Unlocking efficiency through industrialization
The banking industry has been under cost pressure and regulatory scrutiny since the onset of the financial crisis. At the same time, the industry is facing significant technological developments with disruptive potential. After nearly a decade of challenging market conditions, banks are now seeking solutions to improve cost-to-income ratios, secure regulatory compliance, and foster innovation to deal with market disruptions. Industrialization is not a new concept in the industry. However, the benefits are still to be sowed, as little emphasis has been placed upon it. Going forward, nine levers of industrialization can guide banks toward the sought-after solution to unlock the efficiency and agility in banking.
Challenging market conditions have pressurized profitability margins among banks. This has happened on a global scale through a combination of both increasing costs and declining revenues. The ones that are particularly affected are European banks: According to ECB calculations, the average return on equity of Euroarea banks has decreased from over fifteen percent in 2000 to a mere five percent in Q2 2016. T his is a re sult of various factors, such as record low interest rates, unfavorable market conditions, more stringent capital requirements, risk-averse clients, and increased competition. Tightening regulatory requirements add their share on the challenges for banks. This has resulted in banks being tied up in remediation activities at the expense of focusing on clients. Finally, the emergence of new technology-centered players (FinTechs and tech giants such as Apple, Google, or Alibaba/Ant Financials) has increased the need for innovation to avoid being disrupted.
In order to cope with the situation of decreasing margins, banks have primarily focused on “quick wins” to improve profitability. Frequently, these were achieved through cutting the number of employees without fundamental changes in how banks operate. Now, the focus of financial institutions is changing. In a recent survey by WealthBriefing and Deloitte, 85 percent of globally selected wealth managers named increased focus on their core businesses as a key priority.
In the same survey, wealth managers expressed their intent to significantly invest into developing client-facing and clientadviser enabling technologies. Still, with “quick wins” off the table, the question remains: How will banks be able to fund the development of new competitive advantages while reestablishing long-term efficiency?
Performance magazine issue 22, January 2017
Performance is a triannual digest, dedicated to investment management professionals, which brings you the latest articles, news and market developments from Deloitte’s professionals and clients.