Retail Banking 2020 Evolution Or Revolution? - PwC

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Retail Banking 2020Evolution or Revolution?Powerful forces are reshaping the banking industry. Customer expectations, technologicalcapabilities, regulatory requirements, demographics and economics are together creating animperative to change. Banks need to get ahead of these challenges and retool to win in the next era.Banks must not only execute on today’s imperatives, but also radically innovate and transformthemselves for the

Contents03 Foreword05 Executive summary08 Impact of global macro-trends101114151718Rise of state-directed capitalismTechnology will change everythingDemographics changing priorities and opportunities for growthSocial and behavioural changePotential disruptors to this futureEvolution and disruption – an imperative for change19 Six priorities for 2020222528323539Developing a customer-centric business modelOptimising distributionSimplifying the business and operating modelObtaining an information advantageEnabling innovation, and the capabilities required to foster itProactively managing risk, regulations and capital41 Conclusion42 Contacts

ForewordBob SullivanPwC (US)Global Banking and Capital Markets LeaderWe believe that retail banking will look very different in 2020than it does today.Many have predicted the fall of thetraditional bank, as disruptive new entrantswin share by offering a better customerexperience through new products andchannels. Yet, despite the emergence of newcompetitors and models, we believe thetraditional bank has a bright future – thefundamental concept of a trusted institutionacting as a store of value, a source offinance and as a facilitator of transactionsis not about to change. However, much ofthe landscape will change significantly inresponse to the evolving forces of customerexpectations, regulatory requirements,technology, demographics, new competitorsand shifting economics.Banks need to choose what posture to adoptagainst this change – whether to be a shaperof the future, a fast follower, or to managedefensively, putting off change. Stayingthe same is not an option. We believe thatthe winners in 2020 will not only executerelentlessly against today’s imperatives, butwill also innovate and transform themselvesto prepare for the future. This future willrequire institutions to be agile and open,ready to explore different options in anuncertain world.So is this change a revolution, or anevolution? In truth, it is both. All thesignposts for change are here. Many playersare innovating and experimenting with newproducts, delivery channels and analytics.The industry has historically changed slowly– evolutionary change. And the changeswe envision are less about imaginingsome unknown future, and more aboutimplementing and integrating all the thingswe know today (see the sidebar on the nextpage). Yet the pace of change is increasingrapidly – banks that fail to shift gear riskbeing left behind. And if any institution couldtruly master all the priorities we set out inSection 3, it would be revolutionary indeed.To produce this paper, we integrated insightsfrom PwC teams worldwide. We surveyed560 client executives from leading financialinstitutions across 17 markets regardingthe challenges and opportunities of thisevolving marketplace and their plans torespond. We developed a point of viewregarding how mega-trends will impact thefuture of banking, using PwC’s proprietaryProject Blue framework. And we developedsix priorities for retail banks today to helpensure their future success.We look forward to engaging in a provocativedialogue with you and your colleagues,going forward. We would be pleased toshare additional points of view, informationand insights, as appropriate. Feel free toreach out to one of us or your existing PwCcontacts to start the dialogue.John GarveyPwC (US)US Banking and Capital Markets LeaderJusto AlcocerPwC (Spain)EMEA Banking and Capital Markets LeaderAntony EldridgePwC (Singapore)Asia-Pacific Banking and Capital Markets LeaderPwC Retail Banking 2020 3

Retail Banking2020 – Evolutionor revolution? Willyou be ready to servethis customer?Anna, 56, boards a high-speed train for hercommute to one of the world’s emergingmegacities. She settles in and blinks twice,activating the display in her glasses. She isauthenticated by retina scan, and reviews hermessages.A message from her financial adviser notesthey sold her holdings from a recent IPO andtransferred the proceeds into a new Africanhigh-tech fund. She made this decision afterconsulting with her financial adviser andreviewing recommendations from severalindependent investor analytics enginesshe reached through her bank’s wealthmanagement platform.She then watches a message from the bank’sleading education expert, suggesting it istime to set up a university savings accountfor her 13-year-old son. The adviser askswhether Anna expects her son to attend thenew flagship online university, or a muchmore expensive residential programmeoverseas. She quickly outlines the estimatedcosts and benefits of each, taking into accountAnna’s age and planned retirement at 70.She recommends the flagship, and suggestssupplementing her son’s education with lessexpensive summer programmes in Mumbai,San Francisco and Beijing. Anna agrees, andthe adviser seamlessly sets up the savingsaccount and the auto-deposit.At lunch, Anna browses the local electronicsdisplay, where the latest holovision catchesher eye. A quick scan from her glasses returnscustomer recommendations, coupons andfinancing offers from multiple providersincluding her own bank (which itself hasinstantly reviewed the returns from thescan to ensure their offering is competitive).She makes her choice and completes thepurchase, using a new peer-to-peer lenderthat offers a more competitive rate, due to alower cost structure, thanks to a lack of legacyinfrastructure and a less stringent regulatoryregime.4 PwC Retail Banking 2020The next day, Anna accepts an invitation fora video conversation with her bank businessadviser. The bank had been monitoringthe favourable social media coverage Annahas been receiving and concluded that herbusiness might need additional services.The business adviser has already arrangedfor a commercial estate agent and loanofficer to join them, and they discuss Anna’squestions and offer advice on a range ofsmall business topics. She shares that sheis thinking of expanding her business intoadditional locations, and they explain thedifference between the bank’s products andthe government small business facility, whichoffers less service, but a lower rate of interestand longer repayment periods. Also, Anna ispassionate about environmental protection.The bank recognises this, and through itsown programmes and partnerships, is ableto present an offer where Anna’s use of thebank’s products results in direct donations toAnna’s favourite charity. She accepts – happyshe has found a bank that really seems tounderstand her.

70% of global bank executives believe it is veryimportant to consider how macro trends willimpact the banking industry in 2020Executive summaryPowerful forces are shaping the industryPowerful forces are transforming the retail banking industry.Growth remains elusive, costs are proving hard to contain and ROEsremain stubbornly low. Regulation is impacting business modelsand economics. Technology is rapidly morphing from an expensivechallenge into a potent enabler of both customer experience andeffective operations. Non-traditional players are challenging theestablished order, leading with customer-centric innovation. Newservice providers are emerging. Customers are demanding ever higherlevels of service and value. Trust is at an all-time low.Fewer than 20% of executivesfeel well-prepared for the futureAgainst this background, 70% of globalbanking executives believe it is veryimportant to form a view of the bankingmarket in 2020 – to understand howthese global trends are impacting thebanking system in order to develop awinning strategy.Executives are divided as to who will be theprimary beneficiaries of these trends. Justover half (54%) believe that large banks willbe the winners in 2020. The other half (46%)see smaller banks capturing share throughincreasing differentiation. Executives arealso divided as to the threat posed by nontraditional new players: 55% believe theypose a threat to traditional banks, while31% believe they present innovativepartnership opportunities.Executives also differ in their views bygeography. For example, fewer US executivesthink it important to form a view of theindustry in 2020 (61%) than executives inthe emerging markets (79%). And manymore US executives view non-traditionalnew market entrants as a threat (71%), thanexecutives in Asia (42%), where more viewthem as an opportunity (44%) for partneringand prospering together. This divide betweendeveloped and emerging market thinking is atheme throughout the survey.In Section 2 we address these questionsand concerns, and consider how globalmacro-trends will impact the retail bankingindustry.55% of bank executives view nontraditional players as a threat totraditional banksPwC Retail Banking 2020 5

Today’s challengesFigure 1: Importance of considering the banking market in 1%The impact of complying with growing andchanging regulation remains a top challenge– indeed the number one challenge for USand European banks. Unsurprisingly, thisis a top investment priority for banks inthese regions. Bankers also tell us informallythat they are still struggling to get aheadof this challenge and develop a proactivestance with their regulators – to stop seeingregulation as a burden and start weavingregulatory compliance into the fabric oftheir operations.Source: PwC Banking 2020 SurveyFigure 2: Non-traditional players – Threat or opportunity?USEuropeEmerging MarketsAsia-Pacific0%10%20%30%n Threat n Threat, only if inferior technology n OpportunitySource: PwC Banking 2020 Survey6 PwC Retail Banking 202040%50%60%Unsurprisingly, nearly all bankers surveyedview attracting new customers as one oftheir top challenges over the next two years– banks are hungry for growth, and findingnew customers is the first response of agood product banker. However, banks alsorecognise the need to deepen their customerrelationships and focus more on specificcustomer outcomes. Hence, enhancingcustomer service is the number oneinvestment priority for banks, globally.70%80%90% 100%In the more rapidly developing Asian andemerging markets, where big, establishedbanks have less dominance, bankers reportthat attracting talent and retaining existingcustomers in face of fierce competitionand new market entrants are also topchallenges. R&D, innovation and newproduct development are the top investmentpriorities in these regions.Bankers tell us they are working harder thanever before to address these challenges, andare consistently being asked to do ‘morewith less’, given the continued cost pressurefacing the industry. ‘Execution, execution,execution’ is the mantra, particularly forbanks in the US and Europe.Priorities for 2020However, the pace of change is increasingand banks need to do even more to ensurethey are well-positioned to succeed in thefuture. Through our proprietary researchand insights from client engagements, wehave identified six priorities for success in2020. They are:a customer-centric business1 Developing modeldistribution2 Optimising business and operating3 Simplifying modelsan information advantage4 Obtaining innovation, and the5 Enabling capabilities required to foster itmanaging risk, regulations6 Proactively and capitalDespite broad agreement that they are allvery or somewhat important, fewer than20% of executives feel that they are very

Figure 3: Top 3 challengesFigure 4: Top 3 investment prioritiesUSAUSA47%Regulatory complianceAttracting new customers35%Increasing customer profitability46%Enchancing customer serviceImplementing newtechnology33%Europe30%Europe40%Regulatory complianceAttracting new customers 33%Implementing newtechnology31%Asia-Pacific56%Enchancing customer service36%Regulatory complianceLoss of trust27%Asia-Pacific38%Attracting and retaining talent34%Attracting new customersNew market entrants56%Regulatory compliance34%New product developmentEmerging MarketsEmerging Markets47%Attracting new customers43%Attracting and retaining talentSource: PwC Banking 2020 Survey40%R&D and innovation25%New market entrants51%Enchancing customer service29%47%Enchancing customer service36%R&D and innovationNew product development32%prepared against these priorities, andonly a similar percentage report thatthey are making significant investmentsin these areas.Banks universally agree that they arehindered from addressing these prioritiesby financial, talent, technology andorganisational constraints. Banks needto take aggressive action to ease theseconstraints, and manage themselves in amore agile manner to enable innovationand transformation, while preservingtheir optionality to capitalise on marketopportunities and address unexpectedchallenges.To succeed in this rapidly changinglandscape, banks need to have a clear senseof the posture they wish to adopt – whetherto shape the industry, rapidly follow theleaders, or manage defensively, puttingoff change. And they need to have a clearstrategy to deal with these challengesand address these priorities, includingconsidering partnerships with third partiesand applying lessons from other industries.Of course, the level of focus on each of themdepends both on a bank’s starting point,and its unique strengths and challenges.However, each priority is important, andsuccess will come from a balanced executionacross them – and a balance of tacticalinitiatives and longer term programmes, allcoming together as an integrated whole.90% ofexecutivesbelieve thateach of thesepriorities isimportant;only 20% ofexecutives feelvery preparedto address themWe discuss this further in Section 3.Source: PwC Banking 2020 SurveyPwC Retail Banking 2020 7

Impact of globalmacro-trends onretail bankingTo help frame the discussion of what banks should do (see Section3, ‘Six Priorities for 2020’), we first consider the macro-trends thatare shaping the global financial landscape, building upon PwC’ssubstantial research effort in this area, Project Blue*. We framedthis research around the following seven trends: global instability,demographic change, technological change, social and behaviouralchange, the rise and interconnectivity of the emerging markets, the riseof state-directed capitalism and the war for natural resources.* For further information on Project Blue, please visit PwC Retail Banking 2020

Global InstabilityRegulatory environmentFiscal pressuresPolitical and social unrestDemographicchange Population growthdiscrepencies Ageing populations Changing family structures Belief structuresTechnologicalchange Disruptive technologiesimpacting FS Digital and mobile Technological and scientificR&D and innovation Urbanisation Global affluence Talent Changing customerbehaviours – social media Attitudes to FIs Economic strength Trade FDI Capital balances Resource allocation PopulationRise of state-directedcapitalism State intervention Country/city economicstrategies Investment strategies SWFs/development banksWar for naturalresources Oil, gas and fossil fuels Food and water Key commodities Ecosystems Climate change andsustainabilitySocial and behaviouralchangePlanProject Blue FrameworkAdaptFigure 5: Project Blue – Framework and impact on banking landscapeRise and interconnectivityof the emerging markets(SAAAME)Of course, each of the macro-trends hasa different impact on the retail bankingindustry, as well as on each specificinstitution. In this section we consider,in depth, the following four mega-trendswe consider to have the greatest impact,although our thinking is informedby them all: Rise of state-directed capitalism –regulation reshaping the industry anddictating business models. Technology will change everything –becoming a potent enabler of increasedservice and reduced cost; innovation isimperative. Demographics – changing priorities andopportunities for growth. Social and behavioural change – risingcustomer expectations and the need toregain public trust.We also consider potential disruptors tothose trends, and their implications.Source: PwC Project BluePwC Retail Banking 2020 9

Rise of statedirected capitalism –regulation reshapingthe industry anddictating businessmodels.10 PwC Retail Banking 2020Nation-states are seeking to better controltheir financial systems and the institutionswithin their borders, as they learn that aglobal banking system becomes local in acrisis. Stability is paramount, and centralbanks are heavily involved in managingmarkets. Regulation is increasinglyprescriptive and local in nature. At the sametime, governments are seeking greaterinfluence over the financial system toadvance various policy objectives includingthe fight against terrorism, promotinglending to certain favoured sectors (e.g.students, housing, small businesses,national champions), financial inclusionand supporting the housing markets. Thesetrends, in our view, have a number ofyears to play out and impact the natureof the industry in 2020. Specifically, wepredict that: The playing field shifts from global tolocal. National and regional institutionswill dominate. Developed-world banks,especially in the EU, have been in retreatto their home markets since the crisis,and we expect this to continue. Historicalperceived advantages of global banks, suchas economies of scale (oft sought, yet rarelycaptured), will become outweighed bylocal regulatory constraints. Local lendingactivities will need to be matched moreclosely with in-country deposits. Globalbanks will be forced to compete on a localbasis – they will focus and double-down onfewer markets where they can gain scale,and they will exit markets where theyare subscale. More local markets will close tooutsiders. Traditionally restrictedmarkets such as China, India and Koreawill be joined by others that limit marketshare for foreign institutions throughlocal regulation and subtle preferencesfavouring domestic institutions. This, inturn, will limit the ability of emergingmarket financial institutions to penetratemarkets outside of their home countries.The exception to this will be that regionaland bilateral trade pacts concludedover the next five years will drive selectopportunities for certain institutionswhere financial services are included inthe scope of the agreements. Governments will influence throughregulation rather than ownership. Theywill move to privatise state-owned banksas the impact of politically driven creditdecisions in the aftermath of the financialcrisis is more fully exposed. Schemesfor lending and government-ownedfinancial institutions that channelledcredit largely based upon policy objectiveswill have absorbed significant losses onnon-performing loans by 2020, withnegative impact on both capital levels andpolitical support for continued aggressiveexpansion. At the same time, bankswill be increasingly pressured on varioussocial responsibility fronts, includingfees, affordable housing, andanti-money laundering. Regulated banking assets will besignificantly smaller than today(adjusted for inflation and GDP), due tothe regulatory attempt to significantlyreduce ‘sovereign risk’ through strongercapital requirements. The shadow bankingindustry – absent changes to the rules –will continue to grow to fill as much ofthe gap as it can, perhaps merely pushingfuture problems outside of the regulatedindustry. The pressure on the regulatedindustry will be particularly intensein those markets with growingappetites for credit. B anking sector size will be more closelycorrelated to GDP than today. By 2020,smaller countries with large inst

PwC Retail Banking 2020 5 Against this background, 70% of global banking executives believe it is very important to form a view of the banking market in 2020 – to understand how these global trends are impacting the banking system

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