IBM BV Banking 2015

8/8/2019 IBM BV Banking 2015

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IBM Business Consulting Services

Banking

IBM Institute for Business Value

The paradox ofBanking 2015Achieving moreby doing less


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IBM Institute for Business ValueIBM Business Consulting Services, through the IBM Institute for Business Value,

develops fact-based strategic insights for senior business executives around criticalindustry-specific and cross-industry issues. This executive brief is based on an

in-depth study by the Institutes research team. It is part of an ongoing commitmentby IBM Business Consulting Services to provide analysis and viewpoints that

help companies realize business value. You may contact the authors or send ane-mail to [email protected] for more information.


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The paradox of Banking 2015Achieving more by doing less

Executive summaryAny serious discussion of the future of the retail bankingindustry eventually raises a basic question: will futurecustomers still need retail banks? The answer, it turns out,depends on banks themselves. With technology and non-bank businesses providing new options for safeguardingand managing their finances, customers will continueto depend on banks only as long as banks can provideservice and value that cannot be found anywhere else.

There are already signs that customers are questioningthe ability of banks to look out for their financial well-

being. Only 36 percent of consumers believe what bankstell them, according to a Forrester survey. 1 A separatesurvey also indicates that over 60 percent of U.S. house-holds conduct their own research before buying financialservices products. 2 As a result, banks have begun torethink what, where and how they serve an increasinglyinformed and demanding customer base. At the sametime, a confluence of industry developments, includingconsolidation, regulation, industry specialization, changingworkforce needs and new technologies are putting addi-tional pressure on banks operating models and raisingquestions about traditional strategies for growth and valuecreation.

So, what will the future look like? How will banks continueto grow revenues and remain profitable? What will it take tocreate and maintain advantage in this highly competitiveindustry? An examination of the forces shaping the industryreveals that the future will require superior efficiency andoperational excellence from all banks, while industry lead-ership will be attained by those institutions most adept atharnessing product, service and process innovation toanticipate and meet customer needs. Ultimately, to deliveron these imperatives, banks will have to focus on theircore strengths those activities in which they excel andpartner with best-in-class specialists for everything else:achieving more by doing less.

On the surface, the competitive landscape of the retailbanking industry in 2015 will not look much different thanit does today. Mergers and acquisitions will likely havereduced the total number of banks, especially mid-tierregional banks, and industry specialists and non-bankbanks will play a more prominent role. But most of todaysplayers, including universal banks, community banks,industry specialist banks and non-bank banks, will still bevying to differentiate themselves in a crowded market-place. However, traditional approaches to creating valuethrough growth and efficiency will no longer be enough.Advantages gained through acquisition, new market entry

and reconfigured product offerings will be fleeting at best,while partnering and outsourcing will make efficiency abasic requirement for all.

Through market research and interviews with industryexecutives, the IBM Institute for Business Value identi-fied five major industry trends that will impact the retailbanking industry. By 2015, the combined implications ofthese trends will create an environment in which nothingless than sharp focus and excellence in day-to-day oper-ations will be acceptable, and banks will have to generategrowth through continuous innovation or be left behind:

Customers redefine the rules of the game Pronounced shifts in demographics, attitudes andbehaviors, in addition to ubiquitous information, aregiving customers the power to demand much greaterresponsiveness and transparency from their banks.

Universal banks and ultra-focused niche players thrive Large players will generate higher aggregate profits byreaping the benefits of super scale, while niche playerswill aggressively pursue the most desirable customersby addressing their needs in distinct ways those in themiddle will get squeezed.

Changing workforce composition dictates new approaches An older and increasingly mobile anddiverse workforce will raise management complexityand require flexible approaches to compensation andperformance management.

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Regulatory burdens intensify Heightened require-ments around privacy, security, partnership risk andoperational risk will require banks to take a moreproactive, enterprisewide approach to managingcompliance issues.

Technology improves inexorably to enable breakaway value Advanced technologies will allow banks to infusetheir legacy operating models and infrastructures withunprecedented functionality. Emerging technologiessuch as grid computing, service-oriented architectures,virtualization of data and storage, and predictive intel-ligence will cause entrenched insourcing philosophies toperish in favor of a partnership model where specializedenterprises thrive.

Of these trends, the first two increasingly powerfulcustomers and intensifying competition stand out as

the most significant forces that will drive industry changeover the next decade. The other three trends changesin managing human capital, regulations and technologies will strongly contribute to and reinforce the effects ofintensifying competition and customer empowerment onbanks strategic choices.

In this emerging environment, innovation will take manyforms, including advances in products and services,markets, operational processes, customer intimacy, andnew channel and diversification strategies. But innovationwill not be possible, nor will it have the desired impact,unless banks create the requisite conditions for innova-tion development. There are four strategic imperativesbanks must follow to cultivate innovation and positionthemselves for sustainable growth:

Focus on core strengths and partner for everything else Leading banks will optimize their performanceby becoming specialized enterprises, managing onlystrategic, differentiating business components internallyand partnering with best-in-class specialists for thosecapabilities that do not drive competitive advantage.

Optimize the potential of each customer relationship Rather than attempting to be all things to all people,industry leaders will use superior customer insights tooffer the most appropriate and profitable products, toolsand services to targeted segments.

Harness the potential of the workforce througheffective performance management Banks will needto realign skills and set the right performance metricsto motivate a changing workforce to continuouslypursue innovation.

Recognize that technology will be a critical element of success By making technology a central componentof the strategic decision making process, banks will beable to tightly align their business and technology initia-tives, and will be able to differentiate their offerings andseize market opportunities with greater agility.

Dominant banking industry trendsCustomers redefine the rules of the game Over the next ten years, the retail banking industry will beforced to adapt to rapidly changing customer expecta-tions. Customer diversity and individualism will pervadebuying behavior, and how customers perceive value willchange as a result of pronounced shifts in demographicsand value systems. Norms will become increasingly rare.

Population growth will increase the relative numbers ofboth the oldest and youngest customer segments, posingsignificant new challenges and opportunities for banks.While older customers tend to require more high-touchservice but are generally more loyal, youthful customersare fickle, technology savvy, and highly inclined toresearch and negotiate the best deals . And across all agegroups, long-standing life stage patterns are becomingmore unpredictable. People are marrying later, divorcingmore, having second families, and starting second andthird careers. These changes are leading to unprec-edented diversity in the financial needs of households.

Customers decision patterns will become more complex.Value-oriented buying, based on the price-qualitydynamic, is becoming increasingly influenced by personalviews and the desire to express those views outwardly.Customers will demand low prices for basic goods butpay premiums for products and services that matter moreto them personally (see Figure 1).


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The paradox of Banking 2015

Overall, banking customers are becoming more hands-on and more mistrustful trends that are even stronger inyounger generations. Banks are experiencing defectionrates reaching as high as 30 percent as customers areless inclined to think that banks act in their best interest. 4 Less than one-third of the customers of top 10 U.S.

banks (32 percent), for example, consider their banksto be advocates. 5 More importantly, about as many (31percent) believe that their bank does what is best for itsbottom line at the expense of customers. 6 And as timeprogresses, technology and competition will continue tomake it easier to research, compare, and form and breakrelationships driving switching costs toward zero.

So, what are the implications of these trends? By 2015,better-informed, more discerning customers will redefinethe rules of the game by demanding greater advocacyand control in their banking relationships. To be sure,banks will need to develop (or attain) the capabili-ties necessary to sense and respond rapidly to theircustomers increasingly eclectic demands and unpre-

dictable patterns of banking behavior. To delight theircustomers, banks will need to provide greater perceivedvalue relative to their competition. Having the ability tooffer greater choice and personalization of products andservices in the future will be critical and yet not enough.Becoming a true customer advocate will require banks to

use information about customers to anticipate and proac-tively suggest banking solutions that meet their life andlifestyle needs.

Whats more, in 2015, bank customers will demand rela-tionships with greater transparency there will be notolerance for fine print with vague terms and condi-tions. Banks will have to simplify their fee structures andimplement trusted processes that help customers avoidunnecessary fees.

Our research across the banking and retail industries,

including discussions with senior executives worldwide,reveals that extraordinary service and a superlativecustomer experience are the most sought-after capa-bilities, yet also the most difficult to scale and replicate

Figure 1. From bell curve to well curve Customer demand is polarizing.

Product spectrum

C u s t o m e r

d e m a n

d

... and ips to a well curve Tomorrow

Mass Targeted

Product spectrum

C u s t o m e r

d e m a n

d

The bell curve attens Today...

Mass Targeted

Product spectrum

C u s t o m e r

d e m a n

d

Bell curve Yesterday

Mass Targeted

Limited competition Banks provide largely undifferentiated

products/services Segmentation simple: The majority of

customers can be served with moreor less similar products

Increased competition Banks seek differentiation by

introducing new products, pricingor delivery

Segmentation more difcult:Customers are better informedand shop around

Intense competition, new providersenter market

Banks seek differentiation by applyingfocused strategies to markets, productsor delivery

Segmentation very difcult: Wellinformed customers seek a mix oflow-cost, mass products and targetedofferings that align with their valuesSource: IBM Institute for Business Value.3


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consistently. In the future, retail banks will have immenseopportunity to use service and experience to decom-moditize their offerings and to encourage and rewardcustomer loyalty (see Lexus example).

Lexus Demonstrating passionate commitment to service 7

Luxury car manufacturer Lexus designs customer experiencesthat personify its brand statement and support its customersaspirations, Lexus, the passionate pursuit of perfection. Forexample, dealerships maintain spotless service bays and theyoperate on the Lexus principle ofkaizen - Japanese for contin-uous improvement.

Lexus has designed Express Service areas to provide routinemaintenance for six cars at a time. Service that formerly took45 minutes now is done in 7 to 12 minutes. When necessary,customers are provided loaner cars that expose customers tonew Lexus designs. Lexus also invites targeted customers to

special events where they can test drive cars at race tracks.Collectively, these efforts are designed to continuously bolstercustomer loyalty and envelop customers in the Lexus experience.

The fact that customers are experiencing the kind oftreatment described above in other areas of their livesshould be a wake-up call to banks. Businesses suchas Lexus are raising the bar for responsiveness andincreasing customers expectations. Lexus has seizedthe need for repairs as an opportunity to use informationit has accumulated on customers to suggest additional

models or driving solutions. Banks, similarly, will have todevelop the ability to use customer information in realtime to devise truly differentiating banking experiencesand solutions. There are a number of cues that banks cantake from retailers to support their move in this direction:

Thorough understanding of the needs and buyingpatterns of segments they aspire to serve and delight

Extraordinary service standards and follow through

Strong emphasis on people empowerment

Extensive client associate training

Reward structures designed to elicit desired behaviorswith clear, measurable goals.

We are already beginning to see banks moving towardrewarding customers for their overall relationships andreducing their focus on individual products and transac-tions a trend that should rapidly pick up steam in thecoming years (see Citibank example). Loyalty buildinginitiatives, however, are only part of what it takes to providea truly differentiating customer experience.

Citibank Taking a total view of the customer to increaseloyaltyThrough its no-fee Thank You network, customers receivepoints every month for their aggregate banking activity:checking and savings accounts, loans, mortgages, online billpayments, direct deposits, and debit and credit card purchases.The greater the number of products and services used, thefaster these points accumulate. As customers wish, points canbe redeemed for a host of gifts, including concert and movie

tickets, golf passes, and dining coupons.8

Launched in April 2005, the program has already generatedindications of increased customer loyalty. Citibank reports thatparticipation levels are way up and attrition levels way down.The bank believes it has increased customer retention for thosewho have held accounts for at least ten years, from 90 to 95percent.9 Citibank is also considering a long-term customerreward program that awards extra points on a customers ten-year anniversary with the bank.

Universal banks and ultra-focused niche players thrive By 2015, the results of two prominent competitive forceswill be clearly visible: a middle squeeze of traditionalbanks, and the emergence of far greater numbers ofindustry specialists and non-bank banks each withdistinct competitive growth strategies (see Figure 2).


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The industry will witness consolidation at its middle asit continues to be affected by large banks spreadingtheir reach, and the emergence of specialized bankingplayers that will set new cost and service level standards.Acquisitions led by large banks, however, will continue tobe less attractive until the acquirer and potential targetvaluation gap narrows. Currently, acquirers (as repre-sented by large banks) are valued at approximatelyten times 2006 earnings, while potential targets (asrepresented by regional banks) are valued at 13 times2006 earnings. 10 More likely, regional banks will look toconsolidate among themselves or will seek investors fromoutside their home countries to grow into more powerfulplayers in the market.

Non-traditional participants in the banking ecosystem,including specialized banks, specialist service providers,and non-bank banks, will have a significant impact inaltering the competitive dynamics of the industry as well.Specialized banks, for example, will continue to enhancetheir market differentiation and will be well-positioned tooffer greater choice and personalization to customers(see Square 1 Bank example). These banks are expected

to compete aggressively with traditional banks to controlselect, more-profitable market segments. A good numberwill also become attractive acquisition candidates forlarger banks looking to target specific markets, customersor products.

Square 1 Bank Coming on strong as a specialized bank 11

In August, 2005, a group of California bankers launched Square1 Bank in the Research Triangle area of North Carolina. Thebank specializes in lending to emerging companies in the lifesciences and other technology fields. Rather than requiringhard assets to guarantee its loans, Square 1 makes loans inexchange for partial stakes in the companies being funded.

According to Square 1s founder and CEO, Robert Casey (theformer head of Comerica Ventures and Comerica CapitalAdvisors), the difference with us is that the whole bankis focused on taking care of venture capital firms and thecompanies they fund. They have special needs, and we knowhow to go about lending to very young companies that haveyet to attain revenue. Having raised US$105 million to launch

the venture this year, Square 1 aims to have US$2-3 billion inassets within five years.

Source: IBM Institute for Business Value.

Figure 2. Transformation of the retail banking landscape.

Increase protability with moretargeted offerings while expandingthrough select acquisitions and newmarket entryGrow market share by building onlocal knowledge and deep customerrelationships with a wider range ofproducts and services

Expand customer base by providingtargeted products and services forhigh growth niches while leveragingsuperior process capabilities

Build on existing customer base anddistribution network with an emphasison open sourcing of targeted productsand services

Universalbanks

Large banks

Non-bankbanks

Industryspecialists

Communitybanks

Co-operativesSavings and loansBuilding societies

Mid-tier banks

Non-bank banks

Industry specialists

Community banks

Middle squeeze:Mid-tier, national and regionalbanks collectively lose shareto acquisitive large banks,as well as to non-bank and

specialized rms that presentunique value propositions

2005 2015


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Specialist service providers, however, will have a verydifferent, but no less powerful, impact on the industry.Through superior capabilities in operational functions,customer intimacy, and/or risk and capital management,these firms will at least partially offset the current scaleand efficiency advantages enjoyed by larger players.Emerging players, moreover, will be able to ramp up oper-ations faster than ever before (see Bridge Bank example).

Another competitive category, non-bank banks withdesirable brands and deep pockets, also possessespotentially formidable advantages. Not only will a numberof these firms be able to compete aggressively on priceand convenience, but many have quality customer

service reputations, as well as national and internationalphysical distribution networks. The list of non-bank playerswill lengthen and already includes car makers such asToyota and Volkswagen, the captive finance businesses ofGE and Caterpillar, and retailers such as Target and Tesco,among others.

As competitive forces within the industry intensify through2015, it is clear that banks will have to become far moreresponsive to changing market conditions and emergingcompetitive threats, not to mention a more empoweredcustomer base. They will need to take dramatic stepsto redefine their business models to assemble the bestcapabilities in the market, to become specialized enter-prises that focus on critical, differentiating businesscomponents within the firm, and distribute non-core tasksto external specialists that can provide functionality inopen, flexible ways.

Is the end nearing for traditional banks?Some industry observers believe that non-traditionalcompetitors have the resources, superior value proposi-tion, technological savvy and customer goodwill to wipe outtraditional banks altogether in the near future. While this is anintriguing notion, we believe that, collectively, the followingmarket conditions will help banks maintain their prominence inthe industry:

Regulatory hurdles will persist in the near future, makingexpansion by non-banks into banking difficult unless they arewilling to place themselves under greater regulatory scrutiny

Expansion of industry value networks will give banks accessto best-in-class specialists and provide them with the flex-ibility and range of capabilities necessary to compete againstnew entrants

While there is certainly room for banks to improve customeradvocacy, customers do trust traditional banks to providesecurity and privacy more than companies in other industries issues that will only become more pressing in the future.

Bridge Bank Focusing exclusively on banking, leaving thetechnology work to others 12

Bridge Bank, a four-year-old, US$500 million Northern Californiastart-up business bank has chosen to aggressively compete withSilicon Valley Bank and Comerica for the regions technologylending market. Its two-pronged strategy: emphasize that aneighborhood bank knows you better and outsource virtually allof its technology needs.

Six months prior to the banks opening in May 2001, BridgeBank conducted interviews with, in most cases, between five andten vendors for each type of technology it needed. Today, thebank uses twelve vendors operating from nine different states,including Fidelity Integrated Financial Solutions for core bankingsystems, and item and image processing, S1 Corp for onlinebanking needs, and Bankserv for wire processing, among others.The only capability that is not outsourced completely is networkadministration.

According to Dan Myers, president and CEO, The end result isthat our clients enjoy the services that those top-tier providers

give to the bank, and also the knowledge that as the nextevolution of banking technology comes around in our industryabout every 18 months or so that Bridge Bank and its clientsare going to be first in line to enjoy those advancements.


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Changing workforce composition dictates new approaches As banks redefine their business models to becomespecialized enterprises, the skills required to competeeffectively in the marketplace will also evolve. Thechallenge will be two-fold: optimizing the productivity ofemployees within internally managed components of thebusiness (retaining superior expertise to drive strategicefforts) and effectively managing the human capitalaspect of external partnering, which will require greaterfocus on managing vendor relationships than on actuallyrunning the operations themselves.

At the same time, demographic trends, such as the agingof the population, will also significantly impact how bankssource labor in the future (see Westpac example). Largenumbers of baby boomers the backbone of todaysexecutive ranks are beginning to retire. Whats more,banks will find shortages of workers in labor pools fromwhere they would normally draw younger employees all fueling increased competition for available workers.In the U.S., for example, from 2000 to 2010, the number ofworkers in the 25-34 age group is projected to grow only8 percent, while the 35-44 group will actually decrease 10percent. 13 The number of workers ages 55-64, however,will expand by 52 percent, and the age 65+ group willgrow by 30 percent .14 While increased globalization andworkforce mobility will allow banks to gain access to abroader talent pool in the future, managing workers fromthat pool will require a new set of skills.

Westpac Leveraging the potential of mature workers 15

Recognizing the potential shortage of skilled workers createdby retirement and smaller incoming labor pools, Westpacrecently trained approximately 900 recruits over 55 years ofage who were looking to establish a second career. The bankhas noted that older workers have become an important assetbecause they relate well with older customers, who often feelthat younger staff are not experienced enough to address theirfinancial concerns.

In addition to realigning skills, banks are shifting theirfocus onto performance management programs in aneffort to optimize the productivity and effectiveness oftheir employee base. When asked why employee perfor-mance is less than optimal, 49 percent of retail bankingexecutives surveyed cited misaligned incentive schemesas the top response. 16 Thirty-six percent of these execu-tives stated that incentive schemes are too difficult foremployees to understand. 17 Harnessing the full potentialof employees in the future will require intense focus onredesigning incentives and performance metrics thattake into account how quickly competitive and customerdemands are changing.

Regulatory burdens intensify Demands for transparency from the market and super-visory pressures from regulators will only increase in theforeseeable future. As industry globalization expands andfurther consolidation takes place, regulators are expectedto continue seeking to provide a level playing field andprevent excesses. Greater transparency will be critical not only as markets are given a greater role in the burdenof supervision, but also because of the increased use ofalternative suppliers.

Leading banks will focus on two objectives regardingcurrent and future investments in regulatory compliance:leverage compliance investments enterprisewide andutilize these assets to help manage their business more

effectively. While the expense of compliance is expectedto rise, an enterprisewide approach can help reducethese costs. (see Figure 3).


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Technology improves inexorably to enable breakaway value Advances in global connectivity and computing powerwill both create and support market conditions that fosterspecialization in the next ten years. Communicationnetworks, supported by broadband and wireless tech-nologies, will continue to make digital connectivity faster,more affordable and more pervasive, thereby making the

connection with partners and customers nearly seamless.

400

350

300

250

200

150

100

50

0

Figure 3. Total compliance costs (IT and administrative) for global nancial services.

U S $ b i l l i o n s

2001 2002 2003 2004 2005e 2006e 2007e 2008e 2009e 2010e

Source: Tower Group.

Potential reduction in compliancecosts by leveraging enterprisecapabilities across the business

205 220225

275312

350

264253 248 230

111 107 102100

Specialization is expected to fuel additional regulatoryconcernsThe increased use of specialist suppliers and partners willcreate a whole new set of risks and regulatory concerns forbanks. Regulators will more closely scrutinize how these rela-tionships are structured and how capable and financially viablepartner companies are which will come to have much greaterimplications for capital adequacy requirements in the future.To reduce the associated risks, banks will have to expand

their vendor due diligence and audit programs, and enforcestrict performance and reliability measures, as well as disasterrecovery policies.

Existing core bank systems are currently fragmented andcould impair the leap to more agile business structures inthe future. Service-oriented architectures will be leveragedto a far greater extent to enhance business flexibility byenabling faster software development and modification tomeet changing business demands. Whats more, informa-tion technology will continue to evolve with consolidationof the enterprise software market, proliferation of businessintegration software and the emergence of common

solutions across the business environment.

The quantity of available data will continue to increaserapidly. Advances in storing, tracking, analyzing andprotecting data will allow organizations to differen-tiate themselves by how well they can extract valuefrom multiple sources by correlating structured andunstructured information to improve customer service.Increasing demand will drive IT investment in customeranalytics. Customer data will be gathered at collectiveand individual levels, enabling deeper and more relevantcommunications. Advanced technologies, such as grid

computing, will enable banks to make better use ofexisting resources to cope with the increased demand toperform all of this analysis.


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Widespread digitization will increase security andbusiness continuity threats. Emerging technologies,however, can provide more personal security and bettercustomer authentication. Security-rich and resilient infra-structures can help banks protect against insider fraud,malicious attacks, and other security threats and vulner-abilities. Greater use of autonomic computing can furthermake the underlying infrastructure more resilient, flexibleand efficient.

All of these technologies will also spur the creation ofniche banks and infomediaries (exchanging electronicinformation between businesses and consumers), withnothing but brand and customer experience being theirown all other business functions will be managed by thirdparties (see Zopa example).

Zopa Leveraging technology to further disintermediate banks 18

Zopa.coms big idea: letting people who have spare money lend itdirectly to people who want to borrow it. No bank in the middle,no huge overheads, no unethical investments.

To reduce risk, the money each lender puts in is spread among

at least 50 borrowers (and likewise, each borrower gets moneyfrom a number of different lenders). Zopa is, therefore, forpeople who want to be a part of something new, who want tojoin a community of like-minded individuals and lend to themand borrow from them in a trusting but secure way. As aresult, Zopa claims to offer a better return because its interestrates arent squeezed by middlemen (the banks).

Asian economies: Becoming a much larger forceWhile we expect these trends powerful customers, intensifying competition and changes in human capital, regulations and technologies to affect the industry on a global basis, the influence of particular trends will vary across regions. The Asia Pacific region is one of greatdiversity and immense importance to the banking industry. To better understand the opportunity presented by this dynamic region, wetook a closer look at two of its key markets: India and China.

IndiaPoised to become the worlds fourth largest economy within four decades, India is providing many with real purchasing power.19 WhileIndia remains characterized by extreme wealth and poverty, a middle class is emerging, with absolute demand for products and serviceson the rise. With one of the most under penetrated retail lending markets in Asia Pacific, India offers great potential for the future ofbanking.

Industry executives estimate that Indias retail lending has grown by 30 percent a year in the past few years, and mortgages, which

make up half the total, have been rising at an even brisker pace.20

According to a study sponsored by Visa International, the number of credit and debit cards grew at an annual rate of 55 percent in theseven years to 2004. Indian citizens now hold 44 million cards, 14 million of which are credit cards.21

ChinaMany are betting that Chinas financial system is finally undergoing long-needed repairs. Top bankers see tremendous potential for banksto make lucrative loans, for the local bourses to take off, and for a bond market to develop in the coming years. Whats more, Chinesecustomers are beginning to realize the value of credit cards, mortgages and personal finance.

Loans have grown nearly 16 percent from 2000 to 2004, and deposits have grown by 18 percent per year.22

Lending to consumers, which only began in 1997, has exploded increasing 123 times to more than US$250 billion in seven years.23

As many banks are facing tight competition in mature home markets, innovative expansion strategies in Asia can fuel substantial growth.Continued focus on differentiating local innovations will be critical to realizing this growth potential different markets will require verdifferent strategies. Regardless of whether acquisitive or organic growth is pursued (or a combination of the two), product and servicedesigns must enable the tailoring of standardized products to meet local market needs and business standards.


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Opportunities for innovative growthWhile specialization is becoming imperative to competein the retail banking marketplace of 2015, innovation isexpected to remain a powerful, continuing source ofcompetitive advantage and growth. In a 2005 survey of

more than 100 financial services executives, 88 percentof participants stated that organic growth through innova-tion had become essential to success in the industry. 24 Sustainable value can be created by focused banks thatcombine product, service and process innovation withexecution excellence to meet targeted customer needs.

In the 2004 IBM Global CEO study, a survey of over450 CEOs worldwide, revenue growth was identifiedby 83 percent of respondents as the top focus area forstrengthening financial performance over the next threeyears. 25 And new products and services, new markets and

customer service were identified as the top areas for inno-vative growth (see Figure 4). 26

Combining the results of the IBM CEO survey withmarket research and interviews with industry executives,we have identified five key areas of ongoing innovationthat have the potential to fuel enormous growth for theretail banking industry: retail payments, mortgage loans,account and product integration, global expansion andthe customer experience.

Strategic imperatives: Cultivating innovation Astute banks will focus on four key imperatives now inorder to gain optimum competitive advantage by 2015:focus on core strengths and partner for everything else,optimize the potential of each customer relationship,harness the potential of the workforce through effectiveperformance management and recognize that tech-nology will be a critical element of success. Each of theseimperatives centers on optimizing the results of innovationinitiatives.

Focus on core strengths and partner for everything else Successful execution of specialization strategies willrequire banks to take a component-based view of theirbusinesses and assess each component to determinewhere and how it should be managed. Banks will needto identify which components (or business modules) aretruly differentiating and strategic, as opposed to thosecomponents that would be better served by leveragingbest-in-class specialists.

Specialization will help ensure that banks invest andfocus their innovation efforts on strategic components. If,as Bridge Bank determined (see earlier example), certaininformation technologies are not considered strategic innature, firms may choose not to invest heavily in IT innova-tion. Rather, as that bank has done, they should partnerwith best-in-class specialists to attain IT proficiency, andinvest instead in product, service and process innovationsthat enable real differentiation.

Products/services

Markets

Customer intimacy

New channels

Diversication

Other

0 20 40 60 80

Figure 4. Top areas for innovative growth identied by CEOs.

Percent

65

Source: IBM Business Consulting Services.

55

42

27

16

16

In 2006, the IBM Institute for Business Value will publish an executive brief on the impact that innovation will have in fueling growth opportunities for the retail banking industry through 2015.


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Optimize the potential of each customer relationship To help ensure that they can be highly responsive tothe changing needs and purchasing patterns of theirempowered customers, banks will have to transformthemselves into customer-centric firms. Cultivating atruly customer-centric culture requires getting to knowcustomers and continually improving the customer experi-ence. In doing so, banks will be able to identify who theirmost profitable customers are and can focus on buildingthe right relationships with the right customers ratherthan attempting to be all things to all people.

Pushing innovation in the areas of customer analyticsand service techniques will become more and moreimportant as a means of getting closer to customers anddifferentiating a bank from competitors, both traditionaland emerging. Process innovation, including the use ofincentives and rewards as part of employee performancemanagement, will be essential to successfully executingthese customer-centric strategies.

Harness the potential of the workforce through effective performance management According to one survey of financial services executives,88 percent of their firms believe talent is a very importantor important contributor to business performance, and92 percent believe that talent management is one of thetop three sources of competitive advantage. 27 Despite thiswidespread recognition that an organizations people arecritical to business results, banks will need to drasticallychange their existing talent development programs tobetter take into account projected industry trends and toestablish effective incentive and performance manage-ment strategies.

Additionally, banks will have to focus on optimizing thecollaboration of workers, both inside and outside the orga-nization. Facilitating the exchange of knowledge amongindividuals and teams can fuel innovative ideas andgenerate new capabilities. Accompanying organizationaldesign changes should include initiatives such as stream-

lining vertical line management structures, developingknowledge and talent marketplaces, and deploying teamsto explore innovation opportunities.

Recognize that technology will be a critical element of success Forward-thinking banks will leverage advanced technolo-gies that can support the three previously-mentionedstrategic imperatives. Most importantly, banks mustconduct a technology capability assessment to prioritizeareas of technological investment and to determine howbest to leverage business process outsourcing for non-core functions.

Clearly, investment in advanced technologies cancontribute significantly to optimizing the return on abanks innovation investment. Use of service orientedarchitectures, open standard applications, advancedcomputing power and enhanced global connectivity canall help speed the pace of innovation development andreduce the time to market.

Conclusion2015 will present tremendous challenges for the retailbanking industry. Customers will become increasinglyindividualistic and, at the same time, more controlling intheir relationships with banks. Ubiquitous information willempower customers to compare offerings across themarket and transact increasingly on their own terms. Forbanks, traditional segmentation approaches and go-to-market techniques will become obsolete.

How retail banks compete in the marketplace will also

change dramatically. Universal institutions will competedirectly with community banks offering unique valuepropositions to targeted groups of customers. A flood of industry specialists and non-bank banks will bothcompel and enable traditional banks to become special-ized enterprises themselves.

On the flip side, 2015 will present tremendous oppor-tunities for retail banks, particularly with respect toharnessing product, service and process innovation toserve customers better, to differentiate themselves in anincreasingly crowded marketplace, and to de-commod-

itize current products and services. Moreover, advancesin technology will enable unprecedented levels of globalconnectivity, IT functionality and the ability to realize theenormous potential of data.


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By 2015, success will depend on banks ability to servethe specific financial needs of their target customers.Leading banks will make only highly strategic acqui-sitions focused more on reaching specific targetedcustomer segments (and in areas of their strategicfocus) than on acquiring additional capabilities. Asthe open networked economy allows banks to strikealliances quickly with nimble service providers, capitalwill be freed up for ongoing reinvestment in strategiccapabilities. Ultimately, banks can benefit tremendouslyfrom the industry paradox: achieving more by doing less.

Related publicationsBanerjea, Sunny, Cormac Petit dit de la Roche and JohnRaposo. Seize high growth Indian banking opportunitiesthrough focus and execution. IBM Institute for BusinessValue. September 2004.

Ball, Ian, Allison Hilberg, Shanley Lee et al. Chinese bankstransformation for IPO success, IBM Institute for BusinessValue. February 2005.

Your Turn: The Global CEO Study 2004. IBM BusinessConsulting Services. 2004.

Gilmour, Bill and Julian Chu. Consumer products 2010:Executing to lead in a world of extremes. IBM Institute forBusiness Value, April 2005.

About the authorsKimberly Hedley is a Senior Consultant in the IBM Institutefor Business Value, Financial Services Sector. Kimberlycan be reached at [email protected] .

John White is a Managing Consultant in the IBM Institute

for Business Value, Financial Services Sector. John canbe reached at [email protected] .

Cormac Petit dit de la Roche is a Managing Consultant in theIBM Institute for Business Value, Financial Services Sector.Cormac can be reached at [email protected] .

Sunny Banerjea is the Global Banking Industry Leader inthe IBM Institute for Business Value, Financial ServicesSector. Sunny can be reached at [email protected] .

Contributors James (Rusty) Wiley, Global Banking Industry Leader,IBM Business Consulting Services

Mark Greene, Vice President, Strategy and BusinessDevelopment, Financial Services Sector

Shanker Ramamurthy, Practice Area Leader, Strategyand Change, Financial Services Sector, IBM BusinessConsulting Services

Daniel W. Latimore, Executive Director, IBM Institute forBusiness Value

Saul Berman, Global and Americas Business StrategyLeader, IBM Business Consulting Services

Jeurg von Kaenel, Senior Manager, Human Centric Tools,IBM Research

Emeric Van Waes, Managing Consultant, FinancialServices Sector, IBM Business Consulting Services

Eiko Heffer, Senior Consultant, Financial Services Sector,IBM Business Consulting Services

About IBM Business Consulting ServicesWith business experts in more than 160 countries, IBMBusiness Consulting Services provides clients with deepbusiness process and industry expertise across 17industries, using innovation to identify, create and delivervalue faster. We draw on the full breadth of IBM capabil-ities, standing behind our advice to help clients implementsolutions designed to deliver business outcomes with far-

reaching impact and sustainable results.


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IBM BV Banking 2015

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