The Future of Banking – How bright is it?

Developed economies’ top-performing banks had an average return on equity of 26% for the period 2000 to 2007. Today, many of these same banks are looking at returns of 4% to 5% —if they are still in business. The post-crisis challenge faced by banks is enormous and it is not one that all will be able to overcome.

According to Accenture’s Banking 2012 research project , which analysed more than 150 institutions worldwide interviewing in excess of 30 bank leaders, private equity experts and other industry watchers, banks that make bold decisions about their businesses and operating models in 2009 will rebuild their returns on equity to 15% or even higher within the next three years.

Commenting on the research Wendy Pienaar, Accenture SA Banking Lead, said: “Banks face a mammoth task as they are operating under tighter supervision at a time when they are also trying to restore declining customer trust. Adding to this, traditional non-banking companies such as Vodacom and SAA have been bundling benefits such as free talk-time and voyager miles, respectively, with their credit card offering to attract customers.

“In tough economic times this is an attractive offering to people who are able to spend less money on talking to loved ones or going away on holiday. The trend of increasing non-traditional competition to South African banks is expected to continue as companies seek to find new ways of maintaining or increasing their revenue stream in a time when consumers are not willing to spend.”

Additionally, banks outside of the ‘Big 4’ are now capitalising on reduced customer trust levels. The Accenture research indicates that prior to the current crisis, only 25% of bank customers globally believed their bank was acting in their best interests. Research undertaken by Accenture in the 2008 global survey of customer satisfaction, 42% of clients said they had switched banks because of poor service.

To overcome this, successful banks in 2012 will have responded to the erosion of customer trust by going back to basics, resulting in a more transparent service approach; simplified product offerings and renewed customer-centricity.

“Although there is a relatively low switching propensity amongst South African banking customers, economic pressures and the need for more credit could lead to an upturn in customers switching to other banks who will offer them credit. Customer-centricity is key not only to attract new clients, but to retain existing ones as well,” says Pienaar.

The handful of global banks likely to be flourishing in 2012 will owe much of their success to having significantly scaled back the complexity of their operations. It is further predicted that by this time, most banks will be retail and commercial institutions serving regional or local markets. Some big banks with strong regional franchises will divest loss-making divisions and instead focus on core markets and customer segments.

According to the research findings at least 30% of the banks’ cost base will be variable by 2012, as successful banks use alliances, shared services and sourcing to manage noncore capabilities more competitively.

There is a strong need to reduce the cost of administration by centralising or reducing organisation structures, which can be anything from consolidating operations to simplifying governance structures. Accenture’s research suggests that there will be a move to reduce costs through creating simpler and more flatter operating structures while empowering them with a greater decision making mandate to facilitate quicker turnaround times.

Pienaar comments, “We see technology playing an increasingly important role in the industry’s transformation. Cloud computing, which leverages the Internet to enhance speed and flexibility, will enable banks to dramatically consolidate and rationalise IT costs—as will the creation of ‘virtual’ shared IT utilities, which are likely to proliferate among smaller banks.”

According to The World Bank, currently, between 50% and 80% of adults in many developing countries have inadequate access to financial services, along with up to 10% of the population in developed economies. So the extension of services to the bottom of the pyramid represents a market with significant growth potential.

“Beyond 2012, we foresee a fundamentally reconfigured banking industry: an environment of technology enabled banking ‘ecosystems’, where non-bank players and peer-to-peer networks will compete with mainstream providers to service the needs of ever more demanding consumers. The high performers will be those that can overcome the immediate challenges and maximise the opportunities presented by the dramatically changed banking landscape of 2012.

“In the more distant future, the new banking virtues—sustainable profitability, renewed customer-centricity and a more realistic approach to risk— will be more important than ever,” concludes Pienaar.