Mc kinsey on cooperatives cooperative banks at the cusp of a new era

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Mc kinsey on cooperatives cooperative banks at the cusp of a new era

  1. 1. International Summit of Cooperatives Cooperative banks at the cusp of a new era October 2012Any use of this material without specific permission of McKinsey & Company is strictly prohibitedCopyright © 2012. All rights reserved
  2. 2. Five trends will provide the “crucibles” that will transform the bankingindustry over the next decade Banks will right-size and restructure their business model to Right-sizing the remain profitable in the face of regulation that drives lower ROE 1 platform and higher COE Revenues and The distribution of the world’s banking profit and revenue 2 profits shifting to pools will shift dramatically toward emerging markets, where emerging markets many more of the world’s largest banks will originate because of their rapid market expansion Seamless multi- Banks will have lean, seamless multichannel distribution 3 channel customer networks and differentiate on the basis of the customer experience experience they offer by leveraging the rapidly evolving technology Banks will battle with new non-bank entrants to “own” the New competitive customer relationship and will operate in a more competitive 4 threats environment Impact of big data Banks will leverage the explosive growth of available data and 5 on banking computational capacity to improve marketing and operations products McKinsey & Company | 1 Copyright © 2012. All rights reserved
  3. 3. Seven key questions emerging for cooperative banks 1 How can cooperative banks exploit their focus on customer satisfaction to gain market share? 2 Will cooperatives need to look for growth beyond their borders? 3 How can the cooperatives’ branch networks preserve the advantage of proximity while remaining profitable? 4 How can cooperative banks use their internet presence and social media to improve relationships with members? 5 How can cooperatives retain their privileged relationships with members in the face of new non-bank competition? 6 How can cooperative banks develop a common voice to better protect their interests during regulatory reform? 7 In what ways can cooperatives best exploit their unique attributes to optimize their balance sheets? McKinsey & Company | 2 Copyright © 2012. All rights reserved
  4. 4. Contents Overview of key trends Detailed questions for coop banks McKinsey & Company | 3 Copyright © 2012. All rights reserved
  5. 5. 1 Banks will right size and restructure their business model to remain profitable in the face of regulation that drives lower ROE and higher COE Context Implications ▪ Banks’ return on equity (ROE) will ▪ Banks will need to reduce costs and Right-sizing the be negatively impacted by new allocate capital more strategically as 1 platform regulations they return to the traditional retail model – Basel Ill will require higher to remain profitable capitalization, capital quality, and – Banks will maximize capital efficiency Revenues and liquidity and limit capital-intensive operations 2 profits shifting to emerging markets ▪ Emerging markets will offer higher ▪ Banks will need to dramatically cut ROE than developed economies costs and become significantly more ▪ Capital will be scarcer worldwide, efficient Seamless multi- driving higher cost of equity (COE) ▪ Banks’ physical distribution networks 3 channel customer – Due to an investment boom in will involve fewer, leaner branches with experience emerging markets, an aging varying formats adapted to specific population, and a rebalancing segments toward consumption in China – Branches in developed markets will be leaner, with fewer staff, and will perform New competitive an almost exclusive front-line function 4 threats – Banks will have fewer branches but more of them will be in mass-affluent areas Impact of big data 5 on banking products McKinsey & Company | 4 Copyright © 2012. All rights reserved
  6. 6. 1 Return on equity will be negatively impacted by new ESTIMATE regulations – example of the 4 largest EU markets Retail banking ROE, percent Pre- 13.5 13.6 6.6 5.1 regulation Calculated ROE is not risk-adjusted Basel III -2.9 -2.8 -2.1 -1.4 and therefore does not differentiate between regulations EU mortgage directive -0.4 -0.4 -0.1 -0.3 that are ▪ Risk-reducing (e.g., Basel III) and EU payments -0.1 -0.1 -0.1 therefore positively -0.2 regulation (SEPA) impact risk- adjusted ROE EU investment -0.4 -0.5 -0.4 -0.1 ▪ Only reducing regulation (MiFID 2) profitability and therefore have a Country-specific -2.8 -0.3 n/a2 negative impact on n/a2 regulation1 risk-adjusted ROE Post-regulation 9.5 7.0 3.5 3.11 Germany: taxes and levies; establishment of a fee-based advisory model; UK: ICB ring-fencing, FSA on PPI, living wills, account switching/portability, RDRs, taxes, and levies2 Country-specific regulation in France and Italy has either been implemented already in 2010 or has only low impact, and therefore has not been modelledSOURCE: McKinsey working papers on risk No. 36, Day of reckoning for European retail banking, McKinsey & Company | 5 July 2012 Copyright © 2012. All rights reserved
  7. 7. 1 Moreover, return on equity will be significantly higher ESTIMATE in emerging markets than in developed markets ROE COE Comparison of banking industry return on equity (ROE) and cost of equity (COE) by region, not accounting for mitigating actions from banks in response to new regulation (simplified simulation), 2015 ▪ Even after Percent restructuring and mitigating ROE forecasts include margin projections but no 19.5 actions, ROE of mitigating actions in reaction to Basel III, Dodd-Frank banks from developed markets remains 14.1 13.1 far below that of banks from developing 9.0 9.0 9.6 9.4 markets 7.7 6.7 6.4 ▪ COE will not be much higher in emerging markets than in developed markets US Europe1 Other China Other emerging developed1 COE based on Western Europe; ROE based on European quoted banks (about 90% from Western Europe) McKinsey & CompanySOURCE: Reuters; Datastream; Federal Reserve Bank; Global Insight; McKinsey Global Financial Initiative | 6 Copyright © 2012. All rights reserved
  8. 8. Residential 1 In addition, cost of equity will increase because demand real estate for capital will outstrip the supply of savings in the Infrastructure coming years Other productive investment Global investment and savings USD Trillions, constant 2005 prices and exchange rates ▪ There will be a USD 2 trillion shortfall in savings in 2030, due to 24 22 – Increased demand for capital fuelled by an 5 investment boom in USD 2 trillion emerging markets 4 savings – Limited savings due to shortfall will population aging and a result in rebalancing toward higher COE consumption in China 10.7 ▪ In addition, investors no 2.1 15 longer see banks as safe 1.6 assets and demand 4.5 0.8 0.7 higher risk premium 7.0 2 3.1 ▪ As a result, the cost of equity will be higher 1981 2008 2030 2030 global 2030 savings shortfallSOURCE: Economist Intelligence Unit; Global Insight; Oxford Economics; World Development Indicators of the World Bank; McKinsey & Company McKinsey Global Institute Capital Supply & Demand Model; McKinsey Global Economic Growth Database | 7 Copyright © 2012. All rights reserved
  9. 9. 1 Consequently, banks in the developed world need to carry out ESTIMATE dramatic cost reductions to move to sustainable levels of ROE1 Banks need to reduce cost-to-income ratio in years to come Cost-to-income ratio Percent 100 Total cost reduction by region to offset ROE gap Percent2 75 Europe 26 50 USA 20 Target cost-to- 25 income: ~42% Japan 14 0 2000 2002 2004 2006 2008 2010 2012 2014 20161 Based on the assumption of flat revenues and no inflation for the 2010-2015 period2 Percentage calculated as cost reduction over estimated total regional operating costs McKinsey & CompanySOURCE: McKinsey Global Banking Practice; McKinsey Global Banking Pools | 8 Copyright © 2012. All rights reserved
  10. 10. 1 To remain profitable, banks will restructure to focus Impact of Basel III None Low more on retail banking and less on capital markets Medium High The impact of Basel III on banks’ business lines Corporate Capital Regulatory requirements Retail banking markets Rationale Capital ratio All products will be affected by reduction of available and capital deductions1 Capital market products will be most affected by market Market risk framework risk (particularly OTC derivatives and cash products) Capital require- ments OTC derivatives will be significantly affected by CCR Counterparty credit risk increase; retail and corporate banking will only be indirectly affected via cross-selling All products with low-risk weight – like capital market Leverage ratio products – will mostly be affected by leverage ratio measures All short-term funded products – like capital markets LCR products – will be affected (only relevant for cross-selling) Liquidity and funding Consumer finance products and claims toward FIs face an NSFR increase in LT funding due to classification as “illiquid” Overall1 Different effects for individual segments might arise depending on bank’s capital allocation McKinsey & CompanySOURCE: McKinsey analysis | 9 Copyright © 2012. All rights reserved
  11. 11. 1 Furthermore, cost cutting will occur through decrease in branch density and staffing levels Decrease in branch density Bank branches per million inhabitants 475 -26% 350 With peaks of 30-40% in some countries 2010 2015 Decrease in staffing levels Average FTEs per bank branch 10 -50% ▪ Fewer FTEs needed as low-value-added 4-5 activities move to remote channels ▪ The mix of people will change 2010 2015 McKinsey & CompanySOURCE: McKinsey European consumer and Banking Research and Multichannel Survey | 10 Copyright © 2012. All rights reserved
  12. 12. 1 Nonetheless, lower staffing levels must translate into more value-added activities at the branch, such as sales and advice to customers Branch staff time spent per activity1 Total staff time normalized so that brick-and-mortar equals 100 100 Sales and advice 20 78 Customer service 10 -49% 29 51 Teller service 30 8 16 30 Back-office 30 10 5 Other 15 7 3 10 6 Brick-and-mortar Online adopters Direct first Percentage of 20% 37% 59% staff time spent on sales and advice Online banking 0-10% 15-30% 60-80% usage1 Includes management, training, and other McKinsey & CompanySOURCE: McKinsey European Retail Banking Multichannel Survey 2010; EFMA | 11 Copyright © 2012. All rights reserved
  13. 13. 2 The world’s banking profit and revenue pools will shift dramatically toward emerging markets Context Implications Right-sizing the ▪ Growth will remain slow in ▪ Revenue pools will shift to emerging 1 developed economies markets platform – Advanced economies are – Emerging markets will represent 50% of deleveraging, are plagued by high world banking revenue in 2020 (up from unemployment and public debt, and 34% in 2010), with more than 60% of Revenues and are struggling to put their fiscal revenue growth in banking coming from 2 profits shifting to houses in order emerging markets emerging markets ▪ Banks will have to compete for market share on a global scale where emerging markets’ players Seamless multi- are driving banking growth 3 channel customer experience ▪ In emerging markets, increasing financial depth and rapid GDP growth will drive banking growth New competitive ▪ 2.5 billion adults do not use formal 4 financial services today, and the threats rapidly growing middle classes are driving internal consumption up Impact of big data 5 on banking products McKinsey & Company | 12 Copyright © 2012. All rights reserved
  14. 14. 2 The fiscal tightening required to reduce public debt levels will slow growth in developed countries Fiscal tightening required in 2010-2020 to meet the Euro con- Total government debt, pre- and post-crisis (USD) vergence criteria of government debt of 60% of GDP by 2030 Percentage X More than 50% increase 2008 2012 Percentage of GDP of GDP 169 Japan 207 23 13.41 113 15.5 Greece 184 63 95 10.6 United States 125 31 106 4.9 Italy 119 12 72 7.5 Portugal 117 63 44 Ireland 159 13.5 115 68 France 31 6.0 89 67 Germany 82 22 4.4 40 Spain 77 93 9.4 United 41 74 78 10.4 Kingdom 50 Canada 70 39 4.0 Average adjustment required for G20 countries1 Japan’s target for fiscal adjustment is set at 80% of GDPNote: Countries are assumed to undergo a gradual transition in their primary balance in 2010-2020 and maintain a constant primary balance after 2020 McKinsey & CompanySOURCE: International Monetary Fund; McKinsey Global Institute; IHS Global Insight; McKinsey analysis | 13 Copyright © 2012. All rights reserved
  15. 15. 2 Banks in emerging and developed markets will have ESTIMATE to compete for market share on a global scale World, relative size of banking revenues after risk cost to nominal GDP Percentage of global GDP Historical data Base case forecast ▪ After 40 years of Crisis in steady growth in 6.0% Southeast global banking 5.5% Asia revenue relative to GDP, our McKinsey 5.0% Global Financial 4.5% Initiative base case forecast predicts 4.0% Dot-com – Flattening trend 3.5% bubble and Financial – No recovery to pre- burst crisis crisis level over the Mexico 3.0% next decade crisis 2.5% Banking has ▪ This, combined with 1987: entered an era of stagnant economic 2.0% Black slower growth growth, implies that Monday banks won’t be able to 1.5% grow with the market. 1.0% History Forecast To grow, they will have to compete for 0.5% market share 0% 1980 1990 2000 2010 2020 McKinsey & CompanySOURCE: McKinsey Global Financial Initiative; Thomson Reuters | 14 Copyright © 2012. All rights reserved
  16. 16. 2 In emerging markets, increasing financial depth will drive banking growth ESTIMATE Financial depth1, YE 2010 Percentage of regional GDP United States 462 Developed Japan 457 Western Europe 400 Other developed 388 China 280 India 209 Emerging Middle East & Africa 190 Other Asia 168 Latin America 148 CEE & CIS2 1421 Calculated total regional debt and equity outstanding divided by regional GDP2 Central and Eastern Europe and Commonwealth of Independent States McKinsey & CompanySOURCE: McKinsey Global Institute, Mapping Capital Markets 2011; McKinsey Global Finance Initiative | 15 Copyright © 2012. All rights reserved
  17. 17. 2 In emerging markets, growth will be more than twice as fast as developed economies, adding more than 160 million middle-class households by 2020 Equivalent Evolution of world real GDP annual real Evolution of households income by region growth from distribution in emerging markets1 Real 2005 USD Trillions 2010 to 2020 Millions of households Emerging countries Percent Developed countries 19.3 70.5 1,206 ▪ There will be more 11.1 Household 1,084 than 160 million new 306 middle-class 26.2 5.7% income 139 51.2 8.2 ≥ USD 25,000 households in emerging countries, 15.1 which is more than the current total Household number of house- income 945 900 holds in the US 44.3 2.1% < USD 25,000 ▪ This rising middle 36.1 class will rapidly drive up demand for financial products 2010 2010-20 2020 2011 2020 growth1 Income categories defined per annual income in USD PPP McKinsey & CompanySOURCE: IHS Global Insight; Global Insight; McKinsey analysis | 16 Copyright © 2012. All rights reserved
  18. 18. 2 Nearly 2.5 billion people are still “unbanked” in Percentage of total adult population that is financially emerging markets, representing a huge business excluded opportunity for banks Adult population not using formal financial services Millions East Asia 876 59 South Asia 612 58 Sub-Saharan Africa 326 80 Latin America 250 65 Central Asia and 193 49 Eastern Europe Arab states 136 67 High-income OECD 60 8 Total 2,453 53 McKinsey & CompanySOURCE: Chaia et al., Half the world is unbanked, Financial Access Initiative, 2009 | 17 Copyright © 2012. All rights reserved
  19. 19. 2 Consequently, banks’ revenue pools will shift to emerging markets Revenue pool after risk costs1 Origin of absolute change in revenue pool USD Trillions, 2010-2020 USD Trillions, 2010-2020 Emerging Percent Percent 100% = 3.1 6.9 markets 100% = 3.8 will More than Emerging Other represent 60% of markets 22 28 revenue emerging 50% of Other emerging 32 world growth in China 12 banking banking Other revenue will come 14 21 developed2 in 2020 from China 29 emerging Developed 11 markets US 25 markets Other developed2 8 23 US 20 Western 26 Europe 18 Western Europe 11 2010 2020 2010-201 Banking revenue after risk costs = net interest income + net fees and commissions - risk costs (to account for losses on delinquent loans; meant to capture “normalized” loan loss provisions)2 Includes Australia, Canada, South Korea, and Japan McKinsey & CompanySOURCE: McKinsey Global Banking Pools | 18 Copyright © 2012. All rights reserved
  20. 20. 3 Banks will have lean, seamless multichannel distribution networks Context Implications Right-sizing the ▪ Consumers are using multiple ▪ Simpler banking transactions and sales 1 channels to seek information, will mainly take place online and on platform receive advice and support, and mobile devices purchase products – The vast majority of financial – Customers will increasingly demand transactions will take place on the Revenues and consistent, continuous service internet and on mobile devices 2 profits shifting to across multiple channels (mobile, – For example, mobile banking is growing emerging markets internet, social media, phone/video rapidly and transforming the payments calls, and branches) industry Seamless multi- – They will expect more customized ▪ Branches will focus more and more on marketing and individualized providing advice and handling complex 3 channel customer products transactions and sales experience ▪ Low trust and satisfaction in the – Sales and advice for simple products will banking system have made increasingly take place outside the customers less loyal, increasing branch New competitive switching and spreading 4 threats behaviours Impact of big data 5 on banking products McKinsey & Company | 19 Copyright © 2012. All rights reserved
  21. 21. 3 Customers are using multiple channels to seek information, EXAMPLE Percentage of respondents receive advice and support, and purchase products Channel Quoting Purchase Channel Purchase Servicing1 Insurer example Channel Channel 43% 53% switching switching Internet to agent/ Internet to agent/ 14% 1% in person in person Call centre to agent/ 10% Call centre to agent 4% in person Agent to internet/ Agent to internet/ 5% 31% call centre call centre Internet to call Internet to call Intra-direct Intra-direct 13% 2% centre centre Call centre to Call centre to 1% 15% internet internet Pure agent/ Pure agent/ Bank 38% 31% in person in person Pure Pure 15% 13% internet internet Pure call Pure call 4% 3% centre centre1 Includes portfolio valuation/new deposit/arbitration/changes in policy clauses and personal data McKinsey & CompanySOURCE: 2012 McKinsey insurance multichannel excellence initiative – Customer behaviour survey | 20 Copyright © 2012. All rights reserved
  22. 22. 3 Moreover, online banking usage will continue to rise in tandem with internet usage Online banking usage1 Percent, 2009 80 Netherlands 70 I Finland Sweden Denmark Norway 60 3-5 years Canada Self first 50 nd Switzerland Luxembourg US tre et Belgium UK ark Japan ll m 40 era 7-10 years II France Germany Ov Australia Multi- Online Spain Channel 30 Ireland 10-15 years III adaptors Austria South Korea Slovenia 20 Poland Czech Brick- Brazil Portugal and- Middle Republic IV Italy Hungary mortar Argentina East 10 Colombia Russia Mexico India China Greece Macedonia 0 Turkey Bulgaria 0 5 10 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 Romania Serbia Internet usage1 Percent, 20091 Percentage of individuals who used the internet/online banking in the past 3 months McKinsey & CompanySOURCE: McKinsey Multichannel Survey (2010) | 21 Copyright © 2012. All rights reserved
  23. 23. 3 In addition, low trust and satisfaction in the banking system have increased switching and spreading behaviours Trust in the banking1 system … as has satisfaction with has decreased … banking services Percentage of respondents Percentage of respondents ▪ Decreasing trust and neutral or satisfied 54 96 94 satisfaction in the 84 banking system 28 14 ▪ Perceived risk leading to money switching and spreading Strongly A little bit Not 1998 2005 2009 (worse) (unchanged) ▪ Sharp increase of online usage – Consumers increased switching and spreading behaviours information gathering and shopping – loss of Withdrawals, Deposits, EUR Billions, Netherlands Deposit “contact” with brands Withdrawal 50 ▪ Decreasing loyalty and increasing product unbundling 0 -50 Jan 1998 Jun 20091 Results from German market research launched in December 2009 (sample of 1,056 individuals) McKinsey & CompanySOURCE: BdB; Ipso; GfK Eurisko Finance 2009; CDJ Survey 2010 | 22 Copyright © 2012. All rights reserved
  24. 24. 3 Customers will favour digital channels for Branch only Multichannel simple transactions Digital only Evolution of client distribution preferences Percentage of clients Complex/large Support/ Transactions/ Simple/small sales complaints info requests ticket sales 100% 0 1 5 10 20 30 25 40 50 50 70 50 40 99 50 70 45 45 30 30 20 5 5 10 2010 2015 2010 2015 2010 2015 2010 2015 McKinsey & CompanySOURCE: McKinsey European Consumer and Banking Research and Multichannel Survey | 23 Copyright © 2012. All rights reserved
  25. 25. 3 For example, mobile banking is growing rapidly and transforming the payments industry Mobile banking usage statistics, global 2005-2015E Gross value of mobile payment transactions Percent Never Monthly Daily USD Billions Few times Weekly a year 110 38 50 58 CAGR = 119% 71 60 19 18 15 17 30 11 14 12 17 9 13 10 11 2 5 7 10 2 4 5 2005 2010 2011 2015 2008 2009 2010 2011 2012 2013SOURCE: Forrester; 2012 World Retail Banking Report survey of 41 banks; Finalta/EFMA Multichannel McKinsey & Company | 24 Survey 2008; IE Market Research Corporation; McKinsey analysis Copyright © 2012. All rights reserved
  26. 26. 3 Bank branches will focus more on complex transactions as Direct channels1 Call centre more interactions move to direct channels Agents/brokers European average Branches Product purchasing Current sales breakdown by channel Expected sales breakdown by channel 2010, percentage of sales 2015E, percentage of respondents Current 4 3 84 9 100 53 43 100 accounts 3 1 Savings 3 77 25 16 100 38 59 100 accounts 1 Investments 78 7 4 11 100 58 11 3 28 100 Mortgages 80 11 4 4 100 72 13 5 10 100 Consumer finance 73 8 6 12 100 32 13 8 47 100 products1 Internet, ATM, mobile McKinsey & CompanySOURCE: Efma online survey of 150+ European banks, December 2010 | 25 Copyright © 2012. All rights reserved
  27. 27. 4 Banks will battle with new non-bank entrants to “own” the customer relationship Context Implications Right-sizing the ▪ Non-bank players are infringing on ▪ Banks will maintain ownership of the 1 lucrative niches previously customer relationship by strategically platform dominated by integrated banks adjusting their business model to better – Remote payments, new currencies, fight new entrants B2B payments, and e-invoicing will – Majority of revenues come from owning Revenues and transform the payment industry the relationship and taking on risk within 2 profits shifting to – In market segments such as the value chain emerging markets lending, bank accounts and ▪ New integrator tools that disinter- transactions, protection and mediate services and commoditize insurance, and deposits and products threaten banks’ ownership Seamless multi- investments of the relationship 3 channel customer experience ▪ Additional players leveraging existing infrastructures or new business models will infringe on the banks’ traditional playing field New competitive – Direct banks and insurers are 4 threats rapidly growing among young, wealthy, and educated consumers – Retailers are expanding their offerings of financial products Impact of big data – Telecommunications firms are 5 on banking entering financial services products McKinsey & Company | 26 Copyright © 2012. All rights reserved
  28. 28. 4 Non-bank players are emerging and infringing on lucrative niches previously dominated by integrated banks New products and services offered by new players Find the best prices Aggregate and optimize management of personal finances Make peer-to-peer payments Make mobile payments Protect against fraud ▪ New non-bank players are emerging in parallel with industry leaders thanks to innovative new technologies or business models or by taking advantage of regulatory changes ▪ New players often occupy specialized but lucrative niches, thereby threatening markets previously dominated by larger players McKinsey & Company | 27 Copyright © 2012. All rights reserved
  29. 29. 4 Examples of non-bank players that infringe on traditional banking market segments Global retail banking revenue after risk costs1 by main revenue segment, and examples of non-bank players that infringe on each segment 2010 Specialty lenders Telecoms Lending USD ~1,200 billion Technology Insurers companies Bank account and Protection and Banking transactions products insurance USD ~500 billion USD ~50 billion Deposits and investments Retailers USD ~430 billion Postal services Specialized private banking players1 Banking revenue after risk costs = net interest income + net fees and commissions - risk costs (to account for losses on delinquent loans, meant to capture “normalized” loan loss provisions) McKinsey & CompanySOURCE: McKinsey Global Banking Pools | 28 Copyright © 2012. All rights reserved
  30. 30. 4 Banks’ payments businesses are particularly encroached on by non-bank players Traditional payments area Traditional payments Consumer Payment Issuer Network Acquirer Acceptance Merchant businesses services device device services Information- Mobile POS Mobile POS Information- Consumer card based payments and payments and based transactions business acceptance acceptance business models models Remote payments and new currencies Other consumer electronic Remote payments and new currencies Deposits B2B payments and e-invoicing Business payments McKinsey & CompanySOURCE: McKinsey Payments Practice | 29 Copyright © 2012. All rights reserved
  31. 31. 4 Consequently, winning the battle to own the relationship with customers will be crucial for banks… Have Know and customers’ understand trust customers Owning the relationship Owning the with Be customers’ trusted relationship Collect data and customers partner to increase understand customers will be crucial loyalty and receptive- to tailor the offering to to propose ness to new products their preferences and new products needs and services Be visible to and thus to customers capture value Be the prime interface with whom customers interact to have their attention and be visible to them McKinsey & Company | 30 Copyright © 2012. All rights reserved
  32. 32. 4 … because the majority of revenues come from owning EXAMPLE OF THE US PAYMENTS INDUSTRY the relationship and taking on risk within the value chain Segments that own the relationship and take on risk Payments industry value chain Transaction Acquirer Issuer Payment Network1 acquirer1 processor1 processor1 instrument issuer1 Credit Card-based Debit Prepaid ACH Non-card Wire electronic Money transfer Book transfer Cash n/a Paper-based Cheque Deposits and DDA n/a instruments ATM n/a Other n/a1 Acquirer: financial institution that has the account with the payee (merchant or biller) to receive payments. Acquirer processor: operations functions for the acquirer. Network: institutional clearing and settlement. Issuer processor: operations functions for the issuer. Issuer: financial institution that has an account with the payor (consumer, buyer, etc.) McKinsey & CompanySOURCE: McKinsey US Payments Map, Release Q4-2011 | 31 Copyright © 2012. All rights reserved
  33. 33. 5 Banks will leverage the explosive growth of available data and of computational capacity to improve marketing and operations Context Implications Right-sizing the ▪ Technology enables leveraging of ▪ Banks will adjust their business models 1 big data through explosive growth to leverage the explosive growth of platform of available data and computational available data and computational capacity capacity to improve management, ▪ Leveraging big data can translate decision making, and operations Revenues and into improved decision making, – Banks will invest in analytical software to 2 profits shifting to management, and operations for take advantage of the information they emerging markets financial services institutions handle (e.g., buying patterns, financial – Big data has high value potential in information) Seamless multi- financial services – Banks will better understand their customers (profitability, levers of value 3 channel customer and influence, potential), remember their experience preferences, and define more granular customer micro-segments New competitive 4 threats Impact of big data 5 on banking products McKinsey & Company | 32 Copyright © 2012. All rights reserved
  34. 34. 5 The explosive growth of available data and of computational capacity enables businesses to leverage big data Data generated worldwide Computational capacity of the world’s fastest computers Exabytes (= 1 billion gigabytes) FLOPS1 2, log scale 35,000 16 All the information stored 1E+19 Today’s fastest computers inside the US Library of are more than 10 trillion times Congress amounts to 1E+17 faster than those in 1960 <0.00025 exabytes 1E+15 1E+13 1E+11 7,900 1E+9 1E+7 50 110 1,300 1E+5 2000 2005 2010 2015 2020 1960 61 70 73 80 85 90 97 2000 09 10 2011 Available data will be characterized by its scale, distribution, diversity, and timeliness ▪ Scale: data sets will be massive, >1 petabyte (1 million gigabytes) in size, and built to be easily scaled up ▪ Distribution: data will come from and be distributed both within and outside the organization ▪ Diversity: data will be semi-structured, unstructured, or a combination of different data types ▪ Timeliness: data will be captured and analyzed in real time, allowing for immediate response1 Floating-point operations per second2 Rmax FLOPSSOURCE: IDC Digital universe study 2011 and 2010; Hilbert and López, “The world’s technological capacity to store, communicate, McKinsey & Company and compute information,” Science, 2011; www.vetta.org; McKinsey analysis; McKinsey Global Institute | 33 Copyright © 2012. All rights reserved
  35. 35. 5 The financial services sector is likely to be in the best Bubble size denotes relative size of GDP position to leverage big data Moderate value potential Moderate value potential High value potential High value potential Low ease of capture High ease of capture Low ease of capture High ease of capture High Utilities Healthcare providers Financial services and insurance Natural resources Information1 Computer and electronic productsBig Manufacturing Transport and warehousingdata Professional services Real estate and rentalease ofcapture Management Construction of companies Wholesale tradeindex Admin, support, Accommodation and food and waste management Retail trade Other services Educational services Government Low Arts and entertainment Low High Big data value potential index21 Information includes software and internet companies2 Determined by industry average of transaction intensity, amount of data per firm, variability in performance, customer and supplier intensity, and turbulence McKinsey & CompanySOURCE: McKinsey analysis | 34 Copyright © 2012. All rights reserved
  36. 36. 5 By leveraging big data, banks will better understand their customers, improve modeling, and guide decision making Predictive modeling Social network mapping Typical applications: Typical applications: identify estimate customer churn; key purchase influencers; develop the “next best quantify shifts in sentiments offer” for up-sell/cross-sell; estimate risk Neural networks Visualization tools Typical applications: Typical applications: detect fraud; perform visualize risk; understand diagnostics correlations ▪ Computational capacity for real-time use has grown from 0.004B MIPS1 to >6,000B MIPS over the past 20 years ▪ Business analytics software spend in 2009 was USD 26.1 billion and is expected to grow at a 7.6% CAGR through 20141 MIPS = 1 million instructions per second. By comparison, modern desktop/laptop computers have processors with ~20,000 MIPS McKinsey & CompanySOURCE: McKinsey Global Institute analysis | 35 Copyright © 2012. All rights reserved
  37. 37. Contents Overview of key trends Detailed questions for coop banks McKinsey & Company | 36 Copyright © 2012. All rights reserved
  38. 38. 1 How can cooperative banks exploit their focus on customer satisfaction to gain market share?Context Questions to ponder▪ As public banks What dimensions of customer satisfaction are of greatest importance to your members? face pressure to cut How does your cooperative understand the specific irritants for customers and their main costs, consumer A grievances with competitors (e.g., executive compensation and bonuses, large public bailouts to satisfaction banks, hidden fees, questionable mortgage approval standards)? initiatives are often delayed Which coop-specific attributes or values could be leveraged to address consumers’▪ Cooperatives also B dissatisfaction? Which criticisms can the cooperative model address? How strongly does the need to cut costs, cooperative model appeal to your consumers now? What is the promise to members and how but they have the can your coop make them feel like true owners? flexibility to sacrifice short-term returns How should your cooperative prioritize new investments related to customer satisfaction C vs. your current portfolio of initiatives? How can your coop ensure that consumers translate▪ This flexibility could their dissatisfaction with public banks into actions in your favour? be used as a competitive How can your cooperative leverage your branch network and workforce, provide better advantage in D customer services, and further differentiate your coop from traditional banks? today’s environment How is it possible to ensure that your values and system resonate distinctly with members as some public banks begin to resemble coops in their marketing and E actions? How will public banks respond to criticism and adjust their models? Will they start encroaching on the cooperative model and, if so, how should your cooperative respond? What changes to your business model or image would attract new members? How can F the image and message be made clear and consistent throughout your organization? How can your coop ensure its image is distinct enough to differentiate it from competitors? McKinsey & Company | 37 Copyright © 2012. All rights reserved
  39. 39. 2 Will cooperatives need to look for growth beyond their borders ?Context Questions to ponder▪ Cooperatives must In what ways would your members benefit from international expansion (e.g., scale or develop a view on A market access)? How would the benefits of seizing rapid growth opportunities in emerging how globalization will markets percolate down to your individual members in the long term? affect their current What capabilities does your coop have that will help it to capture the benefits that an activities expansion into new markets would provide? What capital and flexibility is required? How B▪ Banks and coops can your coop ensure the support of members in such expansions? How would you ensure your must decide whether coop has the required management knowhow or go about acquiring it? to expand abroad or What opportunities exist related to your current member base in which to invest talents focus resources and and capabilities to better match your members’ interests? For instance, how can your coop management locally C invest to improve customer service, grab market share from competitors, and/or expand your▪ Cooperatives, offering to non-financial products? usually local, must Given competitors’ expansion initiatives, how will your cooperative’s decision to expand assess if their home or not affect the future competitive landscape? How will competitors who venture abroad market is saturated D gain a competitive advantage by leveraging economies of scale and by arbitraging labour costs and whether to optimize their back-office operations? international How can your coop ensure all relevant and available entry strategies are explored? For expansion is instance, will your coop form alliances with other small local cooperatives? How can it follow desirable E corporate members with international activities into new markets? How can it make a targeted▪ Staying on the push in a new market by leveraging high-performing business units? sidelines of the How will the ability to attract top talent and create career opportunities for key personnel global market may be affected by decisions? Will the best talent in banking be interested in local players or will put coops at a F they aim for global organizations? What steps can your cooperative take to attract talent in strategic either scenario? disadvantage How will the cooperative sector be able to maintain its global market share in banking over the next decades as economic activity shifts to emerging markets? How will G cooperative banks maintain their current share of global banking revenue, or will the bulk of the rapid growth in emerging countries be captured by public banks? McKinsey & Company | 38 Copyright © 2012. All rights reserved

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