What does Industrialization really mean for Banking

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Dr. Peter Leukert, Strategy Global Financial Institutions, FIS

Industrialization strategies that enable banks to reduce cost and complexity while improving customer service.
- Driving forces for industrialization in banking
- Transforming front and back office
- Regulatory trend towards localization (industrialization without globalization?)
- Taking cost and complexity out of the value chain

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What does Industrialization really mean for Banking

  1. 1. What does Industrialization really mean for Banking October 2013
  2. 2. Agenda  Driving forces for industrialization in banking  Transforming front and back office  Regulatory trend towards localization (industrialization without globalization?)  Taking cost and complexity out of the value chain 2 - What does Industrialization really mean for Banking Capco confidential - © Capco - October 2013
  3. 3. Driving force: Lack of trust Reputational challenges have hit the financial industry across the globe Percentage of survey respondents who place trust in given industry, 2012* 80 79 70 66 64 62 60 56 53 51 47 50 40 30 20 10 0 Tech Auo Food Telecom Pharma Energy Media Banks * Participants assessed trust of every industry on a 9-point scale from “trust them a great deal” to “don‟t trust them at all”, Source: Edelman trustbarometer 3 - What does Industrialization really mean for Banking Capco confidential - © Capco - October 2013
  4. 4. Driving force: Regulation Increasing regulatory challenges for the financial industry Basel III Capital, leverage and funding Compressed profitability: Reduced margins whilst increased fixed costs Restrictions on business activities Volcker, ICB, compensation Changes to fundamental structures and business models Additional taxes Bank levies, transaction taxes Changes in consumer protection: MiFID II, RDR Consumer protection Disclosures, distribution Changes to compensation levels 4 - What does Industrialization really mean for Banking Capco confidential - © Capco - October 2013
  5. 5. Driving force: Cost pressure Between 21% and 33% cost reduction still needed to deliver 15% RoE Sample of 8 global banks. Representing 15% of total global banking cost base. 33% expense reduction needed to deliver 15% RoE if income declines by 10% USD Million 21% expense reduction needed to deliver 15% RoE Profit Expense s 2011 2006 15% rise in expenses between 2006 and 2011 Expenses Income flat between 2006 and 2011 Income 58% rise in shareholder equity between 2006 and 2011 Equity 0 100,000 200,000 300,000 400,000 Target 15% RoE, income decline 10% 5 - What does Industrialization really mean for Banking 500,000 600,000 700,000 Target 15% RoE, stable income Capco confidential - © Capco - October 2013 800,000 2011 900,000 2006
  6. 6. “Industrialization is a period of profound change whereby social, economic and technological advances coincide to deliver a rapid modernization of society” Driver Enabling trends 1. Technological      2. Economic      3. Social      Propensity to influence financial services Internet Cloud Miniaturisation Componentisation Standardisation High Intense cost pressure Surplus capacity New entrants/business models Supply chain disintegration Emerging economies High “Electronification” of society Loosening of networks Trust based on data, not relationships Brand/product switching Mass empowerment Medium -> High 6 - What does Industrialization really mean for Banking Banks have been leading adopters of technology…focus now on gaining strategic advantage as quasi-tech companies In the face of stiff economic headwinds, vertical disintegration of the value chain appears inevitable Trends already seen in the buying of commodity Financial Services (insurance, mortgages) will accelerate as consumer behaviour trends towards mass empowerment Capco confidential - © Capco - October 2013
  7. 7. Let‟s review one of the most revolutionary „industrializations‟ of all time: 70 years of the electronic computer 1000 100 Unit price of computing power/USD/byte 10 1 .1 .01 .001 “Worldwide market is for no more than 5 computers” (Thomas Watson, CEO, IBM) Monolithic computing companies (IBM, HP, ICL, Olivetti ), rise of the mainframe First electronic computer built -„Colossus‟ .0001 .00001 .000001 6th commercial computer completed by 1953 Apple, which no longer manufactures computers, is the most valuable company on earth Rise of the network and the PC, mass customisation trend (Dell) Rapid break up of the value chain through changes in technology and supply chain logistics Rise of the Internet and the ubiquitous computer Total specialisation of the value chain First 1 GB disk drive .0000001 .00000001 1944 1960 7 - What does Industrialization really mean for Banking 1970 1980 Capco confidential - © Capco - October 2013 1990 2000 2010
  8. 8. Applying these trends to Financial Services, the banks of tomorrow will look radically different to the banks of today… Today 3 years 5 years + Aggregation Third Party Channel integration Customer service Fulfilment Bank Bank Product Economic and technological drivers to industrialise bottom end of value chain Social and technological drivers further re-shape relationships between customers and banks Third Party Third party Technology Threat of disintermediation as the way consumers buy banking services fundamentally changes Bank Third Party Infrastructure 8 - What does Industrialization really mean for Banking Capco confidential - © Capco - October 2013
  9. 9. Transforming front and back office Front office    Back office Improve customer experience Offer more convenience, choice and control Improve connectivity to customers and employees      Improve quality Reduce waste Reduce complexity Virtualize services Integrate channels Virtuous cycle 9 - What does Industrialization really mean for Banking Capco confidential - © Capco - October 2013
  10. 10. In manufacturing industrialization corresponded to globalization  Distributing/selling products to customers across the globe  Production sites and suppliers across the globe  Cost of transport less and less relevant 10 - What does Industrialization really mean for Banking Capco confidential - © Capco - October 2013
  11. 11. However in Banking regulation drives towards localization  Home market regulators pressuring banks to curtail and / or ring-fence their external activities either through explicit rules (e.g. ICB in the UK) or through the lens of resolution planning (e.g. in Italy).  Home market regulators seeking to limit proprietary trading activity, or ring-fence this from retail deposit-taking activity.  Host regulators in the key hubs limiting, and seeking greater transparency and control, over risk-taking conducted overseas but booked into the hub (e.g. UK PRA).  Host regulators in the hubs and other markets pushing for increased capital and liquidity to be held locally, as well as onerous (and at times unpredictable) governance requirements (e.g. local risk appetite frameworks, local limit frameworks etc.).  Host regulators pushing for foreign bank branches to become subsidiaries, or treating them as if they are subsidiaries, heightening the level of scrutiny and supervision. Industrialization without globalization? Impact on business model, legal entity structure, operating model? 11 - What does Industrialization really mean for Banking Capco confidential - © Capco - October 2013
  12. 12. Evolution of value chain in manufacturing Level Value chain Characteristics 1 Traditional manufacturing  2 Manufacturing partially sourced  3 Straight Through Processing  4 Business Partner Solutions  12 - What does Industrialization really mean for Banking     Many expensive process breaks in value chain All process steps executed in-house Many expensive process breaks in value chain Non-core process steps outsourced to third parties Inefficient process breaks are eliminated Non core process steps outsourced to third parties Smart Sourcing Solutions Manufacturer offers business partner solutions Capco confidential - © Capco - October 2013
  13. 13. Unit costs Taking cost and complexity out of the value chain Regulatory burden takes most or all of this cost saving back… Regulatory burden reduced through sharing Overall cost reduction of 15%+ is only achievable through industrialisation 1 Uncompetitive zone 2 X Traditional re-engineering and off-shoring within a single bank can only go so far... Y 3 Industrializing to reach new cost position:  Sharing across banks to realize economies of scale (e.g. sharing investments for regulatory changes)  Reducing complexity, by e.g.  Standardization  Eliminating redundancy  Removing non value-adding variety Size of firm 13 - What does Industrialization really mean for Banking Capco confidential - © Capco - October 2013
  14. 14. Activities ripe for industrialization? High Strategizing across three categories will help banks realize significant benefits Global research asset sale Wealth mgmt asset sale Investment bank asset sale Commercialization of assets Reference data Payments processing Externalize research offering Medium Infrastructure Electronic trading white labelling Leverage utilities & suppliers Wealth mgmt for masses (non-US) Product rationalization Market data Vendors Low – medium Value of benefits realized ML Online (wealth mgmt white label) Application support Enhanced cost transparency Asset servicing Premises Headcount Cost/ ticket reduction Infrastructure pooling Risk management Global markets client portal Settlement & clearing Improve cost management Location Collateral management Derivatives industry gateway Reference data Application real estate Legal entity optimization Expenses >10 competitors Standard IT simplification >5 competitors Medium Difficulty in benefits realization 14 - What does Industrialization really mean for Banking Capco confidential - © Capco - October 2013 >1-2 competitors Complex

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