From Complexity To Client Centricity


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To grow and prosper in today’s ever-changing world, banks
too must change. They need to move beyond any existing
organizational silos, infrastructure complexities and other
constraints – and toward an operation centered on the client.

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From Complexity To Client Centricity

  1. 1. IBM Global Business Services BankingExecutive ReportIBM Institute for Business ValueFrom complexity to client centricityWith simple smart service
  2. 2. IBM Institute for Business ValueIBM Global Business Services, through the IBM Institute for Business Value, developsfact-based strategic insights for senior executives around critical public and privatesector issues. This executive report is based on an in-depth study by the Institute’sresearch team. It is part of an ongoing commitment by IBM Global Business Servicesto provide analysis and viewpoints that help companies realize business value.You may contact the authors or send an e-mail to for more information.Additional studies from the IBM Institute for Business Value can be found
  3. 3. IntroductionBy Srini Giridhar, David Notestein, Shanker Ramamurthy and Likhit WagleNearly 90 percent of bankers in our global survey believe thattransforming from the status quo is critical to profitability. Tomorrow’s banks mustbecome more client centric by leveraging sophisticated insights to improve riskmanagement, pricing, channel performance and client satisfaction. Simultaneously,banks in mature markets should reduce operational complexity, which we estimate coststhem approximately US$200 billion annually.1 In emerging markets, where wealth isgrowing at nearly US$900 billion annually, banks should focus on wealth management,innovation and inclusion of the underbanked and unbanked.2To grow and prosper in today’s ever-changing world, banks trust and mindshare. These conclusions are a natural evolutiontoo must change. They need to move beyond any existing from our prior research studies on themes relating to global-organizational silos, infrastructure complexities and other ization, simplification and specialization.3constraints – and toward an operation centered on the client. Further, banks need to focus on the underlying economicHow will banks achieve this transformation for the new fundamentals of the mature and emerging markets. Fortomorrow? instance, banks in mature markets must address the cost of complexity in their operations. We estimate complexity costsBased on our most recent banking industry research, surveys the industry up to US$200 billion annually and constrainsand interviews, we believe that sophisticated insight is a key pre-tax profits by nearly 20 percent.4 On the other hand,differentiator (see sidebar: Research methodology). Insightful future growth and profits for banks in emerging markets arebanks worldwide will continuously tailor their services and dependant on financial inclusion of the unbanked and under-distribution networks to changing client needs. To succeed in banked along with a focus on the lucrative wealth managementthe volatile, ever-changing marketplace, banks must not only business, which is growing US$900 billion annually.5 In theavoid excessive risks, but also rebuild and strengthen client near term, we believe banks in emerging markets that invest in client insight could potentially grow their wealth management business annually by an average of US$150 million each for the next few years.6
  4. 4. 2 From complexity to customer centricity The banking ecosystem“We look at our lines of business and operations more closely than in the past. If our products We define the traditional banking system as deposit-taking institutions that provide financial services to retail and and services increase our risk profile or do not institutional clients. We classify organizations within that meet our stringent rules on cost of capital, we system into three categories: will divest this operation.” • Universal banks are large global banks that typically haveSenior executive, Universal bank, North America . significant operations in 12 or more countries or trading regions and have assets of US$800 billion or more. These banks realize at least 2 to 2.5 percent of their revenue from each of their different countries (or trading regions) ofAs banks focus on the fundamentals of their market, they operation. They manufacture, process and distributeshould use their insights to: diverse products to multiple client segments globally. • Multinational and national banks include banks with• Optimize risk by leveraging information significant operations in 11 or fewer countries with an• Increase revenues by becoming more client centric asset base between US$250 billion and US$800 billion• Enhance operations by managing cost and complexity. that receive 50 percent of their revenue from their home base. They manufacture, process and distribute a large set of products to multiple client segments within a country or trading region.Research methodology • Specialized banks and regional banks include specialized banks that operate in one or more countries, have anFor this IBM Institute for Business Value study, we partnered asset base of less than US$250 billion and gain 75 percentwith the Economist Intelligence Unit to conduct a global of their revenue from one or two major countries or lines ofsurvey of the top 200 banks based on tier 1 capital. Of our business. They manufacture, process and distribute a veryresponses, 28 percent were from the Americas, 36 percent focused set of products over a small region.from Europe, and 36 percent from Asia and Australia. Wealso conducted interviews with approximately 50 executivesin the banking industry and did secondary research todevelop quantitative models of the top 200 banks based onfinancial information from the last five years.
  5. 5. IBM Global Business Services 3The world today the next five years.11 At the same time, banks face a variety ofToday’s economic environment is characterized by divergent new regulations along with higher capital and liquidity require-growth forecasts and inflation prospects. Currently, worldwide ments. Consequently, in the next few years, most banks willgrowth is being driven by the emerging markets, which have to bolster their capital, stabilize their funding andaveraged 6 percent GDP growth in 2010 – far surpassing the improve their liquidity, all of which will impact profitability.mature economies’ 2 percent GDP growth.7 These emergingmarkets are also likely to experience increased development, In the face of these challenges, banks in both emerging andinflationary pressures, a growing market segment of high-net- mature markets will need to transform their operations to driveworth individuals and a huge pool of unbanked and under- future profits. As part of our research to determine the naturebanked populations. and direction of this transformation, we asked bankers what top attributes they believe are critical to shareholder value. TheIn comparison, mature markets are faced with the prospect of top four areas they identified are superior risk management,low growth with low inflation coupled with debt, deficit and client service excellence, capital management and cost effi-deleveraging. While government intervention in many mature ciency, with risk management holding the number one spot inmarkets helped end the financial crisis, a number of Western both markets (see Figure 1).economies are now faced with a fiscal crisis. In 2010, publicdebt as a percentage of GDP was more than 80 percent in boththe United Kingdom and Germany and 60 percent in the Top attributes critical to shareholder valueUnited States.8 Simultaneously, household debt as a percentage Emerging and mature marketsof disposable income was close to 150 percent in the United Mature Emerging marketsStates and over 140 percent in the United Kingdom.9 Concur- 58% 54%rently, governments facing budget deficits are competing withbanks for consumers’ deposits and savings. As a result, banks 43% 39% 38%will have to be innovative and make their deposit business 35% 34% 31%much more attractive as they compete with government forfunds.In this unique economic environment, the top 200 banks havereturned to precrisis levels of income, while their profits and Risk Client service Capital Costreturn on assets have settled lower, with profits across the managementindustry 15 to 20 percent below their 2007 highs.10 Further,banks in many countries have potential funding problems as a Notes: n=235; Top four responses shown; Question asked: Which attributes do you think will be most critical in creating shareholder value for your financial institutions in the next threeresult of mismatched maturity periods in short-term borrowing years? Select up to three. Source: IBM Institute for Business Value/Economist Intelligence Unit Business Analytics inand long-term lending. Hence, many banks are confronted Banking Survey 2010.with a funding crisis of nearly US$1 trillion per year in each of Figure 1: Bankers worldwide believe risk management is the top attribute critical to shareholder value.
  6. 6. 4 From complexity to customer centricityOur survey also reveals that most bankers understand the need Thus, improving risk management techniques by eliminatingfor change, as less than 10 percent indicated that the status quo operational silos, increasing transparency and implementingis a viable option for building future profits. With close to 90 consistent risk management practices will almost always be apercent of bankers calling for either incremental or transfor- mandate for banks.mative changes, the majority of bankers understand thatbusiness as usual is no longer a viable option. However, to Financial risk: In preparation for regulations requiring higheractually achieve the necessary changes, banks need to invest in capital, many banks have increased their capital base. Ininsight to more effectively manage risk and build a holistic addition, the assets of the top 200 banks have recovered fromview of the client, while managing cost and complexity. their 2008 lows by more than 5 percent to nearly US$82 trillion. However, the top 30 banks have actually increasedLeveraging information, reducing risk their asset size postcrisis.12 Further, in many countries, banks’Banks continue to face varying dimensions of risk associated assets are more than 200 percent of their national GDP (seewith financial crime, operations, governance and compliance. Figure 2).13 As a result, many of the biggest banks have become bigger, and systemic risk is higher.Bank assets as a percentage of national GDP 2007 to 2009800%700%600%500%400%300%200%100% 0% Switzerland United France Australia Spain Germany Canada Japan United States Kingdom 2007 2008 2009Note: GDP of country based on the bank’s domicile.Sources: “Global Financial Stability Report.” International Monetary Fund. October 2010; IBM Institute for Business Value analysis. 2010.Figure 2: Bank assets in many countries far exceed national GDP.
  7. 7. IBM Global Business Services 5 Financial crime: Bank fraud continues to be a problem, with the many types of fraud becoming more sophisticated and Risk and income prevalent. In fact, fraud attempts have grown exponentially. For example, according to the 2009 American Bankers Association Banks need to become more risk savvy and invest in risk Deposit Account Fraud Survey Report, card fraud from data analytics to optimize risk and profits. Exposure to “high- breaches, data spoofing and phishing has doubled in the last risk” income sources can result in income volatility, as risky two years, with the value of debit card fraud estimated at income has the potential for significant profits or losses. US$788 million.14 As a result, banks continue to increase their Reducing a bank’s risk profile by decreasing exposure to fraud prevention budgets annually. risky businesses can affect the bank’s income and profit outlook. We estimate that for every 1 percent reduction in Operational risk: Banks across the world are more intercon- income from riskier businesses, banks will have to more nected than ever before. Globalization and continuous than double or triple their low-risk income to maintain financial activity have resulted in higher transaction volumes profits at the same level. By using risk analytics, banks and transaction values overall. The average daily turnover in could improve insight into their income and asset portfolios, the global foreign exchange market alone has increased improve their risk management techniques, and better dramatically to US$4 trillion a day.15 Payments and settle- understand the impact of economic conditions on the ments volumes are rising in parallel. This has contributed to banks’ clients and investments. greater demands on system capacity and increased the risk of Source: IBM Institute for Business Value analysis of top 200 banks in failure. study. February 2011. Governance and compliance: Banks are facing more and more regulations. In the United States alone, 70 new studies by 11 different regulators were underway in late 2010, as well as 240 new rule-making processes.16 In parts of Europe, banks are faced with multiple regulations in multiple jurisdictions. While the policy and spirit of the regulations might be in alignment, the actual implementation of policies varies by country. The majority of financial institutions are ill-prepared to face the burden of compliance. In a recent survey, almost 80 percent of financial firms reported they had not integrated their gover- nance, risk and compliance processes.17“As we implement the new international regulations, we should not forget the unique needs of the small regional banks and their clients.”Senior executive, Specialized regional cooperative bank, Asia
  8. 8. 6 From complexity to customer centricityThis perceived increase in risk actually represents an opportu- Responses to our survey indicate that in conjunction with thenity for banks that invest in predictive analytics to differentiate overwhelming need for risk analytics, more than 40 percent ofthemselves. Many banks have the information they need to banks suffer from information overload and a lack of tools. Forbetter manage risk – they just aren’t using this valuable example, banks have information on a clients’ family profile,resource effectively. Banks need to leverage their information savings profile, income profile, etc., much of which might beby investing in the right tools and analytics, an investment that duplicated. Yet, many banks are often unable to build serviceswill help deliver sustainable, long-term results. to meet client needs. To effectively use analytics, as well as the wealth of information available, banks require additional toolsRecognizing the value of analytics in optimizing risk, bankers and processes (see Figure 4).in our survey rated risk management as the number one areawhere analytics could best deliver long-term benefits (seeFigure 3).Which function will yield maximum benefits as a result of an investment in analytics? 85% 82% 81% 80% 80% 77% 76% 75% 72% 66% 69% 66% 63% 61% 63% 58% Risk Client Innovation Strategy Pricing Marketing Channel Workforce management management planning management Current FutureNotes: n=235; Questions asked: To what extent does your organization apply analytics to the following activities? Rate each function on a scale of 1 to 5, where 1 = significant extent and 5 =insignificant extent. For each of the following functions what is the likelihood an investment in analytics will deliver long-term sustainable profits for the bank? Rate each function on a scale of 1 to5, where 1 = high potential and 5 = low potential.Source: IBM Institute for Business Value/Economist Intelligence Unit Business Analytics in Banking Survey 2010.Figure 3: Bankers believe investing in predictive analytics can deliver long-term benefits.
  9. 9. IBM Global Business Services 7Use of information and tools and focus of analytics investment Becoming more client centric As banks strive to better understand their clients, they should Mature focus on: 7% 20% 27% 26% 19%Information Emerging Enhancing pricing models to meet client needs in the overload1 • 6% 22% 19% 26% 28% different segments • Modernizing client segmentation techniques Mature 8% 19% 29% 35% 10% • Improving client experience in the different channels of Lack of Emerging interaction. tools1 7% 8% 26% 34% 24% Pricing to win Mature Few banks have consistently used pricing as a competitive Risk 5% 17% 37% 41% differentiator in their client relationships. More often than not, analytics2 Emerging they have priced products and services by merely following or 9% 32% 57% matching their local competitors – much like gas stations on opposing street corners. To effectively price their services, 1 2 3 4 5 banks need to move beyond a “one-size-fits-all” pricing model Completely Completely disagree agree and toward more innovative models – ones that take into account factors such as risk and client need, as well as thoseNotes: n=235. Question asked: 1. To what extent do you agree with the following statements?Rate on a scale of 1 to 5. “The bank has more information than it knows how to use that offer client choice and flexibility.effectively.” “The bank lacks the tools and processes for rigorous use of analytics.” 2. Topmost selection shown; Question asked: For each of the following functions what is thelikelihood an investment in analytics will deliver long-term sustainable profits for the bank?Rate each function on a scale of 1 to 5, where 1 = high potential and 5 = low potential. According to our survey, approximately 25 percent of banks inSource: IBM Institute for Business Value/Economist Intelligence Unit Business Analytics inBanking Survey 2010. mature markets and 28 percent in emerging markets currently employ standard “across-the-board” pricing regardless of the client relationship. Reflecting a future move toward moreFigure 4: Banks need to effectively leverage information and invest intools to reap the full benefits from risk analytics. innovative pricing, only 13 percent of mature and 12 percent of emerging market banks plan to retain “across-the-board” pricing.Risk-savvy banks will invest in analytics to help them leveragethe vast information available to them, improving their insight,lowering their risk profile and optimizing their profits. “We change the price of our products and services by channel. And then we focus on lowering our costs and maximizing client satisfaction.” Senior Executive, Universal bank, Europe
  10. 10. 8 From complexity to customer centricityIndeed, more than 60 percent of bankers believe that pricing Innovations in pricinginnovation will help build client loyalty and improve profits inthe new environment (see Figure 5). Banks in both markets are Maturelooking at more granular pricing and self-service bundling. To 14% 19% 36% 31%achieve more granular pricing, banks will have to segment Granular Emerging pricingtheir clients to accommodate varying risk profiles and differing 7% 20% 32% 40%abilities to pay. We believe banks will also offer self-service Maturepricing bundles as an option to empower clients to choose Self-service 11% 26% 36% 24%price, channel and level of service. pricing Emerging bundles 12% 26% 31% 31%To create effective pricing models, banks must utilize in-depthdata relating to: 1 2 3 4 5 Completely Completely• Client risk disagree agree• Costs associated with delivering products and services in each Notes: n=235; Questions asked: To what extent do you agree with the following statements? Rate on a scale of 1 to 5, where 1 = completely agree and 5 = completely disagree. More of the channels granular pricing (i.e., customized prices developed individually based on individual client needs) will help win clients. Banks can improve profitability by introducing self-service bundles• Client motivation for buying products and services that let clients chose a bundle of products and channels at pre-set prices. Source: IBM Institute for Business Value/Economist Intelligence Unit Business Analytics in• Elasticity of pricing in different markets. Banking Survey 2010.When asked what additional information was needed to Figure 5: A majority of bankers believe pricing innovation will buildeffectively price services to better meet client needs, more than client loyalty and profits.70 percent of bankers identified the need for more client-levelrisk information – followed by information on the cost of A fresh look at the clientservice and price elasticity of the market. Banks’ traditional methods of client segmentation are based on demographics. But demographics are only part of the story.The good news is that these barriers to acquiring the data Today, banks need to get inside a client’s head, so to speak.necessary to enhance pricing models are within the banks’ They need to move toward more psychographic segmentation.control. Banks can overcome most of these challenges byinvesting in infrastructure to analyze the vast volumes of data Our research indicates that banks – particularly in emergingthey have collected to date. markets – are poised to move toward needs-based and behavior-based segmentation in the next three years (see Figure 6). Rather than focusing primarily on demographics, banks worldwide plan to focus more intensely on behavior“The under 30 segment of our population is segmentation and client needs. very large. We just need to understand their attitudes and preferences better, as they start to seek financial services.”Senior executive, National bank, Asia Pacific
  11. 11. IBM Global Business Services 9 Mature markets Emerging markets 64% 63% 66% 59% 61% 60% 57% 57% 53% 47% 40% 40% 33% 32% 34% 27% Demographics Behavior Client needs Client Demographics Behavior Client needs Client segmentation centric profitability segmentation centric profitability Current FutureNotes: n=235; Question asked: On what basis does the bank (your line of business) segment its clients today? Select all that apply. On what basis will the bank (your line of business) segment itsclients in three year’s time? Select all that apply.Source: IBM Institute for Business Value/Economist Intelligence Unit Business Analytics in Banking Survey 2010.Figure 6: Banks in both mature and emerging markets plan to change their segmentation methods.This is an encouraging trend, as we believe future success will additional information is not the only barrier banks face inhinge on segmenting clients by attitude, interests and behavior implementing new segmentation methods. In fact, our surveypatterns, rather the familiar demographics of age, gender, participants indicated the biggest barriers to gaining clientethnicity, etc. However, inconsistent client information and insight are:insight pose a challenge for many banks as they try to linkclient profitability and client behavior to better segment the • Constraints in systems and processesmarket. • Time/willingness of clients to provide information • An absence of tools to do follow up.Bankers worldwide identified behavior segmentation andclient needs-based segmentation as the top two methods thatwould require information not available today. This need for
  12. 12. 10 From complexity to customer centricity Many of these barriers are largely within the banks’ control Unfortunately, for many banks, current client satisfaction in and exist due to internal shortcomings. To break through these the channels is, at best, mediocre (see Figure 8). barriers, banks are going to have to invest in their infrastruc- ture to improve their processes, analytical tools and ability to share information across the organization. Predicted change in channel use and current levels of satisfaction In search of channel satisfaction High 5 Average Channels represent an essential piece of the puzzle that brings response score together the major elements of a bank: Channels provide the link between clients and the bank’s products and services. 4 Bankers clearly understand the importance of channel interac- customer satisfaction ATM Internet Current level of tion. When asked in which areas they need better insight in the Branch future to sustain profits, bankers cited satisfaction by channel, 3 Mobile followed by profit by channel (see Figure 7). Call center Social media 2What better insight is needed to sustain profits? Mature Emerging markets Low 1 71% 67% 1 2 3 4 5 63% 54% Predicted change in channels use 49% Notes: n=235; Questions asked: Which of the following channels will experience the most 36% 38% change in client usage over the next three years? Rate on a scale of 1 to 5. To what extent do 29% you believe clients are satisfied with service levels in the following channels? Rate on a scale of 1 to 5. Source: IBM Institute for Business Value/Economist Intelligence Unit Business Analytics in Banking Survey 2010. Figure 8: Banks have an opportunity to increase client satisfaction Satisfaction by Profit by Client Web banking in the channels. channel channel motivation behaviorNotes: n=235; Top four selections shown; Question asked: In the future, in which of theseareas will your bank need better insight to sustain profits? Select up to three.Source: IBM Institute for Business Value/Economist Intelligence Unit Business Analytics inBanking Survey 2010.Figure 7: Bankers recognize the need for better insight regarding theirchannels.
  13. 13. IBM Global Business Services 11Call centers are a challenge for most banks, with below average To improve performance in their channels and increase clientclient satisfaction and little change expected in terms of client satisfaction, banks must understand:usage. The Internet and mobile, on the other hand, arerelatively better in terms of client satisfaction but are still • How people bankbelow the top tier (top tier being a ranking greater than four). • How often they bankHowever, banks expect the greatest changes in use will occur in • What products and services they seek when banking.the Mobile and Internet channels – with branch bankingcoming in third. Branches and ATMs are both ranked high in Banks can use this information to increase client satisfactionclient satisfaction and average to low in terms of change. by:Bankers do not perceive social media as a true delivery • Determining which channels are appropriate for which sets ofplatform today. In the words of one executive we interviewed, clients“In many ways, social media is at the same stage the Internet • Developing prices to attract clientswas 15 years ago. We expect it will evolve in the coming years, • Ensuring that service delivery is aligned with clients’ choice ofas will new policies and regulations associated with it.” channelsAccording to another executive, banks are using social media • Building a consistent user experience across the for “social proofing.” By participating in the social mediaexperience and encouraging clients to participate, banks hope In summary, banks must focus on client satisfaction across allothers will follow suit. For example, by creating a social channels. To do so, they need to radically improve their clientnetworking profile and amassing “fans” or “friends,” a bank insight and eliminate barriers, particularly those within theirhopes to demonstrate loyalty, trustworthiness and client own systems. The future will belong to sophisticated bankscommitment. that use superior segmentation and pricing methods to deliver best-in-class service in their channels.“We have unique prices and distinct services in our different channels. We look at all interaction in our channels to improve satisfaction and focus on our profitable client segments.”Operations executive, Universal bank, Europe
  14. 14. 12 From complexity to customer centricityShrinking complexity, growing revenueBanks, like other successful organizations, must continuallyevaluate their operations, seeking ways to increase efficiency, “Cost efficiency is in our DNA. Wedecrease costs and create new revenue opportunities. continuously optimize our processes as close to the customer as possible…and then weToday, the operational issues faced by mature market banks aredifferent than those faced by emerging market banks. In continuously measure customer satisfaction togeneral, banks in mature markets need to focus on the ensure we are moving in the right direction.”complexity of their operations, while banks in emerging Executive, Universal bank, Europemarkets should focus on expanding their revenue sources andreaching out to the unbanked and underbanked.The complexity conundrum maintained their cost efficiencies over the last five years (seeAs previously mentioned, banks in the emerging markets are Figure 9). In contrast, mature market banks have not fared asleading growth. In fact, emerging markets are the leaders in well in controlling costs and operate overall at a much higherterms of profitability and cost efficiency – and they have cost-to-income ratio. 300% Cost increase by region, 2004 to 2010 275% 250% United Kingdom 225% 200% North America 175% 150% Western Europe 2004 to 2005 125% costs at 100% 100% China 75% Asia 50% 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010Source: IBM Institute for Business Value analysis of Economist Intelligence Unit Business data. 2010.Figure 9: Emerging market banks are cost efficiency leaders.
  15. 15. IBM Global Business Services 13A large part of the mature market banks’ increased costs can be and higher profits. These banks have leveraged their superiorattributed to complexity (e.g., complexity due to operational insight to deliver the right products at the right price to thesilos, customization of IT systems, etc.). To prepare for success right client segments (see sidebar: Exemplars outperform peersin the new economic environment, they must reduce both through specialization).complexity and costs to remain competitive. Following the lead of the exemplars, mature market banksThrough our research, we discovered a group of outper- should focus on increasing their incomes while also reducingforming banks we call exemplars. These banks have managed the complexity that has been a drag on their profits. Toto lead their peers in costs and profits in each of the last three determine the cost of complexity, we compared the exemplarsyears. By focusing on sophisticated insight in their areas of in each class against the other banks (see sidebar: Method forspecialization, the exemplar banks were able to streamline their calculating complexity). We determined that banks in matureoperations – avoiding complexity and leading to cost savings markets could reduce complexity – estimated to cost the industry US$200 billion – to possibly increase pre-tax profits by up to 20 percent (see Figure 10).18 US$ billion 10 billion to 200 billion to 500 billion to Above 1 200 billion 500 billion 1 trillion trillion Average cost $3 $6 $10 $34 Complexity percentage of cost 55% 40%- 30% 25% Complexity reduction percentage 30%-40% 30%-40% 30%-40% 30% Potential extra profit from reducing complexity 20% 30% 25% 20% Potential extra profit $ from reducing complexity $200 billionNotes: n=50 mature market banks compared with the top 200 exemplars; Extra profit = Incremental profit / Original profit; Complexity cost derived by comparing exemplars against the other banksin the ecosystem and comparing channel costs and branch network of the exemplars against the other banks in the ecosystem; All percentages rounded to the nearest multiple of 5.Source: IBM Institute for Business Value analysis.Figure 10: Mature market banks could increase profits by decreasing complexity.
  16. 16. 14 From complexity to customer centricityExemplars outperform peers through specializationIn our study, we identified a group of outperforming banks that are designed to meet the needs of multiple clientwe call exemplars. These banks have outperformed their segments within the country or trading area. Thesepeers in costs and pre-tax profits in each of the last three exemplars deliver services across multiple distributionyears by focusing on their areas of specialization. They all channels. They also typically have strong regulatoryuse insight to achieve client centricity and improve oversight, which discourages excessive risk taking whileoperations. encouraging domestic champions. Typically, these banksSpecialized and regional exemplars operate at about a 40 to 50 percent cost-to-income ratio andSpecialized and regional exemplars have several clear have a compensation-to-income ratio of approximately 50distinguishing factors in common that helped them achieve percent.nearly 20 percent higher pre-tax profits than their Universal exemplarscompetitors. These banks have in-depth knowledge of their Exemplars among the universal banks averaged a 15 percentclients and markets, and they utilize this knowledge to higher pre-tax profit than their competition. These exemplarsdesign products and services dedicated to meet their have strong market insights into varied client segments inclients’ needs. They distribute their products through a multiple countries or trading blocs. They design productsbranch network that provides saturation coverage over and services that focus on multiple markets and economies,small geographical areas. as well as specific segments within those economies.Some of the specialized exemplars are auto-finance Because their products and services are designed based onspecialists, and others specialize in developing credit superior client and market insight, they vary from country tosolutions. The regional specialists have a strong distribution focused on a specific region, accompanied by a set The universal exemplars can be categorized into two groups.of products and services tailored to local needs. Many of The first group excels at tailoring products and distributionthese banks target clients within a set risk rating while channels for specific markets and client segments. Thissimultaneously avoiding high-risk operations such as group operates at a cost-to-income ratio of 50 to 55 percentsecuritization. Typically, these exemplars have a cost-to- and a compensation-to-income ratio of approximately 55income ratio of 25 to 30 percent and a compensation-to- percent. The second group focuses on standardizedincome ratio of 30 percent. processes and centralized infrastructure services to deliverNational and multinational exemplars cost advantages globally. These banks operate at a cost-to-The national and multinational exemplars outperformed income ratio of 35 percent, while their compensation-to-their competition – with approximately 10 percent higher income ratio is close to 35 to 40 percent.pre-tax profit. These exemplars have strong client insight Source: IBM Institute for Business Value analysis. November 2010. Note: Bank exemplars are the list of banks common to the top 30and market knowledge within a country or trading bloc. according to pre-tax profit and cost-to-income ratio for the period 2007They have a wide range of diverse products and services to 2010.
  17. 17. IBM Global Business Services 15Method for calculating complexity “Complexity is a result of “multiple layers of• Bank exemplars are the list of banks common to the top governance, too many customized systems 30 according to pre-tax profit and cost-to-income ratio for the period 2007 to 2010. platforms, poor integration after multiple acquisitions…”• Best-in-class operations costs for the exemplars were Senior executive, Multinational/national bank, Asia Pacific determined.• The number of retail branches and the size of loans and deposits were obtained from 2009 and 2010 annual Our research suggests emerging market banks should embrace reports. sophisticated insights – or analytics – to help drive their wealth management business. Today, wealth management only• Cost of complexity was determined as the difference in represents 15 percent of emerging markets’ net fee and cost between the exemplars and the other banks in the commission income, compared with 30 percent in mature same asset category. markets (see Figure 11).19 Components of net non interest income, 2009-2010Mature market banks that reduce complexity in operations and Select mature and emerging market banksuse sophisticated insight to identify areas of innovation and Mature markets Emerging marketsrevenue will likely emerge as the market leaders. Emergingmarket banks, on the other hand, should continue their focus 20% 30%on cost efficiency and avoid duplicating the complexities faced 15% 45% 15%by the mature markets. 15% 30% 65%Rebalancing the portfolio 32% 15%The emerging market banks’ focus on the traditional retail 23% 35% 20% 40%business has positioned them strongly in today’s environment.However, their profits are over reliant on interest income Net non Net fee and Net non Net fee andbusiness and subject to interest rate risks. To help ensure interest commission interest commission income income income incomelong-term growth and profitability, emerging market banksneed to rebalance their income portfolio to reduce their Net fee and commission income Others Trading income Stock brokingexposure to economic cycles and interest rate changes. Other income Wealth management Loans and credit cards Notes: 1: N=16, i.e., 20 percent of emerging market banks in the top 200 compared against the “average” universal bank in the mature market with emerging markets/Asia Pacific exposure; “Other income” includes one-time income, income from nonregular activities, fair valuation changes, rental income, etc. Sources: IBM Institute for Business Value analysis. Figure 11: Emerging markets banks should grow their share of wealth management business.
  18. 18. 16 From complexity to customer centricityAccording to our research, household wealth in emergingeconomies is poised to grow at an average of US$900 billion Unbanked, 2009per year until 2015.20 And by 2013, Asia is poised to have more Percentage of total populationmillionaires than the United States.21 We believe banks in the Sub Saharan Africaregion with insight into local markets could each potentially 88%cultivate US$150 million of wealth management businessannually for the next few years.22 However, in many of these Southern Asiaregions, the wealth management business was more or less 76%nonexistent five years ago. Hence, to grow in these markets, Middle East, North Africabanks must – among other things – pay attention to the 65%varying risk profiles of their clients, their clients’ appetite for East Asia and Pacificfinancial and nonfinancial assets, and the currency controls and 61%regulations of the regional markets. Central Asia, Eastern EuropeSimultaneously, banks in emerging market should focus on 58%servicing the underbanked and unbanked sections of the Latin America, Caribbeanpopulation. This segment represents a sizeable opportunity – 55%one that could help maintain long-term profits (see Figure 12). Developed countriesFor example, The Republic of Maldives, 200 inhabited islands 16%in the Indian Ocean, stands poised to become the first country Source: IBM Institute for Business Value analysis of data from the World Bank Groupin the world to provide universal financial access, even for the Financial Access Survey 2009.poorest villager on the most remote island. Using mobilephone networks and a network of local retail establishments Figure 12: The unbanked represent a sizeable percentage of theserving as banking agents, Consultative Group to Assist the population in many emerging markets.Poor, the World Bank and the Maldives’ central bank areworking together to reach the unbanked and underbanked.23As another example, banks in Brazil established 95,000 banking correspondents (e.g., local merchants, lottery dealers, post offices, etc.) with point-of-sale terminals and increased services across 1,600 municipalities that had no service less than seven years ago.24 These are only two examples of numerous methods emerging market banks can employ to service the underbanked – without losing their focus on cost efficiency.
  19. 19. IBM Global Business Services 17Using superior insight will help banks position themselves for Taking actiongrowth and new income sources in the emerging markets. So, how can banks begin the transformation necessary toSimultaneously, banks in the region should continue to focus succeed in the new economic environment? Below are someon cost efficiency and avoid the operational complexities that specific actions to help spark critical changes.plague many of their counterparts in the mature markets.We believe the future belongs to banks that effectively managetheir costs, balance risk with return and focus on financialinnovation to meet client needs.Banks worldwide should invest in sophisticated insight to:Client centricity • Enhance their client segmentation techniques and develop more focused services aligned with client needs • Optimize their channel investments to enhance the effectiveness of their distribution networks • Innovate their pricing models to build stronger client relationships • Differentiate themselves through client service excellence.Operations • Effectively manage the cost and complexity of operations • Specialize their operations • Eliminate barriers that prohibit business insight.Risk • Leverage existing information to optimize risk • Efficiently manage sources of funding and levels of capital and liquidity.Banks in mature markets should: • Invest in insight to develop new sources of revenue • Eliminate the cost of complexity in their operations • Reduce their operating costs • Reduce their exposure to risky assets and significantly reduce the volatility in their income portfolios • Address their funding risk for the next three years.Banks in emerging markets should: • Increase revenues and diversify sources of income – Focus on burgeoning segments, such as private banking and wealth management, to build profits in the next few years – Innovate channels and services to include the unbanked and underbanked sections of society • Continue their leadership in cost efficiency • Avoid complexity in their operations and governance.
  20. 20. 18 From complexity to customer centricityConclusion Related publicationsGlobally, banks need to be more business savvy, client centric Ramamurthy, Shanker, Srini Giridhar and Cormac Petit. “Fit,and efficient in their operations. By investing in sophisticated focused and ready to fight: How banks can get in shape for theinsight, banks can more effectively increase their client focus, battle ahead.” IBM Institute for Business Value. Decemberimprove risk management strategies, innovate pricing tech- 2009., optimize channel performance and foster client gbe03272usen/GBE03272USEN.PDFsatisfaction. Feller, Wendy, Cormac Petit and John White. “No bank is anBecause banks in emerging markets and those in mature island: Get global before globalization gets you.” IBM Institutemarkets face disparate challenges due to differences in market for Business Value. February 2008.conditions, their strategies will vary, despite their commonneed for sophisticated insight to meet these challenges. While Ramamurthy, Shanker and Michael Robinson. “Simplify tomature market banks should focus on eliminating complexity succeed: Optimise the customer franchise and achieve opera-and reducing costs, banks in emerging markets need to tional scale.” IBM Institute for Business Value. 2002.diversify their income sources, while maintaining costs. Andbanks worldwide need to invest in analytics to help specializeoperations and deliver superior products and services that bestmeet clients’ needs.To learn more about this IBM Institute for Business Valuestudy, please contact us at For a full catalogof our research, among the first to receive the latest insights from the IBMInstitute for Business Value. Subscribe to IdeaWatch, amonthly e-newsletter featuring executive reports that offerstrategic insights and recommendations based on our
  21. 21. IBM Global Business Services 19About the authors Shanker Ramamurthy is the global leader of the IBM BankingSrini Giridhar is the Banking Lead for the IBM Institute for and Financial Markets Industry consulting practice. He alsoBusiness Value. He has over 20 years of international manage- played a key role in developing the Component Businessment and technology consulting experience. Srini has worked Modeling (CBM) methodology and heads the IBM CBMextensively in retail and commercial banking, lending, wealth initiative. Shanker is a qualified accountant with an MBA inmanagement and capital markets. His areas of expertise include Finance from the Indian Institute of Management Ahmedabadcommercial and retail loans, anti-money laundering processes and a Master’s degree in Information Science from theand compliance reporting. In addition, Srini has experience in University of New South Wales, Australia. He has over 20business strategy development, IT governance, business years of consulting experience and has advised numeroustransformation, technology issues in mergers and acquisitions, Fortune 100 financial institutions in North America, Europeand eXtensible Business Reporting Language. He holds a and Asia Pacific. He is a widely quoted thought leader andmaster’s of science degree in computer engineering from the speaker and has written several major papers, includingState University of New York at Buffalo, obtained an MBA “Simplify to Succeed,” “The Specialized Enterprise” andfrom York University and is a graduate of the Wharton “Component Business Models: Making Specialization Real.” InBusiness School-York University International Program. Srini 2005, Euromoney magazine ranked Shanker as one of the 50can be reached at most influential financial services consultants worldwide. Shanker can be reached at Notestein is the Financial Services Sector Leader for theIBM Institute for Business Value and previously was part of Likhit Wagle is a Partner and the Global Industry Leader forIBM’s consulting organization. With more than 25 years in Banking and Financial Markets within IBM Global Businessinsurance and banking, Mr. Notestein focuses on financial and Services. Having begun his career as an investment banker inanalytical solutions for complex financial enterprises, including the United Kingdom, he has over 20 years of experience in thepricing and underwriting criteria for commercial loans as well field of strategic consulting, including value-based manage-as property and casualty insurance companies, pure premium/ ment and mergers and acquisitions. Likhit has led manyrisk factors calculated, and loan underwriting rules. Prior to complex engagements for blue chip clients in Europe, Japanjoining IBM in 1999, David was Division Senior Vice President and AP, which have included the development and implemen-of the Great American Insurance Company. He has also been tation of value creation strategies, new business models,on the board of directors of several insurance companies and performance management, organizational change, and decisioncredit unions and was an SEC registered investment advisor. support systems. He was one of the principal authors of “CFO:David received his bachelor’s and master’s degrees from the Architect of the Corporation’s Future” and is a regular contrib-Sloan School of Management at the Massachusetts Institute of utor to industry publications and conferences. Likhit is aTechnology. He can be reached at member of the Institute of Chartered Accountants in England and Wales and has a Bachelor of Arts (Honors) in Economics and Business Finance. Likhit can be reached at Likhit.Wagle@
  22. 22. 20 From complexity to customer centricityContributors ReferencesDouglas Butler, Banking and Financial Markets Leader, 1 IBM Institute for Business Value analysis of mature marketAmericas, IBM Global Business Services banks within the top 200 banks in study (based on financialsSarah Diamond, Managing Partner, Financial Services, IBM for 50+ mature market banks). November 2010.Global Business Services 2 IBM Institute for Business Value analysis based on informa-Mansi Kanuga, Senior Consultant, Strategy and Transforma- tion from: “Global Wealth Report.” Credit Suisse Researchtion, IBM Global Business Services, IBM India Institute. Credit Suisse. October 2010.Eric Lesser, Research Director and North American Leader, 3 Ramamurthy, Shanker, Srini Giridhar and Cormac Petit.IBM Institute for Business Value “Fit, focused and ready to fight: How banks can get in shape for the battle ahead.” IBM Institute for BusinessCormac Petit, Principal Consultant Banking, IBM Center for Value. December 2009. Insights ssi/ecm/en/gbe03272usen/GBE03272USEN.PDF; Feller,Shweta Tyagi, Strategy and Transformation Consultant, IBM Wendy, Cormac Petit and John White. “No bank is anGlobal Business Services, IBM India island: Get global before globalization gets you.” IBM Institute for Business Value. February 2008; Ramamurthy,The right partner for a changing world Shanker and Michael Robinson. “Simplify to succeed:At IBM, we collaborate with our clients, bringing together Optimise the customer franchise and achieve operationalbusiness insight, advanced research and technology to give scale.” IBM Institute for Business Value. 2002.them a distinct advantage in today’s rapidly changing environ- 4 IBM Institute for Business Value analysis of mature marketment. Through our integrated approach to business design and banks within the top 200 banks in study (based on financialsexecution, we help turn strategies into action. And with for 50+ mature market banks). November 2010.expertise in 17 industries and global capabilities that span 170countries, we can help clients anticipate change and profit from 5 IBM Institute for Business Value analysis based on informa-new opportunities. tion from: “Global Wealth Report.” Credit Suisse Research Institute. Credit Suisse. October 2010. 6 Ibid. 7 World Economic Outlook. International Monetary Fund. 2010. 8 IBM Institute for Business Value analysis of Economist Intelligence Unit Country data. October 2010.
  23. 23. IBM Global Business Services 219 Deslongchamps, Alexandre. “Canadian Household Debt 18 IBM Institute for Business Value analysis of mature market Exceeds U.S. Levels for First Time in 12 Years.” banks within the top 200 banks in study (based on financials Bloomberg. December 13, 2010. for 50+ mature market banks). November 2010. com/news/2010-12-13/canadian-household-saw-their-net- 19 IBM Institute for Business Value analysis of the top 200 worth-and-debts-increase-in-third-quarter.html; “Special banks in study. November 2010. Report: Canadian household debt a cause for concern.” TD Economics. TD Bank Financial Group. October 20, 2010. 20 IBM Institute for Business Value analysis based on informa- tion from: “Global Wealth Report.” Credit Suisse Research10 IBM Institute for Business Value analysis of the top 200 Institute. Credit Suisse. October 2010. (Note: Household banks in study. November 2010. wealth is defined as the number of households with more11 IBM Institute for Business Value analysis of International than US$100,000 in investable assets.) Monetary Fund Global Financial Stability Report data. 21 Goff, Sharlene. “Asia: Battle stations as centre of gravity October 2010. shifts.” Financial Times, November 9, 2010.12 IBM Institute for Business Value analysis of the top 30 banks in study. November 2010. 00144feab49a.html#axzz1BUzqH97o13 IBM Institute for Business Value analysis based on informa- 22 IBM Institute for Business Value analysis based on informa- tion from: “Global Financial Stability Report.” Interna- tion from: “Global Wealth Report.” Credit Suisse Research tional Monetary Fund. October 2010.. Institute. Credit Suisse. October 2010.14 “2009 ABA Deposit Account Fraud Survey Report.” 23 “There’s nothing ‘micro’ about poverty.” The World Bank American Bankers Association. November 2009. http:// Group and Microfinance. nsf/AttachmentsByTitle/M-PovertyBrochure/ Fraud.htm $FILE/M-PovertyBrochure.pdf15 “Triennial Central Bank Survey of Foreign Exchange and 24 Lyman, Timothy R, Mark Pickens and David Porteous. Derivatives Market Activity in April 2010.” Bank for “Regulating Transformational Branchless Banking: Mobile International Settlements. April 2010. Phones and Other Technology to Increase Access to publ/rpfx10.htm Finance.” Focus Note. Department for International16 Baer, Justin. “The Future of Financial Services, Wall Street: Development and Consultative Group to Assist the Poor. from recession to regulation.” Financial Times. September January 2008. 24, 2010. 1.9.2583/FN43.pdf 8683-00144feab49a.html#axzz1DJB1qN2B17 Governance, risk and compliance in financial services. Economist Intelligence Unit. June 2008.
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