The Banker/SAP survey into the prospective state of retail banks in 2015 finds, among other things, that corporate and private banking clients will be the prime focus. Stephen Timewell explains.

Retail banks will undergo many changes by 2015, but how will they change and why? What strategies will banks focus on and what customers and what products will be targeted? In addition, what will be the IT priorities in delivering both customer satisfaction and shareholder value? In short, how can banks position themselves to be market leaders by 2015 and what will be the software requirements needed?

The Banker, in association with technology provider SAP, conducted a detailed survey of retail banks worldwide and the 115 responses from chief executives, heads of retail banking and senior IT decision makers spread across the globe (Europe, Middle East and Africa 64%, Americas 20% and Asia 16%) represents a critical assessment of what banks could look like in 2015.

Revenue expansion is key

Among a number of key findings from the survey, revenue growth is seen as the clear strategic direction retail banks worldwide need to take to influence shareholder value in the future. Revenue expansion heads the survey’s priorities with a clear majority – 92% of respondents rating this as 4 or 5 in the ‘importance scale’ (5 is most important). Risk management and cost management, although of secondary importance, are also rated highly as factors influencing shareholder value, achieving 77% and 70% respectively with 4 or 5 ratings.

RATING OF IT ELEMENTS IN DELIVERING BUSINESS PRIORITIES

In terms of focus on particular customer groups, the clear winners in the survey among retail banks across the globe are corporate and private banking customers. These two customer groups achieved 82% and 78%, the highest ratings, for being the most or next most important in achieving customer satisfaction and driving shareholder value. Following these groups in importance is the affluent on 72%, well ahead of small business on 63% and the mass market on 57%. Clearly the respondents see their corporate and private banking customers as the prime focus for the future.

If revenue growth is the major objective, what are expected to be the key drivers of this growth and where is investment likely to be made and where are costs likely to be cut in the next eight years? In answer to the first of these questions relating to key drivers, the respondents were unambiguous, with 88% stating that cross-selling to existing customers is the most or next most important strategy. After cross-selling, customer acquisition is rated the next biggest driver on 74%, followed by fee-related products and services on 65%.

“Retail clients will be different in 2015, and technology will be the real driver of difference,” says Corrado Faletti, IT head of Italy’s Banca delle Marche. So how do respondents rate the various technology elements in delivering business priorities? In a list of IT factors, innovation rates as the most critical element in the business strategy, achieving the highest ‘most important’ ranking at 43%.

However, taking a broader view and including the ‘next most important’ ranking, the picture changes and although innovation reaches 73% under the combined measure, respondents rate tools, such as front-office automated functions, as the most important IT factor overall on 80%.

Tools are closely followed by platform and architecture development on a combined 79% and back-office efficiencies and effectiveness on 74%. Innovation may be vital but tools and systems are seen as more important overall. And in other results, often-discussed insourcing and outsourcing are given a relatively low IT importance overall by comparison, on 32% and 41% respectively.

In looking towards 2015, how are banks going to adjust their spending behaviour? “Banks will follow what is happening in the car, food and clothing industries; differentiation will be made by strong brand names, high quality or low prices,” says Emanuel Obodescu, chief executive of Piraeus Bank Romania. The survey results show that 80% are looking to expand their investment in IT with only 1% looking at a decrease. In terms of branch networks, 51% of respondents are looking to expand while 28% want to remain the same and 21% are looking to reduce branches.

Surveying other spending areas, there are mixed views regarding central functions, such as marketing, with 45% looking to invest, 45% remaining the same and 10% going for a reduction. In terms of operations and procurement, such as payments, views are more mixed with 38% wanting to expand, 36% remaining the same and 26% opting for a reduction.

Similarly, attitudes to the future number of employees is surprisingly varied, with only 41% looking to expand their workforce, while 39% want to remain the same and 20% are opting to reduce.

More hands on decks

In assessing these results, 92% of respondents believe revenue growth is essential to develop in the period to 2015 and 80% believe further IT investment is part of that strategy, but it is interesting to note that 59% believe such expansion can be achieved without increasing the number of employees. While this demonstrates strong faith in banks and IT systems to boost productivity and efficiency mainly through technology, it seems difficult to expect the business growth desired without some workforce expansion.

RELATIVE IMPORTANCE IN INFLUENCING SHAREHOLDER VALUE

According to one chief executive: “The new generation depends heavily on the internet. Speed and convenience is everything… [internet banking] is the way to provide speedy and effective financial services. However, it is important not to downplay or ignore the ‘human touch’, that is, human interaction for advice-related services and sales.”

Another aspect of the survey included questions to determine the relative importance of individual risk management areas and the effect of costs attached to regulation and compliance. Of the three risks assessed – credit, operational and market – the area of most importance is credit risk, with 55% rating this as ‘very important’ to their business and when the ‘quite important’ category is included the overall total is 83%.

Operational risk comes next, with a 28% ‘very important’ rating and a combined importance rating of 76%, followed by market risk with a similar 28% ‘very important’ rating and a combined 67% rating. While all risk factors are seen as important, credit risk for retail banks is by far the dominant concern.

As for the impact of regulatory costs, respondents are divided. While 39% see the regulatory/compliance cost issue as limiting investments and innovation, 38% view the costs positively as driving value added and 22% see them as having a neutral effect.

Looking at the usage of software packages, strong responses in excess of 80% are achieved in respect of software packages in the key areas of accounting, reporting and human resources. But how important have been (and will be) particular legal requirements, such as Basel II and the Sarbanes-Oxley Act, in influencing decisions to introduce or upgrade software packages?

The survey showed that Basel II ‘completely’ influenced 49% of respondents and had some influence on 83% of respondents. International Accounting Standards (IAS) and Sarbanes-Oxley had some influence over 58% and 45% respectively.

The final survey question addressed what proportion of the global retail banking marketplace in 2015 would be accounted for by the banks’ financial services industry, given the banks’ share today is 90%. The respondents appear undaunted by non-bank competition and indicated the bank share will remain the same or be slightly lower.

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