Moving forward

Although the credit crisis and resultant financial turmoil clearly hit the banking and finance sector hard, a recent business climate survey by KPMG in the US of banking and finance executives, reveals optimism in the industry. Over 50 percent of these executives believe the economic recovery will begin in 2010, and are preparing for the future. Carl Carande analyzes and discusses the results.

There is now increased emphasis on transforming business models to align with evolving strategies and capitalize on opportunities, to attain profitable and sustainable growth, and manage the cost structure. Such transformation may well be all-encompassing: companies are searching for new products, services, or other income generators to drive top-line growth, while still managing costs efficiently and without compromising risk management principles.

Examining revenue streams
The KPMG business climate survey¹ affirms the importance of identifying incremental revenue streams; 57 percent of executives cited the need to find new sources of revenue growth as a major challenge. This is even more critical due to the recent banking business model where basic consumer products have been offered free of charge, with yield spreads, fees, penalties, and - more recently - credit and securitization innovations, generating the revenue.

With today's greater regulatory scrutiny, minimal yield spreads, and a securitization market that is a fraction of its former self, the subsidized approach no longer appears viable.

Moving forward, we see two strategic models that companies may pursue.

The Traditionalist Model
In this model, the bank follows a 'back-to-basics' approach to serve their clients, with emphasis on traditional commercial banking products including checking and savings accounts, credit cards, mortgages, and standard investment vehicles. When offering what many would consider to be commodities, banks adhering to this model will likely strive to become economically advantaged relative to their peers in order to grow profitably. All this must be accomplished while providing competitive products and customer service.

The Innovative Model
While not completely disregarding the need for cost optimization, other banks are focusing on truly new and innovative products or services that add value for the customer. The goal is to garner not only incremental market share but also offer high enough customer value to generate additional banking fees. The innovative model could involve incremental charges for such optional services as high-speed transfers or notification of transactions being delivered to a mobile device through text or email alert. A service that is gaining popularity in many parts of the world is mobile payment options.

Many European banks, due to the UK's Treating Customers Fairly initiative, may be further along the evolutionary path of a business model where products and services that offer true value to customers are available at an appropriate price, considering appropriate risk characteristics.

Banks will need to make strategic decisions regarding which revenue streams will have the most potential, considering their existing customer base, appetite for risk, and capital position. Those banks that most carefully articulate the desired end-state will be more likely to achieve competitive advantage. But transforming the banking business model will require investments of both time and money. From changing technology and retraining staff to implementing pilot programs, the cost side of the business model equation cannot be ignored.

The industry continues to examine its cost structure
The survival mode of many companies in the recent past necessitated immediate and drastic cost cutting measures. While significant human resources cost reductions now appear to be in the past, opportunity still exists in many pockets of indirect expenditures by viewing cost optimization through a strategic, rather than a siloed, lens. There further appears to be vast opportunity for cost optimization as banks examine their current business processes and vendor relationships, and create their roadmaps for executing strategies.

Strategic investment for long-term growth and competitive advantage is at the heart of realizing an optimized cost structure. And this begins with understanding how a company's overall business model impacts costs. As the banking business model undergoes transformation in order to realize new growth opportunities, it will be important to understand both the short-term 'shocks' to costs while implementing new processes, technology, or compensation structures as well as the long-term cost implications.

However, cost optimization is a significant piece of the profitable growth equation, even when there are no plans for significant changes to revenue streams. A holistic approach to cost can break down the silos among operational functions, searching for synergies and efficiencies. It allows for insights into potential benefits or unintended consequences stemming from cost-sensitive decisions. In this light, savings from cost reductions in one area may fuel the investment needed in another area.

One transformational cost opportunity that most of the largest US banks are examining is the long-discussed Branch Image Capture solution for servicing retail and commercial clients. Such strategic solutions have several variations (front counter, back counter, hybrid) but all focus on alternatives of digitizing customer transaction information at the point of presentment. This allows for expedited processing, creating revenue opportunities that can be shared with clients and significant cost reduction opportunities across transportation and check processing support areas. These strategies involve significant up-front commitment from the banks but have shown transformational cost enhancements on the back-end.

Regardless of the specific initiative, successful cost structures include a process that sets cost management objectives, identifies where sustainable savings can be achieved and where investment is needed, and ensures monitoring of progress against strategic objectives.

Conclusion
With optimism that global economies are beginning to emerge from an especially challenging period, there is increased recognition that the landscape has changed. Heightened regulatory scrutiny - with increased compliance requirements - already exists, while consumers and businesses are adapting to a more risk-averse environment. In this new world, banks are searching for new strategies that allow for profitable growth.

The transformation of existing business models will take many forms. Those companies that are successful will be balancing many moving parts, with opportunities available on both sides of the revenue-cost equation. That equation does not imply simply raising revenue or cutting costs. Rather, transformation will involve fundamental changes to the business model, determining where to invest for revenue growth and determining how best to improve efficiencies.

Article author

Carl Carande
Principal
KPMG in the US +1 704 335 5565 Carl Carande View all articles by this author

1. Financial Service Executive Survey Points to Economic Recovery, KPMG in the US, September 2009.