when or how to conduct a client meeting. Yet, at the same time, banks are granting advisors wider latitude in con-ducting client conversations, depending on their own ex-pertise, the client’s profile, and other factors. The same is true in call centers, where some banks have stopped fo-cusing on call duration and are placing more emphasis on customer satisfaction. Broadly speaking, the number of years that banking staff spend in client-facing positions may be on the rise—which would greatly promote cus-tomer excellence.

Use customer excellence as an antidote to regulation. Many, if not all, retail banks are genuinely afraid of regu-latory intervention. In our view, customer excellence in retail banking could be the ultimate defense.

Due-diligence steps such as “know your customer” just scratch the surface. Banks that take the time to thorough-ly document their customers’ profiles—such as their de-mographic characteristics, attitude toward risk, product history and preferences, channel behavior, and financial boundaries and limitations—and that continually update such information may find themselves less troubled by regulation because they really do know their customers and act in their interests, which is what regulators care about most.

Such banks aim to educate their customers first. They ad-vertise honestly and don’t gouge. Their products do what they say “on the label” and have a transparent and fair pricing structure, without cross-subsidies—all leading to a high level of “cross buying,” as opposed to cross-selling. They enable simple account opening and servicing that, ideally, is fully automated.

Banks that embrace these initiatives will have fewer complaints and regulatory concerns, including hindsight risk. Their bywords are simplicity, clarity, and efficiency for all.


Although this report is focused on broad-based global trends, we recognize that the dynamics of local and re-gional retail-banking markets have varied significantly during the crisis and continue to show a wide range of specific characteristics. In this Appendix, we briefly ad-dress some of these dynamics on a market-by-market basis.

Australia

Australian banks have come through the financial crisis in better shape than most of their global peers, supported by a strong domestic economy and housing market, a sound regulatory framework, prudent risk management, and government guarantees of customers’ deposits and banks’ wholesale funding.

Mortgage specialists, which have relied heavily on securi-tization, have largely exited the market, and many for-eign banks have scaled back their activities, particularly in commercial property. As a result, the major Australian banks have consolidated their leading positions. The rela-tive strength of the Big Four banks has enabled them to pursue organic and inorganic growth opportunities in support of increasingly differentiated strategies, specifi-cally, a focus on Asia (Australia and New Zealand Bank-ing Group), wealth management (National Australia Bank), and consolidating domestic customer franchises (Commonwealth Bank Group and Westpac Bank).

However, some significant headwinds exist for the Aus-tralian banking sector. These include potential household and business deleveraging, historically high property pric-es—among the world’s highest in real terms—renewing interest from some foreign banks in the Australian mar-

ket, pressure on deposit margins, and continued reliance on wholesale funding.

Canada

Canada’s leading retail banks demonstrated a high de-gree of performance stability during the financial and economic crisis. While growth rates in many product cat-egories have been dampened somewhat and loan loss provisions have increased, the relative impact of these changes has been small compared with that in many oth-er countries. Moreover, thanks to continuing cost-manage-ment discipline and focused resource management, Ca-nadian banks are poised to deliver robust results going forward.

The primary domestic focus of Canadian retail banks is improving the customer experience and continuing to create deeper, multiproduct relationships. Better execu-tion and successful, targeted strategies in high-growth seg-ments and local markets by some banks have resulted in market share shifts. Several niche, subprime players have withdrawn from the market or reduced their presence, with some of the volume migrating to the balance sheets of established banks.

Broadly speaking, Canadian banks have gained signifi-cant confidence and enhanced their international reputa-tions. Relatively solid balance sheets coupled with a strong currency is helping these banks position them-selves for more aggressive strategies in global markets, including the United States. Given their improved global status and focus on growth, several Canadian banks are adding to their capabilities by attracting experienced tal-ent from other markets.

AppendixFrom Global to Local—

Trends in Specific Retail-Banking Markets


China

The financial health of Chinese banks remained relative-ly stable throughout the global financial crisis. Retail banking revenues have showed moderate growth, but their relative share of overall revenues has decreased owing to a massive surge in corporate and state-led busi-ness driven by the government’s economic stimulus program.

In 2009, retail banking profit in China declined. This was due both to constraints on top-line growth and to an in-creased cost base. In addition, income growth and profit-ability were affected by a series of regulatory measures aimed at cooling off an overheating economy. These measures included increased deposit-reserve ratios and restrictions on loan growth. Impairments dropped back to precrisis levels, and nonperforming loans remained rel-atively low in 2009.

As Chinese household wealth and the number of million-aires continue to rise, leading local banks have been ac-tively developing their wealth-management and private-banking offerings. There has also been rapid growth in credit cards and consumer finance, as well as the launch-ing of a few bancassurance joint ventures.

Going forward, the Big Five Chinese banks, along with China Merchants Bank, should continue to hold domi-nant positions, while some smaller retail-banking players will try to differentiate themselves through innovation in products and alternative channels. Large, established for-eign banks will continue to actively expand their branch footprints, and more foreign entrants will likely arrive and try to ride the wave of growth in the Chinese con-sumer-banking market.

France

Retail business represents roughly two-thirds of global revenues for French banks, with strong variations among players (from around 50 percent up to 100 percent). With-in retail banking, French domestic customers account for more than 60 percent of all activity, again with a wide range among banks (from about 30 percent for the most international banks to 100 percent for the local post bank). A small number of institutions dominate the market.

Within this context, top French retail banks have demon-strated strong resistance to the financial crisis, managing to increase both revenues and profits. Revenues, on aver-age, grew by 3 percent per year between 2006 and 2009 (although they decreased by 2 percent in 2008). In addi-tion, cost containment initiatives contributed to an over-all increase in profitability for most banks during the crisis.

Nonetheless, French retail banks will face regulatory chal-lenges that could affect overall profitability. For example, despite good results from stress tests, new requirements from Basel III could affect returns and increase competi-tion for deposits. In addition, the evolution of local regu-lation might influence margin levels and the current busi-ness mix of French banks.

Germany

German retail banks enjoyed relatively stable revenues throughout the financial crisis. Manageable private-household debt and limited risk in real estate financing contributed to this stability.

Still, average 2009 operating profit for German retail banks was lower than 2002 levels. Moreover, revenues have now dropped to precrisis levels and are sinking slightly. But costs are declining, too—a sign that German banks have leveraged the crisis to improve their efficiency.

Specialized institutions and direct banks with sparse branch networks have not only profited from the crisis and increased their revenues; they have also become star performers, achieving the highest average return on as-sets with low average cost-to-income ratios (CIRs) for the years 2001 through 2009. Some of these players have used their efficient processes and lean cost structures to prevail in the market.

Many traditional branch-based banks have undergone re-structuring initiatives, and several mergers aimed at in-creasing back- and head-office efficiencies are in progress. At the same time, savings banks and mutuals—perceived as safe havens—enjoyed rising deposit volumes through-out the crisis.

The key challenge over the next few years will be to con-tinue generating revenues with deposit products—as


long as the flat interest-curve persists—and to reignite growth models.

India

Banks in India stayed largely insulated from the global crisis. However, the mild slowdown in the economy dur-ing the recession was manifested by rising nonperform-ing assets in unsecured loans. Today, most banks and nonbanks have recalibrated their unsecured-lending strat-egies. Overall, the prospects for sustained high economic growth in India look bright, and retail banking is poised for its second round of spectacular growth.

Looking ahead, the dependency ratio in India will con-tinually decline over the next two decades, and the sav-ings rate is expected to rise. The mortgage market will benefit from the demographic dividend and is expected to surpass $900 billion by 2020. Rapid concentration of in-come in the top 5 percent of households will drive the wealth management market to ten times its current size.

At the same time, millions of households will rise out of poverty to form the largest customer segment for banks. In order to serve this segment profitably, financial institu-tions will need to adopt low-cost business models and pursue rapid expansion using smaller, cost-effective branches as well as innovative technology. There has al-ready been a significant regulatory push to use nonbank organizations as partners for low-cost banking activities. Moreover, there is a threat of a margin squeeze stemming from the deregulation of savings bank rates. Many banks are exploring initiatives to enhance productivity and im-prove branch throughput.

Internet banking, which has otherwise not seen much adoption, will experience a revolution as mobile phones become the primary channel of Internet access for the majority of Indian households.

Italy

In Italy, the effects of the financial crisis moved progres-sively from the realm of financial markets into the real economy in 2009, dramatically affecting the cost of risk, hindering revenues, and hurting the overall performance of the retail banking sector.

Retail banks showed lower margins on average and re-ported negative revenue and pretax-profit growth in 2009. Government regulations and a customer shift toward less risky investments were contributing factors to the down-ward trend. Operating costs were fairly stable. No re-bound in profits is expected in 2010.

When it comes to loans, retail banks reported slightly lower credit volumes in 2009, owing mostly to increased customer defaults (chiefly among small-business owners). The deleveraging trend witnessed in some countries has not been seen in Italy, as Italian consumers have long been relatively savings oriented. Credit volumes are ex-pected to be up in 2010, in line with recovering consumer confidence.

During the height of the crisis, small and local players such as cooperative banks gained market share, acceler-ating a trend already present in the precrisis years. These banks have leveraged such strengths as entrenchment in local communities, closeness to customers, long-tenured relationship managers, and rapid response to queries and problems—as well as to credit requests. Larger Italian banks have noticed this success and have started to move accordingly, reorganizing their retail operations to opti-mize processes while focusing on the “local” factor.

Latin America

Current opportunities for banks in Latin America are vast, especially in the retail sector. In most countries, ris-ing levels of prosperity will reduce the number of un-banked people. Similarly, the rise of an affluent class will increase demand for retail banking products. The mar-ket’s strength is illustrated by the fact that Latin Ameri-can banks accounted for 6.9 percent of the global bank-ing industry’s market capitalization in 2009, up significantly from 5.5 percent in 2008.

Brazil. Brazil’s banking sector, the largest in Latin Amer-ica with more than $2 trillion in total assets, weathered the crisis well. Market leaders have consolidated their po-sitions in the ranks of leading banks worldwide as mea-sured by market capitalization, and the retail sector has been a key element in their success.

Credit products will continue to be the engine of growth—perhaps not at the precrisis pace, but at double-digit rates


for the foreseeable future. The greatest opportunity is in mortgages, which have boomed in line with declining in-terest rates. We expect mortgage volumes, starting from a very low base, to reach 10 to 12 percent of GDP over the next ten years.

Brazilian banks are also growing in a geographic sense. Banco do Brasil has bought a bank in Argentina and ac-quired a license to operate in the United States. It has also, along with Bradesco and Banco Espírito Santo, formed a joint venture to pursue opportunities in Africa. In addition, Itaú Unibanco has grown throughout Latin America, notably in Argentina and Chile. We expect to see more geographic expansion by Brazilian banks.

Mexico. The Mexican banking sector, the second-largest in Latin America, performed well during the crisis and is continuing to do so. Consolidation has been robust: the top five banks in the country now account for roughly 80 percent of the market.

The retail sector, representing close to 55 percent of all banking revenues, is growing strongly. The number of branches is expanding at 5 percent annually, with an add-ed capillary coming from the corresponsalias, through which all major retailers provide basic banking services for a fee. Deposits are growing at precrisis rates, and con-sumer credit has started to recover. Nonperforming loans seem to be stabilizing and banks are starting to lend again. Smaller single-purpose financial firms (such as the sofoles, or niche mortgage lenders) were harder hit by the slower mortgage market, providing an opportunity for large universal banks. But mortgage markets are getting healthier, with a high concentration of loans in the social sector guaranteed by the government.

Retailers that have acquired formal banking licenses are the new entrants in the market, but they have yet to prove their ability to attract the nearly 45 percent of the Mexican population that remains unbanked.

Chile. Measured by market penetration, Chile has the most developed banking sector in Latin America—a sec-tor that maintained strong profitability throughout the crisis. As of June 2010, the overall return on equity (ROE) of the banking sector was a very healthy 20.75 percent. Credit volumes are growing at more than 7 percent per year. In addition, retailers continue to play an important role, having developed leading positions in the cards busi-

ness and in cross-selling into other retail products such as consumer lending, insurance, car loans, and mortgages. With the Chilean economy entering an expansionary cy-cle, retail banks should benefit. Given their strong fund-ing and capital, we expect continued growth and increas-ing penetration.

Argentina. The Argentine banking industry is emerging from a challenging decade. Banking penetration in 2010 will end up well below pre-2001 levels—and also below penetration rates in Brazil, Mexico, and Chile. Yet there has recently been a remarkable turnaround in profitabil-ity driven by the recovery of Argentine sovereign bonds. With strong liquidity and solvency indicators, and taking advantage of the resurgence in GDP, Argentine retail banks are better prepared to ride the next growth wave. An ongoing challenge will be restoring the confidence of the affluent segment, much of which continues to book savings predominantly offshore.

The Middle East

Overall, Middle Eastern banks were less affected by the financial crisis than their international peers. Retail banks in most countries were able to generate double-digit growth rates between 2005 and 2008, led by U.A.E. banks, which had average annual growth of 21 percent. In the first half of 2010, retail banking revenues in the region stagnated for the first time in five years. Profits decreased slightly. Still, impairments were more than $4 billion and remain at a high level today. The decelerated revenue growth has been caused largely by more cautious lending policies combined with high rates on deposits in several countries (owing to funding needs and heavy competition for deposits).

For many years, amid strong overall growth in the Middle East, virtually all banks were able to steadily increase their revenues by simply expanding in line with market development. But the new market environment will lead to a significant increase in competition for the most at-tractive customer segments, since banks are still in search of revenue and profit growth. While a number of banks have started cost reduction initiatives, simply cutting costs will not be sufficient. Banks in the region will need to increase their productivity, get their risks under con-trol, and focus on the right differentiated strategies and business models.


The Netherlands

Although the Dutch retail-banking revenue pool was rela-tively stable during the crisis, the market has undergone significant turmoil.

Savings volume increased in 2009 compared with 2008, albeit at very low margins. In 2010, margins have recov-ered somewhat. New-production volumes in mortgages have dropped dramatically since early 2009 owing to eco-nomic as well as fiscal uncertainty, but new-production margins have increased significantly in 2010. Also, the back-book margin has benefited as the duration of mort-gages has increased—enabling banks to refinance them at (on average) better rates.

CIRs are currently declining as a result of large-scale transformation and integration programs, although they are still above the European average. Profit levels in 2009 were under pressure, but the level of loan losses on mort-gages was lower than expected during the crisis. With higher margins in both savings and mortgages, 2010 prof-it levels are expected to be significantly better. However, renewed competition, increasing transparency enforced by regulators and consumers, and high funding costs will lead to meager revenue-growth rates—between –1 per-cent and 2 percent in the short term—compared with precrisis rates of roughly 5.5 percent.

The competitive landscape underwent a significant shift during the crisis. Several smaller monoline players col-lapsed (Icesave and DSB Bank) or retreated (GMAC Bank and Argenta). Many clients retrenched to the major play-ers, with Rabobank emerging as a clear winner, attracting large volumes of savings in the midst of the crisis with a continuing strong share in mortgages. With ING and ABN AMRO finalizing their integration efforts with Postbank and Fortis Bank Nederland, respectively, competition is expected to intensify.

Poland

The retail banking sector in Poland was not as severely hit by the global financial crisis as many other markets. Nonetheless, change is in the air. The postcrisis climate will be characterized by lower but more stable ROE than in the past, more diversified revenue streams from both lending and deposits, healthier balance sheets owing to

better capital protection and tighter risk management, and a stronger focus on deepening client relationships (as opposed to just pushing products).

Following a slowdown during the crisis, overall banking-sector revenues in Poland are expected to grow at a com-pound annual growth rate of 9 percent from 2011 through 2015. Retail revenues will be the largest contrib-utor, accounting for 70 percent of the growth—which will be driven mainly by mortgages and consumer loans on the product side and by the upper-mass-market and af-fluent segments on the client side. Small and medium enterprises (SMEs) will also strongly contribute to growth. In addition, the retail banking sector will remain highly competitive, and some degree of consolidation may occur.

Overall, institutions that understand and act on the following axioms will be best positioned to succeed in Poland:

Branches will remain crucial for high-margin product ◊ sales.

Multichannel success is about convenience and lower-◊ ing the bank’s cost to serve, but not necessarily about migrating the customer online.

Good “hook” products supported by powerful market-◊ ing will always work.

Leveraging the customer base through cross-selling, ◊ smart pricing, and effective customer-relationship management will drive profitability.

Operational efficiency will become more and more ◊ important.

Portugal

The global financial crisis triggered a profound downturn in Portugal. Ongoing uncertainty about the country’s abil-ity to deploy an effective growth and sustainability plan to ensure fiscal stability has put additional stress on the economy. Portugal is expected to continue suffering from low growth (between –0.7 percent and 0.5 percent in 2011), high unemployment (currently around 11 percent), and reduced access to international financing.


Liquidity constraints and a wholesale-funding shortage are playing large roles in restricting the overall banking industry’s ability to recover. Thin margins along with an expected decrease in credit concessions, mainly in corpo-rate lending, will continue to hinder revenue generation and profitability. Such constraints, combined with the need to cope with additional asset impairments, will have an impact on solvency—and thus on retail banks’ capac-ity to meet new regulatory requirements.

Despite good stress-test results, the Portuguese banking industry is slowly transforming itself. Institutions will fo-cus on deleveraging, as well as on improving liquidity and profitability. The war for deposits will intensify, and limits on credit concession (supply driven) and asset repricing will be imposed. When it comes to market configuration and banking concentration, both shareholder structures and the lack of sufficient capital will limit national con-solidation. This will likely result in a trend toward higher levels of international shareholdings.

Spain

In Spain, the crisis in the real estate sector set off a pro-found and long-lasting downturn. For the foreseeable fu-ture, the country will experience low growth rates and high levels of unemployment (around 20 percent).

In this environment, the financial industry faces three principal dynamics, which are having a greater effect on savings institutions than on universal retail banks:

Deteriorating efficiency resulting from expansion into ◊ new areas, demonstrated by numerous branch open-ings amid a construction boom

Decreasing solvency resulting from real estate and ◊ mortgage exposure

Increasing liquidity problems owing to troubled bal-◊ ance sheets, reduced ability to appeal to wholesale markets amid tumbling ratings, and new requirements from Basel III

Overall, the industry is consolidating slowly. Fourteen merger agreements have been announced in 2010, with 13 involving savings banks. Seven of the mergers have asked for public aid. These developments will change the

competitive dynamics of the Spanish retail-banking industry, as the merged players focus on improving efficiency and deleveraging. We are likely to witness the following:

Large divestments and branch closings ◊

A fierce deposit war ◊

A potential second wave of consolidation, as some ◊ players may have difficulty meeting their transforma-tion plans in a difficult environment with low margins

In the medium term, a shift in market share of 10 to ◊ 15 percent

Large players and strong second-tier competitors will be well placed to leverage these opportunities and enhance their positions.

United Kingdom

Retail banking profits in the U.K. market were deeply hit by the financial crisis, driven largely by a high level of im-pairments. There are signs, however, that the market is turning a corner. In fact, actual asset performance has been much better than expected in 2010, and a strong re-bound in profitability is expected in 2011.

Asset prices have slipped slightly from their historical highs as competitive pressure has begun to reassert itself. However, the funding constraints that underpin the high spreads will take years to dissipate. Therefore, unusually high asset profitability and intense competition for front-book deposits are expected to remain in the medium term.

Moreover, the U.K. consumer continues to deleverage, al-though it is unclear how much is demand- rather than supply-side driven. State aid provisions on some major banks are reinforcing the trend. This environment offers a unique opportunity for those with stronger balance sheets to gain significant share, often at very attractive margins. For the rest, unsurprisingly, the focus is on “fran-chise customers”—rationing the scarce balance sheet and deepening existing relationships by getting clients with three key products to buy a fourth, for example.


While there is much talk of new entrants, we expect their actual impact to be muted. However, if someone were to bring together the 1,000 branches and roughly £100 bil-lion in assets from the government’s various stakes, that would make a material difference.

United States

Following an intense battle for liquidity in late 2008 and early 2009, most U.S. retail banks now find themselves flush with deposits. But a wave of new regulations re-stricting or eliminating lucrative fees has dramatically di-minished the attractiveness of new retail deposits in 2010. These regulations are expected to reduce the deposit profit pool by $25 billion by the end of 2011. Given the continued impact of low base interest rates, which are ex-pected to remain at rock bottom for the foreseeable fu-ture, it is no surprise that U.S. retail banks are questioning the value of raising further deposits.

But new capital regulations may bring some relief. For example, lenders will need to cover hundreds of billions of dollars of securitized assets coming back onto their balance sheets. And the increase in liquidity ratios prompted by Basel III may drive renewed interest in re-tail deposits.

When it comes to lending, the first half of 2010 saw im-proving credit quality for consumers and small business-es (outside of home equity lending). Delinquencies and charge-offs are turning the corner, and the release of loan loss reserves will bring relief in 2011 and 2012. Nonethe-less, with businesses and consumers still deleveraging, loan demand remains low. In part, this reflects govern-ment stimulus programs, which prompted people to bor-

row or refinance early to take advantage of incentives—in a sense, “borrowing demand” from the future.

As for costs, most retail costs are in the branch network. Addressing the revenue challenge in any meaningful way must include reducing cost to serve in branches, but the scope for that is limited. Most costs are fixed and expen-sive to reduce. Branch consolidation is a tricky exercise, and it provides little relief in the short term.

Many banks are adopting similar responses to this chal-lenge. Most are actively engaged in efforts to review mar-ginal branches and markets for potential closures. In ad-dition, some banks, such as Bank of America, have been especially successful at migrating transactions to lower-cost channels. They have done this through innovative of-ferings in mobile and online banking, as well as heavy investments in advanced ATMs. While back-office savings have been substantial for some U.S. banks, real savings will occur only once banks have actually removed tellers and vaults from the branches.

In the current low-growth environment, almost every player is banking on cross-selling to gain share of wallet and ultimately achieve above-market rates of growth. In addition, many U.S. banks have identified the mass-afflu-ent and SME segments as priorities. The overall result will be a tremendous increase in competitive intensity as multiple players fight for the same limited opportunity for growth. As the rising tide will no longer lift all boats, differences in execution ability will drive banks’ profits and growth rates over the next several years.


The Boston Consulting Group pub-lishes other reports and articles that may be of interest to senior financial executives. Recent examples include:

The Solvency II Challenge: Anticipating the Far-Ranging Impact on Business StrategyA White Paper by The Boston Consulting Group, October 2010

In Search of Stable Growth: Global Asset Management 2010A report by The Boston Consulting Group, July 2010

Leveling the Playing Field: Upgrading the Wealth Management Experience for WomenA White Paper by The Boston Consulting Group, July 2010

Crisis as Opportunity: Global Corporate Banking 2010A report by The Boston Consulting Group, June 2010

Regaining Lost Ground: Global Wealth 2010A report by The Boston Consulting Group, June 2010

Life Insurance in Asia: New Realities and Emerging OpportunitiesA White Paper by The Boston Consulting Group, April 2010

Building a High-Powered Branch Network in Retail BankingA White Paper by The Boston Consulting Group, March 2010

Risk and Reward: What Banks Should Do About Evolving Financial RegulationsA White Paper by The Boston Consulting Group, March 2010

After the Storm: Creating Value in Banking 2010A report by The Boston Consulting Group, February 2010

Leveraging Consumer Insights in InsuranceA White Paper by The Boston Consulting Group, February 2010

Retail Banking: Winning Strategies and Business Models RevisitedA White Paper by The Boston Consulting Group, January 2010

The Near-Perfect Retail Bank A White Paper by The Boston Consulting Group, November 2009

Come Out a Winner in Retail Banking A White Paper by The Boston Consulting Group, September 2009

Value Creation in Insurance: Laying a Foundation for Successful M&A A White Paper by The Boston Consulting Group, September 2009

For Further Reading


AcknowledgmentsFirst and foremost, we would like to thank the retail banking institutions that participated in our current and previous research, as well as other organizations that contributed to the insights contained in this report.

Within The Boston Consulting Group, this report would not have been possible without the dedication of many members of BCG’s Finan-cial Institutions practice, including Lionel Aré, Bruno Bacchetti, Jorge Becerra, Kilian Berz, Nan DasGupta, Christophe Duthoit, Thad Garver, Julien Ghesquieres, Michael Grebe, Roland Kastoun, Frankie Leung, Stefan Mohr, Jens Mündler, Joel Mu-niz, Federico Muxi, Monica Regazzi, Rob Sims, Pablo Tramazaygues, Sau-rabh Tripathi, Ute Wellnitz, and Willi Westenberger.

Finally, our special thanks go to Philip Crawford for his editorial di-rection, as well as to other members of the editorial and production teams, including Gary Callahan, Kim Friedman, and Gina Goldstein.

For Further ContactIf you would like to discuss your re-tail-banking business with The Bos-ton Consulting Group, please contact one of the authors.

Andy MaguireSenior Partner and Managing DirectorBCG London+44 207 753 [email protected]

Vincent Chin Partner and Managing DirectorBCG Kuala Lumpur +60 3 2688 [email protected]

Laurent DesmanglesPartner and Managing DirectorBCG New York+1 212 446 [email protected]

Huib Kurstjens Senior Partner and Managing DirectorBCG Amsterdam+31 20 548 4000 [email protected]

Reinhold LeichtfussSenior Partner and Managing DirectorBCG Dubai+ 971 4 509 6700 [email protected]

Reinhard MessenböckPartner and Managing DirectorBCG Berlin +49 30 28 87 [email protected]

Tim MongerPartner and Managing DirectorBCG London+44 207 753 [email protected]

Nicole MönterProject LeaderBCG Brussels+32 2 289 02 [email protected]

Steven ThogmartinPartner and Managing DirectorBCG New York+1 212 446 [email protected]

André XavierPartner and Managing DirectorBCG São Paulo+ 55 11 3046 [email protected]

Note to the Reader

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