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The Swiss Financial Services Industry in 2030

The Future of Retail Banking

Winning transformation strategies for a decade of major change

With the dawn of unprecedented tech-driven disruption, Swiss retail banks face a growing imperative to understand customers’ future demands and to adapt their business strategies and priorities accordingly. Hence, banks will be forced to roll out a fully re-designed business model that will enable them to leverage the emerging technologies as well as new talent, so that they have the capability to «adjust, adapt and apply».

Recent observations made across Swiss retail banks and key players active in other retail sectors indicate the following capabilities will be key dimensions for the successful retail banking business model of the future.

The capability to deliver data-driven and tailor-made personalised services, products, and pricing to customers.
The capability to react instantly and adjust to ever-changing client needs, technological advances, and industry shifts.
The capability to drive banks’ customer engagements by analysing financial data in real time, anticipating customers’ latent needs and fully understanding their financial behaviours, and respond proactively to them.
The capability to orchestrate and deliver value to customers through an integrated ecosystem of providers and partners as opposed to decoupled and siloed offerings.

We have developed four scenarios for the Swiss retail banking sector that we believe might materialise by 2030 when taking the most impactful driving forces into account. In addition, we have formulated seven «key non-regret moves» and transformation strategies that – regardless of whichever of the four scenarios ultimately plays out – will allow Swiss retail banks to create business value in 2030 and beyond.

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European and Swiss retail banking today

By international comparison, Swiss retail banks operate in an attractive market that is characterised by a slow pace of change and long lead times for introducing technological innovation into the market. However, there is a host of challenges awaiting traditional players - of which unexpected geopolitical conflicts, energy supply shortages and inflation risks are the latest in a long list - and the promise of a new digital dawn is on the rise.

The European retail banking sector was impacted by challenging market conditions

In recent years, the European retail banking sector operated in challenging market conditions. A weak and fragile economic environment due to the pandemic, ever-increasing regulatory burden, digital disruption, and the historically low interest rates regime weighed heavily on the profitability of the sector. In line with the above, our analysis shows that between 2018 and 2020 profitability levels of banks in major European countries more than halved. Historically low margins due to negative base rates together with sub-stantially increased business volumes exposed banks’ operational in-efficiencies, limited capabilities for scale and high operating cost levels. In parallel, competition from low-cost neo- and challenger banks heated up and put additional pressure on Europe’s high street banks.

… and then the turnaround happened

The post-pandemic macroeconomic rebound that was largely triggered by unprecedented government intervention in 2020 and 2021, though, pushed back banks’ average RoEs to levels observed before 2018 and even beyond. Hence, all good again for Europe’s high-street banks? In our view, by no means: global geopolitical conflicts on the rise have tamed the post-pandemic macroeconomic rebound, fuelling a multitude of looming economic factors. Pre-existing inflationary tensions on energy and commodity prices mean-while have expanded to the braoder economy, exacerbating the concerns of a persistent stagflation trap.

With the abrupt and material regime switch in global interest rate levels, rising financing costs and decreasing real returns put pressure on banks' P&L and balance sheets alike. In addition, banks are facing heightened risk profiles in their loan books due to deteriorating credit quality in the real economy. Hence, we believe, there will be further pressure on banks' top- and bottom line, eventually leading to hefty reductions in achieved RoEs in the near future again. Latest bank failures in the US, the forced merger of UBS and Credit Suisse here in Switzerland as well as subsequent global market turbulence in bank stocks have clearly pointed out that a global banking crisis might be on the rise again.

Swiss retail banks operate in a more robust, less volatile domestic market

Even though the Swiss banking sector has faced unprecedented events in recent weeks, our analysis shows that Swiss universal and retail banks have mastered crisis- and turmoil events of recent years much better than their peers across Europe. Profitability levels of Swiss banks as well fell between 2018 and 2020, although by far less than elsewhere in Europe. Thus, the 2021 and 2022 rebound in Switzerland was of much lower strength than for European peers. We believe that there are three key factors explaining the different, less volatile behaviour of the Swiss retail banking market..

Achieved RoEs of selected universal and retail banks in Switzerland

We believe that three factors explaining the different behaviour of the Swiss retail banking market in comparison to the European retail banking market are as follows.

1. The base of comparatively wealthy customers allows Swiss retail banks to generate a high level of operating profit per customer.

In comparison to other European markets, top-line revenues of Swiss retail banks are driven by a relatively high business volume per customer resulting in a higher operating profit per customer.

2. The boom in the Swiss mortgage market over the past two decades allowed for steady top-line growth for Swiss retail banks.

The Swiss mortgage market was a dynamic and steadily growing business segment for Swiss retail banks as it grew in total by over 50% from the Global Financial Crisis until the end of 2021 - fuelled by the expansive monetary policies of central banks including the Swiss National Bank. Over the past two decades, the market more than doubled in size and provided a strong average annual growth of 4.5%.

3. Swiss retail banks have so far benefited from strong brand loyalty of their customers, evidenced by remarkably low bank account switching.

Academic research shows that Swiss retail banking customers have developed a strong bond with their respective principal bank, and their is little or no willingness to change their principal banking relationship.

The future challenges for Swiss retail banks – from protection to disruption

In our view, Swiss retail banks will soon face a challenge to sustain their existing profitability and growth levels. This will be the result of the societal and economic transformation to «net-zero», a further maturing and saturation of the home market, a change in the demographics of the customer base and a growing demand among customers for «state-of-the-art» and «end-to-end digital» banking services. Competition will soon heat up - enabled by regulatory changes for open banking, as well as by technological advances in machine learning, artificial intelligence, the cloud and distributed ledger technology.

Attracted by robust domestic market conditions and above average revenue potential, new market entrants will challenge Swiss retail banking incumbents in several ways.

1. The rise of ecosystems will offer retail customers a comprehensive service offering, combining so far separate nonbanking and banking services.

2. Digitally-savvy banking operating models of neo- and challenger banks provide a superior customer experience at a lower cost.

3. Well-funded non-bank financial institutions (NBFIs) will become credible competitors in the offering of core banking services.

The winning transformation strategies for a decade of major change

The way that Swiss banks have done business in the past is now changing. With changing customer needs and expectations, new interaction models, increasingly decomposed value chains and technological advances, retail banks must develop new strategies to create and maintain a competitive advantage throughout the next decade.

At a time of massive disruption fuelled by «lightning speed» changes in technology, it is an almost unsurmountable challenge for CEOs and CIOs to set a strategic agenda for the coming years.

Scenario planning may serve as a basis for robust strategic decision making

Although it is difficult, in fact almost impossible, to predict the future exactly, envisioning possible scenarios about the evolving future can help to develop sustainable survival strategies. When envisioning the future, we see four possible scenarios of what the sector may look like in 2030 regarding the transformation of the value chain, customer behaviour and demand as well as customer interaction models.

Today’s retail banking value chain will remain largely integrated. Banks will retain control of the key touchpoints with the customer and continue to be the main financial products provider. The digital channels of retail banks provide the main interaction points, but customers also continue to use banks’ offline channels selectively. Compared to today’s business models, there is no fundamental change, and incremental (digital) efforts of banks are sufficient to stay competitive.

The banking value chain «dis-integrates», only to «re-integrate» with broader retail value chains. Core retail banking services in the form of a stand-alone offering become largely irrelevant – everything is done in the context of use cases and digital ecosystems become the «new normal». Banks may have the «right» and also the relevant capabilities to own the customer relationship and hence to orchestrate the overall ecosystem. However, it is likely that in most ecosystems retail banks become mere participants, with the function of a product (commodity) provider, only.

Large platform providers rise to dominate the customer relationship as they evolve from their initial and current role as pure comparison service providers to digital platforms that become the default sales, distribution, and advisory channels for retail banks. Retail banks will focus on providing the most competitive products and processing engines as commodities, with ever increasing cost pressures as differentiation becomes nearly impossible without their control over the customer relationship

The retail banking value chain and customer relationships are fluid and largely «dis-intermediated». Retail banking becomes fully digital with maximum focus on customer convenience and hyper-personalisation. Customers’ decisions are informed by insights that are garnered on the basis of artificial intelligence and predictive analytics using financial data in real time, fully understanding customers’ financial needs and behaviours and even acting on their behalf. Branches largely disappear, «digital» becomes the default channel for everything, and touchpoints decrease as many retail banking services become increasingly «invisible» for customers.

Adapting existing strategy or developing a new one in response to the developing scenario involves hard choices for banks. A key decision that banks must make is where to compete in the value chain and how to define their future business model.

Swiss retail banks need to consider the implications of the above scenarios for their current business and operating models to be successful in the next decade. Re-designing the organisation to become more «agile» will enable companies to proceed with confidence while staying open for new opportunities as they arise. The main benefit of scenario planning is to provide some control over an uncertain future.

Strategic choices and «key non-regret moves» for forward-looking Swiss retail banks

Swiss retail banks will need to make their strategic decisions about where to play with respect to the described scenarios. Focus either on creating products or managing channels and customer relationships, or a hybrid of the two. In addition, Swiss retail banks will need to position themselves in the broader ecosystem - whether to invest in open banking or alternatively pursue a Banking as a Service (BaaS), Banking as a Platform (BaaP) or a dual platform strategy. Subsequently, Swiss retail banks need to answer the question of how to blend the traditional banking elements with the wider ecosystem - should the bank launch a new platform or adapt and modernise its existing platform?

Irrespective of the final strategic choices made, we believe there are seven «key non-regret moves» Swiss retail banks should take into consideration that will help them to become more «agile» and position themselves to become a «bank for the future».

7 «key non-regret moves»

Becoming «digital» will be an imperative key success factor in the next decade. This requires more than just staying up to date with current technological trends. We believe that focusing on a digital culture and ways of working will lead to more innovation and agility. Improving a bank’s digital maturity increases significantly the quality of interaction with its customers. This will help the bank to become more connected with its customers at every touchpoint of their journey and enable it to be more responsive to shifts in customer preferences. This goes hand in hand with the potential to increase business volumes and eventually will lead to greater profitability levels.

Deloitte's latest Digital Banking Maturity Study shows, that «digital champions» consistently outperform their market peers at elementary KPI levels. As such, they achieve higher RoE and RoA levels [plus 1.9%-points and plus 0.2%-points respectively] as well as lower C/I ratios [minus 4.0% points] when compared to their market peers.

This implies that a «digital mind shift» is required towards embedding a start-up culture characterised by entrepreneurship, design thinking, a focus on innovation, and customer centricity at all levels, in order to succeed in a dynamic all-digital environment.

Consumer preferences, technological advances and regulatory requirements often change faster than a bank's business plans can be adjusted. The successful retail bank of the future replaces the robust profit driven ten-year strategy with a ten-year purpose-driven vision. Instead of asking departments to translate the corporate strategy into separate sub-plans within their respective silos, adaptable organisations enable their value streams - flexible networks of teams and talented individuals - to make decisions in alignment to the organisation’s vision. Organisations that enable decisions to be made at the lowest level possible, in alignment with the business strategy, turn ambiguity into clarity and can outperform their competitors. This requires an organisational shift, starting at the top, as leaders empower, entrust, and give responsibility to their people.

The shift towards more decentralised decision making requires a robust talent management system, with individualised career advancement and a focus on continuous upskilling. Leaders are at the forefront of creating a workplace of high-performance standards mixed with psychological safety and reinforced by simple guardrails instead of detailed rules and procedures. Instead of managing the workload, leaders must shift their attention to the bigger organisational challenges of becoming adaptable. For retail banks, this revolves around balancing flexibility and opportunism with structure and compliance - enabling teams to make the best decisions while ensuring they comply in this highly regulated market. How retail banks navigate this problem will determine the banking landscape of 2030.

Existing systems cannot keep up with the pace of BigTechs and FinTechs when rolling out new product offerings or enhanced service features. We believe it has become inevitable for retail banks to leverage the cloud - not only to shift from CapEx to OpEx (and to realising an increased predictability for OpEx), but also as a key technology enabler driving an extensive business model transformation. The move to cloud infrastructure will make it possible to capitalise on more powerful and agile business and technology capabilities and allow for the continuous deployment of industrialised solutions with a shorter time to market. In recent years the number of organisations adopting cloud technology has tripled. Swiss retail banks as well as institutions across the global financial services industry have been transitioning to the cloud over the past three to five years, with tremendous acceleration over the past twelve to eighteen months.

Customers today are looking for identity, trust and support in brands. It is not about either a great physical or a great digital experience. Customers expect to experience the best of both worlds - a personalised interaction combined with the convenience of a digital journey. Re-positioning the organisation towards customer centricity is therefore a key differentiating factor in the retail banking market. This requires a fundamental change in the operating model, from working along existing silos, often grouped in systems or functions, towards horizontal value streams that can cover end-to-end customer journeys. This impact the organisation's structures, its processes, ways of working, the technological infrastructure, and its talent. Only by breaking up existing systemic and/or functional silos can banks put the customer at the heart of their businesses and operations and start to think in radical new ways of customer-centric value creation.

In a retail banking sector that is becoming more cashless, data driven and empowered by platforms, customers engage more digitally with their respective banking service providers. In recent years, we have seen a reduction of about a third in the number of customers using branch services – obviously, a number amplified by the pandemic. Unsurprisingly, the use of digital and mobile banking services leads to strong rates of growth year-on-year. Transactions executed via digital and mobile banking channels provide a 95% cost advantage over transactions executed in branches. However, two key questions remain for banks. What does this mean for the quality and strength of the client relationship, and what is to be done with the existing branch network?

We would advise incumbent Swiss retail banks with a dense branch network across the country to question any future investments in the network given the future of a post-pandemic world. In this regard, future investments should be tested against the following four key dimensions.

We expect that in a post-pandemic environment:

«Interaction and engagement» - Embrace the new social norms and behaviours
To have a lasting effect on how and why we will interact physically. From service standards and protocols to digital interactivity and hygiene concepts, banks will need to tackle the new expectations of customers in their service design.
«Purpose and support» - Continue to support your customers
To have a long-lasting impact on the financial well-being of customers. The future branch needs to provide appropriate support that goes beyond the future end-to-end banking experience. Staff need to be equipped with the respective tools to handle the wide range of occurring needs.
«Technology and equipment» - Leverage smart technology and digital intelligence
To increase the adoption of new technologies, and an impetus to leverage data, analytics and the internet of things. As we move to a «digital first» branch development it is imperative to consider the application of new technologies to help optimise customer and business value throughout an in-branch customer visit.
«People and story» - Celebrate your history and the customers who made it
To challenge the status quo and to entice customers to explore extensively new, purely digital service offerings. Incumbents need to engage with their established customer base to their own advantage – they have the opportunity to restore and reinvent the «customer community» through a physical presence and human connection that neo-banks can't offer.

Considering the retail banking sector’s move to become more digital-savvy and the overall change to a post-pandemic world, we can imagine the branch of the future adopting forms as outlined in the figure below. Essentially, we believe that the branch of the future (irrespective of the specific form adopted) will be successful only when providing hyper tailored service offerings to the specific customers making an in-branch visit and at the same time providing a lean and efficient operating cost base for the incumbent retail bank.

To build business agility, boost innovation, and enable growth, a fundamental shift is required from incumbent Swiss retail banks - moving from inward-looking practices with rules and procedures, to outward-looking engagements through partnerships and collaborations. These complex ecosystems and platforms involving banks are already a reality today and are expected to evolve rapidly and more extensively in the coming years. The authors and survey participants of a recent study conducted by the University of St. Gallen and Deloitte expect an increasing importance of collaboration and partnering between non-financial services companies and banks, to leverage the banks’ direct access to a vast number of customers, their brand power and massive data sets through the application of ecosystems and platforms. Therefore, Swiss retail banks should foster their capabilities in developing and operating partnerships with FinTechs, BigTechs and RegTechs and also cross-industry, as this will be paramount for future business success in the next decade.

The required shift in mindset and underlying operating model is fundamental. Platform institutions do not merely create value themselves but orchestrate the value creation by outsiders. These network effects cause institutions to «invert», shifting value creation from inside the organisation to the outside. Inside scale is not as easily achieved as outside scale, as there are more customers than employees. If customers (i.e. platform users) are to create value for other customers, then they must be aided and rewarded for doing so. This means institutions (need to) shift from vertical integration to open orchestration.

The impact of environmental, social and governance (ESG) issues is increasing for the global, European and Swiss financial services communities. The complex transition towards an overall «net zero» economy will require a large-scale and long-term transformation that allows for new ecosystems to evolve across all areas of the economy.

In this regard, we expect (financial) regulators to introduce stricter and more standardised rules on ESG transparency to hold companies accountable for violations of global and local sustainability norms. In a recent example, the European Banking Authority (EBA) advised the European Commission to define a binding framework for European banks to provide increased transparency on the «pathway towards sustainability and financing activities such as those consistent with the Paris agreement». The European framework will entitle shareholders and stakeholders alike to improve their assessment of (long-term) sustainability risks related to their business and operating models of their banks. At the core of the framework - covered under the «Non-Financial Reporting Directive» (NFRD) - will sit a newly defined KPI, the so-called «Green Asset Ratio» (GAR). This ratio will measure European banks’ overall share of sustainable, climate-friendly assets and businesses, and will be published from 2022 onwards. The European «taxonomy for sustainable activities » (and green investments) is to be used as the benchmark for the classification of assets in the calculation of the GAR.