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In this contribution I like to draw your attention to a research done by Capgemini in collaboration with EFMA and ING published mid of March 2008 and available for download here.

The report contains two parts.

  • Within the first section of the report banking service pricing is compared across different banks and countries. The results are related to similar studies from the past.
  • The second section describes “organic growth” of banks within their domestic markets.

Pricing:The report summarizes feedback form 194 banks out of 26 countries covering Europe Eurozone, Europe non-Eurozone, North-America, and Asia-Pacific. Although banking markets act global, the retail banking competition has strong differentiations by local flavours. In the competition within retail banking the influencing of customer behaviour was dominantly driven by pricing of banking services.

  1. The services (in this report) were categorized by sales services (for banking products), influential services (channel and support), and unseen (on-top, exceptional handling e.g.).
  2. For comparison reasons the report uses profiles (a local one for domestic market with local product basket, and a global profile with a uniform product basket across different countries).
  3. The bank customers were described by activity level (less active, active, and very active).

Although the average of the services price within the local profile was about the same value over all regions, the bandwidth of variances was considerable great for rest of Europe and North America. For those regions pricing of the global profile (product basket) was highest. As explained in the report:

  • harmonisation of pricing within Europe Eurozone was influenced by the business requirements associated with SEPA within payments services (as an example).

Banks used service pricing to influence customer behaviour regarding channels etc. to improve performance of specific service provisioning.

Due to major differences

  1. in local customer behaviour compared to other regions (like payments and cash utilization in US) and
  2. the most sensitive customer attraction mechanisms over last decades,

service prices vary strongly over different regions and countries. Over time also service pricing had very strong local impacts (subprime in US). At the moment prices for specific services vary largely over European Eurozone countries as well. It’s to be expected, that SEPA will drive more harmonization across the countries by lowering pricing. This in itself will increase level of competition among different banks. Pricing in the none-euro zone depends strongly on the habits of local customers/banks (Nordics versus Eastern-Europe). Discrepancies in pricing across countries are a clear indication for matured versus fast-changing markets.

Organic growth in domestic markets: Larger banks deal dominantly with retail banking.

  • In most countries only a few number of banks control dominantly the local retail banking business.
  • Only 6 of 52 banks from this research had a percentage of domestic in global retail business of less than 50.

Therefore growth strategies biased on M&A are no more viable and growth has to come from organic (under the restriction of risk limitation and assured profit for growth strategies).

Interesting is the expected growth in retail banking revenues over next 12 years. As some nations (populations) will decrease in size and others are within emerging countries/markets, I correlate the expected revenue development with the expected change in population (from UNO reports). These numbers are very impressive:

  • North America 18%,
  • Western Europe 35%,
  • Japan 29%,
  • Australia 15%,
  • rest of America 22%,
  • rest of Europe 68%,
  • China 169%,
  • India 105%,
  • rest of Asia-Pacific 105%.

The variance among the western countries is amazing. As this report is build on information of 52 banks, one might assume, that growth in emerging countries will go for a lower portion with these banks listed in this report. (It’s unknown whether growth in emerging countries will favour non-leading market participants or we deal with a report selection feature. It’s interesting to explore). The remarkable difference between North America and Australia on one side and Japan, Europe on the other must be partly related to the large variance in pricing of banking services as this was discussed earlier in that report.

As mentioned before growth in domestic retail market requires performance strategies. This as other possible growth parameters are flat (size of population, local growth of economy). The report discusses next performance influencers:

  • combination of: fast time to market, innovation, local client intimacy
  • full multi-channel integration and optimisation
  • dynamic branch management supports increase of sales productivity
  • multi-brand portfolio to create attractive value propositions for different market segments

The last part of the report is an in-depth analysis of these 4 performance alternatives biased by banks with a ratio “revenue growth CAGR to cost growth CAGR” of above 1.0; those market participants which outperformed their domestic competitors. These were Crédit Mutuel CIC, ING, La Caxia, and HBOS. Details of this deep dive are referred to the original document by Capgemini, EFMA and ING.

We all know that these 4 models require appropriate software applications with integration, optimal organizational setup and workflow. To get there business-process-reengineering in conjunction with (application) platform resizing might become crucial.

Determination of the Future: The report continues with a description of the possible impact of influencers on future business of retail banks:

  • new market entrants
  • the cost/income ratio
  • risk management vs liquidity
  • market opening based on regulations
  • enablement by new technology
  • change in customer behaviour towards more demanding and self-directed attitude
  • product vs distribution specialists

A simulation among European retail markets based on alignment of fees and interest margins affecting size of future retail business show a strong impact regarding specific countries and major banks. These types of alignment are expected by regulations like SEPA and others. Latest by these results it gets evident to discuss bank specific growth strategies. This report does and discusses different business models with examples. More details in the report.

Overall this report might support banks to determine their relative market position, customer value, and to reflect on their strategic growth strategies.

May 8, 2008 I attended a Celent Webinar: “Strategic Expense Management in the US Banking Industry” presented by Celent and Oliver Wyman members. A necessity to increase performance was led by the increase of costs, where revenue and revenue growth already declined. The messages from this webinar pointed in typical BPR (business-Process-Reegnieering) activities and determination of built-in cost factors as typical for large reporting structures (HR). Details are in the report available here. It would be interesting to know about the impacts of the Capgemini simulation for the American banking market participants. The cost containment program as suggested by Celent could be a differentiation indicator between US and European banks.

The methodology of Celent’s proposed cost containment program remembers me strongly to similar programs in manufacturing, engineering & construction, and other industries mid to end of the 90’s. A cross-industry expertise exchange towards the banking industry might be very supportive and using best practice most probably avoids some of the mistakes made by those industries in the past.

 Kind regards Paul

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