pwc - retail banking 2020
TRANSCRIPT
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Retail Banking 2020Evolution or Revolution?
Powerful forces are reshaping the banking industry. Customer expectations, technological
capabilities, 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 todays imperatives, but also radically innovate and transformthemselves for the future.
www.pwc.com/banking
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Contents
03 Foreword
05 Executive summary
08 Impact of global macro-trends
10 Rise of state-directed capitalism11 Technology will change everything14 Demographics changing priorities and opportunities for growth
15 Social and behavioural change
17 Potential disruptors to this future
18 Evolution and disruption an imperative for change
19 Six priorities for 2020
22 Developing a customer-centric business model25 Optimising distribution28 Simplifying the business and operating model32 Obtaining an information advantage35 Enabling innovation, and the capabilities required to foster it
39 Proactively managing risk, regulations and capital
41 Conclusion
42 Contacts
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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 institution
acting 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 in
response 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 execute
relentlessly against todays 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 changes
we 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 regarding
the challenges and opportunities of thisevolving marketplace and their plans torespond. We developed a point of viewregarding how mega-trends will impact the
future of banking, using PwCs 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 to
share additional points of view, information
and insights, as appropriate. Feel free toreach out to one of us or your existing PwCcontacts to start the dialogue.
Foreword
We believe that retail banking will look very different in 2020than it does today.
Bob SullivanPwC (US)Global Banking and Capital Markets Leader
John GarveyPwC (US)US Banking and Capital Markets Leader
Justo AlcocerPwC (Spain)EMEA Banking and Capital Markets Leader
Antony EldridgePwC (Singapore)
Asia-Pacific Banking and Capital Markets Leader
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4 PwC Retail Banking 2020
Anna, 56, boards a high-speed train for hercommute to one of the worlds 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 several
independent investor analytics enginesshe reached through her banks wealthmanagement platform.
She then watches a message from the banksleading 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 accountAnnas age and planned retirement at 70.She recommends the flagship, and suggests
supplementing her sons 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 electronics
display, 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 the
purchase, 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.
The 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 t hey discuss Annasquestions and offer advice on a range ofsmall business topics. She shares that she
is thinking of expanding her business intoadditional locations, and they explain thedifference between the banks 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 Annas use of thebanks products results in direct donations toAnnas favourite charity. She accepts happyshe has found a bank that really seems tounderstand her.
Retail Banking2020 Evolutionor revolution? Willyou be ready to servethis customer?
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Executive summaryPowerful forces are shaping the industry
PwC Retail Banking 2020 5
Against this background, 70% of globalbanking executives believe it is veryimportant to form a view of the bankingmarket in 2020 to understand how
these 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 non-traditional new players: 55% believe they
pose a threat to traditional banks, while
31% 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 in
the emerging markets (79%). And manymore US executives view non-traditionalnew market entrants as a threat (71%), thanexecutives in Asia (42%), where more view
them 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 banking
industry.
Powerful forces are transforming the retail banking industry.Growth remains elusive, costs are proving hard to contain and ROEsremain stubbornly low. Regulation is impacting business models
and 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.
70% of global bank executives believe it is veryimportant to consider how macro trends willimpact the banking industry in 2020
Fewer than 20% of executivesfeel well-prepared for the future
55% of bank executives view non-traditional players as a threat totraditional banks
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6 PwCRetail Banking 2020
Todays challengesUnsurprisingly, 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.
The impact of complying with growing and
changing 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.
In the more rapidly developing Asian and
emerging 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 new
product development are the top investmentpriorities in these regions.
Bankers tell us they are working harder than
ever 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, we
have identified six priorities for success in2020. They are:
1 Developing a customer-centric businessmodel
2 Optimising distribution
3 Simplifying business and operatingmodels
4 Obtaining an information advantage
5 Enabling innovation, and thecapabilities required to foster it
6 Proactively managing risk, regulationsand capital
Despite broad agreement that they are allvery or somewhat important, fewer than20% of executives feel that they are very
Figure 1: Importance of considering the banking market in 2020
Asia-Pacific
71%
USA
61%Europe
67%
EmergingMarkets
79%
Figure 2: Non-traditional players Threat or opportunity?
nThreat nThreat, only if i nferior technologynOpportunity
0% 10% 20% 30% 40% 50% 60% 70% 90%80% 100%
US
Europe
Emerging Markets
Asia-Pacic
Source: PwC Banking 2020 Survey
Source: PwC Banking 2020 Survey
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PwCRetail Banking 2020 7
prepared against these priorities, and
only 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 market
opportunities 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 challenges
and 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 banks 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.
We discuss this further in Section 3.
90% ofexecutivesbelieve thateach of thesepriorities isimportant;only 20% of
executives feelvery preparedto address them
Figure 4: Top 3 investment prioritiesFigure 3: Top 3 challenges
Regulatory compliance Regulatory compliance
Attracting new customers Enchancing customer service
Increasing customer protabilityImplementing new
technology
47% 56%
35% 46%
33% 30%
USA USA
Attracting and retaining talent Enchancing customer service
Attracting new customers R&D and innovation
New market entrants New product development
38% 51%
34% 40%
25% 34%
Asia-Pacific Asia-Pacific
Regulatory compliance Enchancing customer service
Attracting new customers Regulatory compliance
Loss of trustImplementing new
technology
40% 56%
33% 36%
31% 27%
Europe Europe
Attracting new customers Enchancing customer service
Attracting and retaining talent R&D and innovation
New market entrants New product development
47% 47%
43% 36%
29% 32%
Emerging Markets Emerging Markets
Source: PwC Banking 2020 Survey Source: PwC Banking 2020 Survey
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Impact of globalmacro-trends onretail banking
To 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 PwCssubstantial 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 rise
of state-directed capitalism and the war for natural resources.
8 PwC Retail Banking 2020
* For further information on Project Blue, please vi sit www.pwc.com/projectblue
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PwCRetail Banking 2020 9
Of course, each of the macro-trends has
a 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.
Figure 5: Project Blue Framework and impact on banking landscape
ProjectBlueFram
ework
Adapt
Plan
Global Instability
Demographicchange
Technologicalchange
Social and behaviouralchange
Rise and interconnectivityof the emerging markets
(SAAAME)
Rise of state-directedcapitalism
War for natural
resources
Population growth
discrepencies
Ageing populations
Changing family structures
Belief structures
Disruptive technologies
impacting FS
Digital and mobile
Technological and scientific
R&D and innovation
Urbanisation
Global affluence
Talent
Changing customer
behaviours social media
Attitudes to FIs
Economic strength
Trade
FDI
Capital balances
Resource allocation
Population
State intervention
Country/city economic
strategies
Investment strategies
SWFs/development banks
Oil, gas and fossil fuels
Food and water
Key commodities
Ecosystems
Climate change and
sustainability
Regulatory environment Fiscal pressures Political and social unrest
Source: PwC Project Blue
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10 PwC Retail Banking 2020
Nation-states are seeking to better controltheir financial systems and the institutionswithin their borders, as t hey 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, promoting
lending 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 local
basis 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 limi t 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 concluded
over the next five years will drive select
opportunities 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 banks
as 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 objectives
will 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, and
anti-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 intense
in those markets with growing
appetites for credit.
Banking sector size will be more closelycorrelated to GDP than today.By 2020,smaller countries with large institutionswill have shrunk their banking sectors,relative to GDP, through a combination of
asset reduction efforts, business sales andsubsidiarisation. At the same time, therewill be significant growthof domestic banks, particularly inemerging economies.
Leading institutions will practiseproactive regulatory management.Thirteen years after the financial crisis,the relationship between banks andtheir regulators will have reached a newequilibrium as banks more fully integratethe policy objectives of governments andtheir regulators into their day-to-daybusiness.
Rise of state-directed capitalism regulation reshapingthe industry anddictating businessmodels.
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In the last few years technology has rapidlyevolved big data, cloud computing,smartphones and high bandwidth are all nowcommonplace and weve reached a tippingpoint. Analogies with other industries (e.g.music and video distribution, print media)suggest that digital will drive huge shiftsin industry value compressing revenues,enabling new attackers, redefining serviceand crippling the laggards.
We are in the middle of a multiwavetrend where digital is first focused on
optimising current products and services.The second wave, where enhanced datacapture and analysis drives more targetedcustomer offerings and improved services isunderway. Mobile banking will increasinglydisrupt distribution models (e.g. instantvideoconferences with product experts)
and the payments industry (e.g. P2P mobilepayments). Advances in security andverification will enable all aspects of s ales,service and delivery to be conducted online.Technology is making it easier for customersto switch banks, making relationships much
less sticky. This will drive the third wave,where banks and their partners developsophisticated profiles on each of theircustomers.
The pace of innovation will continue toincrease, and leading banks will need toenable or leverage this innovation. All of thiswill accelerate the evolution of leading banksinto customer-centric information and risk-
management businesses. In 2020, we predictthe following:
Every bank will be a direct bank;branch banking will be undergoinga significant transformation.Astechnology enables every aspect ofbanking to go online, and as cashusage falls away, traditional branchesare no longer necessary. Given theirhigh-fixed cost, branches will need tobecome dramatically more productive,or significantly less costly. Banks have
already reduced staff levels, closed themost uneconomic branches and startedexperimenting with new branch concepts.We expect these trends to accelerate, ascustomer expectations and behavioursevolve. Branches will remain, but takemany forms, from flagship information,
advisory and engagement hubs (offeringeducation, financial advice, full-servicecapabilities and community offerings)to smart kiosks (offering service, sales,cash and video contact with a range ofspecialists). Leaders will rapidly improve
their footprints, reducing branch sizeand costs, introducing new models andmigrating transactions to low-touchdigital channels. Digital capabilitieswill improve, so that branch servi ceofficers and bank customers use thesame platforms, with the same look andfeel. The human touch will always be
available, just much more through digitalchannels. Banks that are behind this trend
will start to struggle, due to str ucturallyuncompetitive economics. In heavilybanked markets such as the US, we expectat least 20% fewer branches by 2020, andthat this trend will continue to accelerate.Emerging markets will continue todevelop their physical footprints, using agrowing range of pointsof presence.
Competitive reach is no longerdetermined by branch networks,rather by banking licences, technology
and advertising budgets.When everyaspect of banking can be done online,a banks target market and competitivearena is no longer defined by its physicalfootprint, but by its technology, regulatoryboundaries and marketing budget. Newentrants will no longer have their pace of
expansion constrained by the availabilityof acquisition targets and/or prime retaillocations. In developed markets such asthe US, for example, top regional bankscould become viable national playersand ambitious foreign entrants with
resources but without footprint couldfinally compete on a larger field. Newentrants could grow rapidly, potentiallycreating dozens of new competitors andrefragmenting the landscape. Further, wewill see ever-more competition from non-bank players. Branding and marketing willbe more important than ever before.
Technology willchange everything becoming a potentenabler of increasedservice and reducedcost; innovation isimperative
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Surviving banks will be low-cost
producers, with nearly every productprofitable on a stand-alone basis.Conventional wisdom suggests banksthat engage certain customer segmentsholistically with targeted offerings,advice and solutions will maintain highmargins. We agree. There is a premiumcustomer segment that will find this
holistic approach very valuable. However,new entrants will be offering similarhigh-value services, unencumbered by themassive legacy cost bases of traditionalbanks. So, even those banks targeting
the highest-value customer segments willneed to restructure their cost base, whileat the same time investing in areas such ascustomer analytics and compliance data.And needless to say, those banks targetingmass-market customers with simpleproducts will also be dependent on theirability to compete on cost. As the pain ofswitching providers continues to decrease,
customers will become even more mobile intensifying competition across allsegments. Every traditional bank needsto become the lowest cost producer, and
(nearly) every product needs to haveacceptable returns. Moreover, the lowestcost in 2020 will be up to 50% lower on aper transaction basis than today, as banksredesign their processes and systems forthe digital age, structurally changing theircost base and instituting more aggressiveongoing cost management processes.
The smart device will grow in
importance, and take its placealongside cards as the primarymedium for consumer payment.Thecustomer will be able to select betweenaccount providers (e.g. credit providers,deposit accounts) or locally storedvalue. Acceptance will be universal(with common cross-network payment
protocols) and value-transfer instant.Multi-currency capabilities will becomenormal. Customers will be able to makecontact payments or send funds toany other unique identifier (e.g. email
address, phone number, bank account,credit card number, etc.). Transfers oflocally stored value may be both traceableor untraceable, depending on serviceprovider, as a result, removing removingthe last powerful incentives to use cash privacy, tax avoidance, lack of accessto banking services. Cards will remainpopular, as they are quick, effective, allow
easy compartmentalisation of spend anddont run out of power.
Biometrics (e.g. fingerprints, voice
recognition) will become commonplacein transaction authorisation, but willremain tied to a replaceable physicaldevice (e.g. smartphone).Biometricsare unique and unchanging, yet can becaptured and replicated, so two-factorauthentication (e.g. my fingerprint andmy phone) will always be required.
Industry utilities will arise in nearly
every area of infrastructure(similarto the US bank in a box vendorssuch as Fiserv), as cost pressures andtechnological advances force banksto focus on customer service andrisk management, rather than thedevelopment of undifferentiated andexpensive processing and payments
infrastructures. A number of large bankswith processing scale and efficiencywill commercialise all or part of theiroperations and technology departmentsand offer services to other banks. Groups
of banks might partner to achieve scaleand find best practices, combiningtheir infrastructure into joint ventures.Existing technology service providerswill significantly expand the servicesthey offer. Likely examples of processesprovided by utilities include customerauthentication, fraud checking, paymentsprocessing, basic account infrastructure
and KYC processing.
Technology willchange everything becoming a potentenabler of increasedservice and reducedcost; innovation isimperative
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Most cross-border knowledge
transfer of capital, best practices andinnovations will take place throughnew market entrants, third-partypartnerships and intermediaries, ratherthan through cross-border bankinginstitutions.We see a significant rise incross-border banking partnerships andthe increasing development of cross-
border service providers and advisers tofill the intellectual property gap causedby the shrinking of cross-border banking.This movement is a direct response tothe localisation of the global banking
system, and the constraints on deployingcapital across different jurisdictions.More specifically, we predict a growingmismatch of excess deposits in thedeveloped world and banks unable tosatisfy consumer credit demands in thedeveloping world.
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Demographic changes will provideopportunities for growth and will requireinnovation to develop new productsand services.
Developed-market populations are ageing,
driving focus towards savings and investmentand away from credit and consumption. Thedeveloping world is more mixed. China hasa similar demographic profile to much ofthe developed world, for example, whichexplains the reluctance of the Chinese stateto create more of a credit-based consumer
culture, despite internal and externalpressures. Brazil, however, has a muchyounger population, and a rapidly growingappetite for consumer credit.
Individual life expectancy is rising,lengthening expected retirements. Forexample, a man born in the UK in 2020 isexpected by the government to live for 92years vs. 87 years for a man born in 1990;and the changes are far more dramatic inemerging markets.
Public and private pensions will berestructured, cutting benefits and indexingretirement ages to life expectancy.
The global middle class is projected to growby 180% between 2010 and 2040, with Asi aoutpacing Europe by 2015. Over the next 30years, some 1.8 billion people will move intocities, mostly in Africa and Asia, creating oneof the most important new battlegrounds forfinancial services businesses.
By 2020, we expect:
Wealth management will movealongside deposit-taking as a baselineservice for retail banking.Banks without
a strong wealth offering will lose share, ascustomers take increasing responsibilityfor their lifelong financial well-beingand planning in both the developed andemerging worlds, and look for their bankto meet this need.
Fee-based revenues will increase asa percentage of total in developedmarkets and China, as consumers uselonger working lives to save more andtake out less (pay down more) debt, andas banks favour growing business such aswealth management and retail brokerage.In developing markets with economic andsocial stability, we will continue to seerapid credit growth.
Cities will continue to grow inattractiveness as urban migrationcreates 1,000m new banked customers,as well as 800m new urban unbankedby 2040.
Banking the unbanked (urban andrural) will become a primary policyobjective in both developed andemerging markets,as governmentsseek to reap the economic benefits ofbroader access to financial services fortheir populace. This push will drive
new products and business models,and will become the primary focusof governmental or state-sponsoredinstitutions, particularly where the privatesector is unable to fulfill the need.
Demographics changing prioritiesand opportunitiesfor growth
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PwCRetail Banking 2020 15
Customer expectations are being shapedby their interactions outside of the bankingindustry they increasingly want the typeand quality of service they receive fromindustries that place significant focus oncustomer experience (e.g. the ease of useof Baidu, the seamless integration of Appleproducts across products and channels).
Customers are also increasingly connectedto others across social, geographic anddemographic boundaries. This social worldaugments close friends and family as the
primary source of information, opinion andrecommendation. The smallest piece of noisecan be amplified massively and instantly.Everything from reputation to purchasingdecisions to sales channels is impacted.
Further, unprecedented numbers of womenare heading households, controlling wealthand spending, and becoming the primaryearners. In the US, for example, womencontrol 50% of private wealth, head one-third of households, are the primarybreadwinner in 40% of families and are
increasingly more educated than men.Globally, women control 65% of consumerdiscretionary spending, and this is set to risein the coming years.
Customer trust is at an all-time low, andthey want their banks to be more sociallyresponsible. They are also concerned aboutprivacy and security, as more of their
personal information and financial lifemigrates online.
By 2020 we expect:
Banks will organise themselves aroundcustomers instead of products orchannels. They will offer a seamlesscustomer experience, integrating sales
and service across all channels. They willdevelop the ability to view customersas a segment of one, recognising theiruniqueness, and tailoring their offeringsso that customers view banks as meetingtheir needs not pushing products.
Banks (in most countries) will evolvetheir customer experience to be morefemale-friendly. In one US survey, 73%of women said they were dissatisfied withthe financial services industry. Complaintsrange from a lack of respect, to beinggiven contradictory advice and worseterms than men. Winners tomorrow willaddress this through a combination ofbranding, product and service solutions.We expect many more bankers to bewomen in 2020, and many more banks topublicly state this as an ambition.
Social media will be the media.Today, we view social media as co-existing alongside traditional media. By2020, social media will be the primarymedium to connect, engage, inform andunderstand your customers (from themass social mind to the minutiae ofeach and every individual), as well as
the place where customers research andcompare banks offerings. And, as today,
information and opinion (good or bad)can be amplified, creating new risks andopportunities. Mastery of social mediawill be a core competency.
Customer trust will be returning.Some banks will benefit significantlyfrom taking a leadership role in thepublic debate. The leading firms willhave reclaimed at least some of the highground they lost in the financial crisis andbegin to reshape public opinion. They willinform and educate from mass offerings
on basic financial skills (imagine a bank-led MOOC on finance topics with highschool accreditation) to financial history,culture and economics, reminding us ofthe fundamental benefits of banking tosociety. All major banks will incorporateconsumer education as part of their sales
process. For customers to trust their banksthey need to feel that banks are acting intheir best interests common practicessuch as teaser deposit rates that reset afterone year go against this, while the abilityto design your own mortgage and control
the flow and timing of paperwork is in linewith this thinking. In any case, we seeconduct risk moving from a largely Anglo-Saxon concern to a global requirementfrom an increasingly educated andempowered customer.
Social andbehavioural change rising customerexpectations andthe need to regainpublic trust
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16 PwCRetail Banking 2020
Cyber security is paramount to
rebuilding this trust winners willhave invested significantly in this area.Recent high-profile security breachesand media commentary surroundingcyber attacks have generated fear anduncertainty, further eroding stakeholdertrust. There are now higher expectationsabout security of information and privacy
among clients, employees, suppliers andregulators. Risks range from internalmisuse of social media to organisedcyber-crime (e.g. mass information theft,or denial-of-service attacks). In our recent
17th Annual Global CEO Survey, we foundthat 71% of banking and capital marketsCEOs consider cyber insecurity as a threatto their business prospects, more thanany other sector. Regulation on cybersecurity is increasing, and regulators are
intervening witness Waking Shark II,
the Bank of England-led cyber-attackwargame, simulating an attack on the UKfinancial system. But simply followingregulatory rules wont allow the businessto keep pace with the constantly growingand changing cyber threats. A proactiveresponse is vital. Key priorities includeidentifying and focusing resources
on the crown jewels most in need ofprotection. By 2020, leading banks willhave developed cyber-security strategiesthat are aligned with their businessobjectives, risk-management protocols
and regulatory requirements. Many bankslack the resources to tackle these issues ontheir own, and will have partnered withthird parties.
Social andbehavioural change rising customerexpectations andthe need to regainpublic trust
71% of Banking and Capital MarketsCEOs see cyber insecurity as a threat
to their business, more than any othersector. A proactive response is vital.PwC 17th Annual Global CEO Survey, Feb 2014
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PwCRetail Banking 2020 17
It is always easier to take the trends we seetoday and model their impact on the future.However, a number of big things couldhappen between now and 2020, which couldreverse or accelerate existing trends or evencreate new ones.
Shifting global resourcesFor example, what happens if the USbecomes energy self-sufficient? Or, moreradically, if technological developments
in shale gas, solar and other clean energymeans that nearly every country could be
self-sufficient? What would that do foreconomic development and how would itchange trade flows and economic activity?Does this stop or slow the relative rise ofthe East and decline of the West or doesthis allow China to grow without importingenergy? What do oil-rich, but undiversifiedeconomies do when the world doesnt buytheir oil and gas? How would financialmarkets react and evolve? Would this simplyaccelerate the likely next battle forresources: water?
War or terrorismCould a war or a terrorist strike withweapons of mass destruction cause theisolation of a significant country or regionand create two or more blocs of financialsystems in the world? Could a financialinstitution operate in both? Would they beallowed to by their home governments?
Healthcare and demographicsDo technological advances in healthcreate quantum leaps in longevity thatcompletely change the world demographicmap? With the possibility of working andliving productively for another 20 years (orlonger), do countries with declining fertilityrates have a distinct advantage? What if
those advances dramatically cut the cost ofcare and, by extension, the current healthbills and projected health benefit obligationsthat are constraining economic growthtoday? What would this mean for savings
rates, demand for products and financialinstitutions themselves as they seek tomanage their workforces?
RegulationWe said before that regulation is the mostimportant factor shaping bank s today. What
if the regulatory burden on the financialsector becomes so great that it is impossiblefor the financial system to function efficientlyand effectively? This, in turn, say, constrainsthe supply of credit and risk managementtools to the real economy at levels that
support economic growth in some countriesand allow for the payment of sovereigndebt. Do nation-states begin to pull out ofinternational agreements such as Basel IIIand go it alone for economic survival, sothey can loosen the constraints and gainshort-term economic advantage? Does thisbegin to unwind the improvements in global
regulatory cooperation and consensus-building, post the financial crisis andfurther fracture the cross-border universal
bank model and accelerate the movementtowards national vs. cross-border banks?Does it spur a new era of innovation in somecountries and regions where alternative riskmanagement and regulatory approachesallow for banks to safely increase lendingand economic growth, or does this simplybegin the process of creating the nextfinancial crisis.
Financial crisisWhat if the next financial crisis occursbetween now and 2020? One can see a
number of potential areas of risk: from thepotential break-up of the Eurozone, theslowdown in emerging markets, and thesovereign debt crisis impacting most of thegovernments in the world. Even more thanthe last one, another financial crisis could betruly game-changing, not only for financialinstitutions around the world, but for thepost-World War II geopolitical order thathas underpinned the world for the last70-plus years.
The bottom line is that the more agile and
innovative institutions will be those best ableto navigate any significant disruptors.
Potential disruptersto this future
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So let us take stock. ROEs, while improving,remain at or below the cost of capital inmuch of the world. Growth remains elusive.Regulatory reform, from liberalising ratesin China, to capping card fees in the US, isimpacting revenue streams. Efforts to cutcosts have not been transformative andcompliance costs have risen. Bankers admitthat todays execution will not be sufficient(even as it is necessary), and that much moreneeds to be done.
The industry is at an inflexion point.
Changing customer expectations requiresignificant investment. Technology mayrender much traditional infrastructureobsolete while enabling superior service,growth and new competition. Bankersunderstand that the operational complexityof the past needs to be addressed to provide
the efficient, effective platform for thefuture.
Banks need to get ahead of these challengesand retool to win in the next era ofcompetition. This is imperative, and also
a tremendous opportunity. Banks need tomake hard choices about which customersto service, how to win and where not to play.They need to rebuild their organisationsaround the customer, simplify andstructurally reduce cost. They need to learnto be agile, innovative and adaptable in orderto execute effectively.
Much has been written about the currentbanking competitive landscape and themodels that successful banks are followingor should adopt in the future. For example,should one focus on wealthier sophisticatedcustomers and offer a complete and high-margin complex product set? Or perhapsconcentrate on delivering simple bankingproducts at the lowest cost, leveraging directdistribution channels? Or seek the benefits ofbeing the largest scale player?
In 2020, we expect to see new models and
fiercely disruptive competitors. For example,what if a leading social network chose to setup a banking and payments business? Or ifa leading search engine was to emerge asa global crowd-sourcing platform, raisingfunds and then voting on which competingenterprises should benefit?
We dont believe the future is clear enoughto present a complete and detailed analysisof business models, market shares andmargins of all players. In a way, that isntthe point particularly given the high levels
of uncertainty. Rather, we encourage banksto be thinking today about this disruptivefuture, and developing their own plans forsuccess, plans that include developing agilityand optionality the characteristics thatcreate value in times of uncertainty. Theseplans should address todays imperatives,contain a clear vision of the bank in thefuture and be adaptable enough to change asthe world continues to evolve.
In short, banks need a clear strategic vision,and they need to do things differently.
In the next section we discuss how.
Evolution anddisruption animperative forchange
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Six prioritiesfor 2020Each bank needs to develop a clear strategy to deal with thistransforming landscape. They need to decide whether to lead, tofollow fast, or to manage defensively, putting off change. They need
to create agility and optionality, to adapt to rapid change and futureuncertainty. Yet, whatever the chosen strategy, success will come fromsuccessfully executing the right balance across the followingsix priorities.
PwC Retail Banking 2020 19
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20 PwC Retail Banking 2020
From our work with leading players
worldwide, from our research into themacro-trends impacting banking and fromour survey of global banking executives, wehave identified the following six priorities forretail banks to win in 2020:
1 Developing a customer-centric businessmodel.
2 Optimising distribution.
3 Simplifying business and operatingmodels.
4 Obtaining an information advantage.
5 Enabling innovation, and thecapabilities required to foster it.
6 Proactively managing risk, regulationsand capital.
Every bank needs to develop a view of thefuture landscape, and the uncertaintiessurrounding it. Every bank needs a clear
view of its own unique strengths andchallenges. And every bank needs todevelop its posture against this evolving
and uncertain future. Every bank needsa clear strategy.
Yet, whatever the chosen strategy, it will
involve executing a balance across thesesix priorities.
Banking executives agree that thesepriorities are very important, with eachof them scoring between 4.3 and 4.5 (outof 5) in our survey. However, we found astriking gap between those ranking thesepriorities as Very important (46%64%)and those stating that they saw themselvesas Very prepared (11%17%) and/or thatthey were making a Significant investment(18%25%) in these areas. Technological,
organisational, talent and cost constraintswere viewed as the greatest obstaclesto success.
Below, we discuss each priority in turn.In this short paper we can barely scratchthe surface of these complex issues. Wewelcome the opportunity to have a deeperconversation with you on these topics, aswell as on crafting your overall strategic
response.
Figure 6: Six Priorities: Significant gap between preparedness and importance
nVery prepared nSignicant investment nVery important
0% 10% 20% 30% 40% 50% 60% 70%
Optimised Distribution
Simplication
Information Advantage
Proactively Managing Risks
and Regulation
Enabling Innovation
Customer-Centric Business Model
Source: PwC Banking 2020 Survey
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Its hard to take big-picture trends andpriorities, and translate them into tangibleactions. Its even harder to be unreasonablyaspirational, yet realistic in what can beachieved. Designing your fiercest competitoris a concrete way to tackle these abstractideas and identify how and where you needto change, to thrive in 2020.
PwC has worked with dozens of clients tore-imagine their companies in a practical,results-oriented way. In a way that leveragesthe ambitions and insights of your top team,
and helps build real alignment as to thepath forward. In a way that doesnt take sixmonths and millions of dollars.
Imagine a series of facilitated workshopswhere your business and functional leadersare asked to think dif ferently, to movebeyond the incremental and imagine whatcould be. And then translate these insightsinto realistic actions. Actions that havebeen debated and agreed across businessand functional silos. This is Designing yourfiercest competitor.
Catalyse provocative thinking.Weanalyse industry trends and drivers,and assess their importance to ensurea shared understanding of the industrylandscape. We develop aggressive anddisruptive scenarios and then use themto provoke your leadership team into re-imagining the business.
Design your fiercest competitor(s).We ensure participants take an end-to-end perspective, and define theirfiercest competitor a competitor withdisruptive strengths that ruthlesslyexploits your weaknesses. We design thiscompetitor in a variety of different futurescenarios. We define a fiercest strategy(value proposition, sources of sustainedadvantage, where to compete) and afiercest operating model (organisation,processes, technologies, culture), so thatyou fully understand how these new
players will win.
Make it real.Finally, we translate theinsights gained from designing thefiercest competitor into tangible actionsfor your own business. First, teams gaina heightened sense of priority anddecide to accelerate existing initiatives
and abandon others, so as to focusscarce resources in the most criticallycompetitive areas. Second, teamsimagine new third-party partnerships.And finally, teams begin to develop ideas
for disruptive business designs waysto change their own strategy (where tocompete) and operating model (how tocompete) to attack the market in similarways to the fiercest competitor.
Designing yourFiercest Competitor.Mastering changeby making it real.
Part 1: Fiercest Strategy
Discuss industry perspectives, gain insights on
market challenges and potential disruptions
Result:Quickly get past biases that maydistort your market view and cause you to misspotential competitors
Our Fiercest Competitor
Workshop is a powerful and
practical tool to rapidly craft
an integrated strategic response
to these evolving forces
Part 2: Fiercest Business Model
Design the Fiercest Competitor and strategiesfor a new business model
Result: Rapidly assess impacts to yourbusiness model, and determine the best strategic
path forward
Part 3: Closing The Gap
Make the organisation become the FiercestCompetitor
Learn to quickly work through business modelchallenges
Result:Avoid polarising viewpoints while quicklyidentifying and resolving the root causes of problem areas
Part 4: Prioritised Path Forward
Turn the discussion takeaways into action items
Gain expertise in roadmaps, mobilisation, andexecution
Result:Work through challenges and prioritisethe solutions as part of a long-term go-to-marketstrategy
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Much has been written about the need to
develop a more customer-centric businessmodel. And many banks have beeninvesting in improving the overall customerexperience. But few (if any) have attemptedthe sort of wholesale transformation of theiroperating model which we believe necessaryto win in 2020.
Our survey indicates a growing awareness,but a significant gap in preparedness.Sixty-one percent of bank executives say thata customer-centric business model is veryimportant, and 75% of banks are makinginvestments in this area (this pattern isconsistent globally). Yet only 17% feelvery prepared.
Banks today typically do not know theircustomer very well. Now, at the productlevel, many banks have invested significantlyin customer analytics plenty of creditcard providers, for example, understand
a customers value potential, can trackspending patterns and make targetedoffers. Yet, many still send customersmultiple product offers in the hope thatsomething will stick. And few can analysea customers deposit account, see that hissalary deposit has increased, and send anote congratulating the customer on his
or her promotion together with an offer ofa premium card and a higher credit limit.
Banks struggle to join the dots internally
and prepare bank-wide views of a customerrelationship, let alone integrate externalsources of data. And, as such, risk and creditdecisions are typically taken at the productlevel, not at the customer level.
Many banks carry vast product sets, withsubtle differences, frequently not appreciated
by customers. This comes with a consequentcost in operations, technology, service and,at times, risk and regulatory challenges.Systems are not modular in design, so thateach variant adds to this complexity andcost. Legacy products, no longer offeredfor sale, are rarely discontinued. And everybank customer has experienced the thrill ofbeing passed from call-centre operator tocall-centre operator in the vain hope thatone of the them can solve the problem,that is if they can figure out how to talk toa real person at all. No wonder customers
are frustrated and regulators are concernedabout fair customer treatment.
Yet, even as banks invest today to addressthese issues, the bar just keeps on rising.Customers are redefining their expectations,taking their cues from other industries thatoffer multichannel access, product simplicity,seamless integration and segment-of-
one targeting. They want convenience,personalisation, accessibility and ease of
use. They want to feel like their bank is
anticipating their needs, not bombardingthem with product offerings. They wanttransparency and no surprises in terms offees. Todays definition of first-class service,which most banks are a long way fromdelivering, is rapidly becoming a baselineexpectation. And banks know that bettercustomer experience leads to greater loyalty,
advocacy and revenues.
The winners of 2020 will develop a muchdeeper, holistic understanding of theircustomers. They will need to acquire,integrate and analyse multiple sources ofinternal and external data. They will be ableto understand their customers needs, and bepresent with a relevant solution at the timeof need. They will simplify their product sets.And they will redesign their core processesfrom a customer point of view.
Further, they will (re)answer the most
fundamental questions of who are theirtarget customers, what is their valueproposition to those customers and whatcompetitive advantages will distinguish themin the marketplace. A bank does not need tobe all things to all people to succeed.
Developing acustomer-centricbusiness model
Banks today have a simplistic
understanding of their customersand a vastly complex product
set. The winners of 2020 willturn this on its head. They willdevelop a much more complete
understanding of their customersand dramatically simplify their
product set, and so deliver asignificantly enhanced customerexperience with lower levels ofoperational risk. Begin withunderstanding customer needs,not with products and pricing.
22 PwC Retail Banking 2020
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PwC Retail Banking 2020 23
Figure 7: Areas of significant effort over next 5 years
Enhancing customer data collection
Allowing for increased customer
choice in conguring product features,
including pricing
Conducting customer segmentation
using a dedicated group that supports
strategy development across
Creating a exible and agile product
portfolio adapted to customer segment
Oering a mix of self-directed and
personal interaction channels
to customers
Creating and lling an executive-level
Customer Strategy Ocer position
0% 10% 20% 30% 40% 50% 60%
54%
Evaluating bank performance
metrics and best practices from
customer viewpoint
53%
Using social media to monitor
customer preferences48%
44%
38%
50%
41%
15%
Source: PwC Banking 2020 Survey
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In our paper Experience Radar 2013 Lessons from the U.S. Retail BankingIndustry, we describe the actions banksshould take to ensure a memorable customerexperience. We see these lessons as broadlyapplicable across the globe.
Win the fee war.Fees and rates dominatethe banking experience they are thenumber one driver of customer purchases,and two in five bad experiences touchon rates and fees. Frequent changeshave frustrated customers. Mitigate this
frustration with better communicationand more customer-friendly fee strategies.
Fix the bad, fast.Customers want to feellike their bank is working with them, notagainst them. Dont let customers walkaway with a sour taste in their mouth.Two in five customers leave banks aftera bad experience, and 45% of those willactively discourage others from using thatbank. Turn issues into opportunities tobuild loyalty. Empathy and an apology goa long way towards satisfactory problemresolution. Identify these negative
experiences and work to removethe causes.
Help your story get told.Customerscan become your best marketers. Lookto your staff to make this happen. Fiftypercent of recommendations are due togood experiences, not to rates or products.Identify key influencers among customersto serve as brand advocates promotersaccount for 8090% of positive word ofmouth. Manage social media exposure one in four customers share experiencesthis way.
Go digital.Customers want to interact
whenever, wherever. Give them theconvenience they seek through digitaltools. Sixty-one percent of customerswant to research on their own, and 42%buy on their own without help fromrepresentatives or experts.
Balance automation with the humantouch.Sixty percent of great experiencesare due to great staf f. Twenty-five percentof customers rely on staff to do research,46% to select products and 63% to resolvetheir problems. Create a multichannelstrategy that balances cost and service.
Encourage self-service for routine matters,and refocus branch and contact centrestaff on higher value-added activities likerelationship building and sales.
Executing on todaysimperatives.
Better customerservice is rapidlybecoming a baselineexpectation, yet mostbanks are far fromdelivering it. Heres
how to do better.
24 PwC Retail Banking 2020
volume1
Locatingthe sources
ofvaluebehindtruly
exceptionalcustomer
experience
November2012
ExperienceRadar 2013Lessonsfromthe U.S.RetailBankingindustry
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The coming revolution in branch banking and
the need to optimise distribution networksis clearly top of mind for banking executives.Eighty-five percent of respondents seeoptimising distribution as important, 71% aremaking investments in optimising distribution(with an additional 22% expecting to doso in the near future). Globally, 82% ofrespondents feel that their organisations
distribution model needs to change (90% inemerging markets).
Fifty-nine percent of respondents expect theimportance of branch banking to diminishsignificantly as customers migrate to digitalchannels, and 48% expect branch banking tochange significantly by 2020. Yet, only 16%of respondents viewed themselves as veryprepared for this shift. Respondents globallyview the largest banks as benefitting mostfrom these changes, and smaller regional andcommunity banks being the most threatened.
Banking was once all about real estate bankswere located in prime locations and built toproject strength, stability and safety. ATMs,telephone banking and then the internet allprovided added convenience and expandeda banks reach. But real estate still rulessupreme, and many products still requirecustomers to transact through a branch
We are now at a digital tipping point, withrapid technological advances enabling all
aspects of banking to be conducted online.
And customers expectations are evolving
in tandem. They want to transact at theirconvenience, with information and advice attheir fingertips. Even many of those who valuethe privacy and face-to-face interaction youfind in a branch, will soon demand this fromtheir office or home. They do not want to beforced to travel nor wait in line.
Further, branch network costs are very high,with few easy ways left to reduce them(for example in the US, banks have already
reduced staff from 13 FTE per branch in2004, to an average of less than 6 today).
New, digitally focused, competitors are notso encumbered.
Quite simply, distribution is ripe for digitaldisruption. The transformation of the music,film and print publishing industries provide
chilling analogies for those banks unable toget ahead of this trend.
Optimisingdistribution
Historically, banks with the bestbranch footprint have dominatedtheir markets, gaining outsized
share. By 2020, all banks will be
direct banks, and branch bankingwill be changing fast. Leaderswill offer an anytime, anywhere
service, fully utilising all bankingchannels in an integrated fashion.They will be re-imagining their
physical footprints, introducing
new branch formats, expandingphysical points of presencethrough third-party partnerships,driving sales and cutting costs.
As transactions and sales shiftto digital channels, branches
that cannot create incrementalvalue will need to close, or be
transformed.
PwCRetail Banking 2020 25
2Figure 8: Optimised distribution
nMost threatened nBenet most
0% 10%10% 20%20% 30% 40% 50%
Global Banks
National Commerical Banks
State-Owned Banks
Community Banks/ Credit Unions
Regional Banks
Non-Traditional Retail FS
Providers
Source: PwC Banking 2020 Survey
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26 PwCRetail Banking 2020
The vast majority of banks arent there yet.
But the leaders understand these dynamicsand are moving fast, experimenting withnew concepts. By 2020, banks will managedistribution holistically. Products will not bebuilt-into, or serviced through, the channel:rather, banks will develop shared platformsthat distribute products across all channels.Future in-branch advisers will use the same
technology and infrastructure available tobank customers. Let me help you open anaccount sir? You want to do it yourself? Sure,just go online you can borrow my tablet, oruse one of t he touchscreens. You have your
own? Terrific, take a seat and let meget you a coffee. Every bank, whether inthe developed or developing world, willbe a direct bank.
The value of a branch will need to be
redefined. There will be different models,tailored to specific purposes for example,flagship stores, community centres andexpanded ATMs. Flagship branches willoffer information, education and advice todrive engagement, loyalty and sales. Wewould expect them to host events, such asa seminar on The challenges of growing a
small business, with small business advisersand product specialists on hand for questionsand drinks after. They will be in high-value high-traffic locations. Communitybranches will be smaller in scope, focused
on community outreach and engagement(e.g. offering financial education andwealth-management advice). ExpandedATMs will be in-store or in ot her well-trafficked sites, and as valuable as marketing,sales, transaction and cash-handlingpoints perhaps even with dedicated staff.Partnerships with third parties will enablebanks to further expand their reach with
significantly lower real estate costs.
Advisers and product specialists will bepresent in all types of branch in person, or
by video from centralised advisory offices expanding sales reach. Tellers will need toevolve into financial advisers, fluent in all
bank products a massive transformationof skills. Banks will likely need to simplifytheir product sets for the benefit of bothemployees and customers. Transactionprocessing will be almost entirely digital
though many transactions will continue to
be in store, just conducted through smartATMs, tellerless kiosks and touchscreens.
In developed markets such as the US, leadingbanks in 2020 are likely to have a far greaternumber of physical points of presence andfar fewer traditional branches perhapsas many as 20% fewer across the industry,with the trend accelerating through 2020 asleases roll off.
In developing markets, where branchnetworks are thinner, physical distributionwill continue to evolve, and banks aremore likely to partner with new entrants tocreate alternative distribution channels (forexample, M-PESA in Kenya, handles depositsand payments using a network of agents andcustomers cellphones and is used by two-thirds of the adult population).
These trends are inevitable, and bankstoday need to choose what path they wantto follow. What is your future distributionvision? At what pace do you want to change?Do you push aggressively to precipitate thischange and capture advantage, through
digital optimisation, alliances, partnerships,spin-offs, closures or manage defensively topostpone the inevitable.
Optimisingdistribution
Distribution is ripe for digitaldisruption. The transformation of
the music, film, and print publishingindustries provides chilling analogiesfor those banks unable to get aheadof these trends.
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In our paper, Rebooting the Branch:Reinventing branch banking in a multi-channel, global environment, we discussthe evolution of branch banking in detail.
Leading banks are moving away from
managing branches and instead aremanaging distribution across all the bankschannels including evolving branch modelsto balance local-customer needs with thehigh cost of branch delivery. They aredesigning their branch strategies to deliver adifferentiated experience, based on customer
needs, the competitive landscape, brandpromise and internal capabilities:
Begin by focusing on the customerexperience,answering the question: Whoare we and what kind of bank do we wantto be? Consider customers, competitors,brand and capabilities.
Choose an appropriate mix of branchmodelsto support the desired customerexperience. We see various models beingexperimented with today assisted self-service, in-store branches, full-service
branches, community centres andflagship stores.
Design an optimised distributionnetworkthat supports the needs of thelocal markets and scales to the density ofmarket opportunity meeting customerneeds and minimising the cost of delivery.
Develop intuitive, experience-drivenindividual branch designs,based upona deep understanding of customer needs,behaviours and usage.
Redefine the operating modelincludingthe organisational structure, branch
processes and infrastructure to supportthe branch model and network design.
Develop cross-channel enablersto deliver a seamless and consistentcustomer experience regardless ofbranch model mix.
Executing on todaysimperatives.
High-cost branchescannot survive intheir traditionalform. Evolving thenetwork today toalign with changing
consumer behavioursand economicrealities can helpbanks positionthemselves for thefuture. Heres how.
PwCRetail Banking 2020 27
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Banks have developed staggeringly complex
and costly operating models. Often, eachproduct has separate operations, technologyand risk management processes. And bankstypically have a multitude of products, manynot even offered to new customers, all ofwhich require some kind of operationalcustomisation to serve. In several cases wehave found that only 5% of products deliver
over 80% of revenues and an even largerpercentage of profits. Further, many bankshave been built over decades of acquisitions,and new product and channel development,typically with each development addingadditional systems, processes and costs. Fewhave tackled the difficult and expensive work
of integrating, optimising and simplifyingtheir platforms.
A majority of banking executives (53%)believe that simplification is very important,and 70% are making some level ofinvestment in simplification. Yet, only 17%
feel well-prepared. Taking a customerperspective, a majority of executivesbelieve their banks must simplify products,channels and prices/rates. Taking an internalperspective, a majority of executives believethey must simplify their technology, theirprocesses and their back offices. Bankersbelieve that simplification will lead tobetter service, lower costs and increasedprofitability.
This complexity and redundancy drives poorcustomer experience, high cost, operational
risk, employee frustration and regulatorunease. And the traditional separationbetween customer-facing activities, andoperations and technology means fewbusiness leaders are strong end-to-end
managers who understand sales throughdelivery. Indeed, we frequently hear ofbusiness leaders complaining about theiroperations and technology cost allocations,instead of managing them.
Since the crisis, banks have been fightinghard to cut costs. Headcounts have been
significantly reduced, belts tightened.Every bank has launched re-engineeringefforts with some considerable successes.Yet, expense ratios remain stubbornly inline with pre-crisis levels as regulatoryimplementation costs continue to rise.And with higher capital charges, ROEsremain depressed. Customer demands and
competitive intensity are both increasing.Banks need to do something different moreof the same is not enough.
Simplifying thebusiness andoperating model
Banks have developed staggeringly
complex and costly business andoperating models. Now theymust simplify. Rising customerexpectations, increasinglyactive regulators and stagnant
shareholder returns demandit. Efforts to date have not been
enough. Start with the customerand work backwards simplifyingthe experience requires that
products, channels, organisation,operations, all simplify andchange. This is a big deal but
getting it right can deliver animproved customer experience,
structurally lower cost and reducedlevels of operational risk.
28 PwC Retail Banking 2020
3Figure 9: A majority of executives believe they need to simplify
nFrom a customer perspective nFrom an internal perspective
0% 10% 20% 30% 40% 50% 60% 70%
Products
Channels
Prices/Rates
Processes
Technology
Back Oces
Source: PwC Banking 2020 Survey
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PwCRetail Banking 2020 29
A strategic redesign of bank business andoperating models is needed a majorsimplification and automation to enhancecustomer experience, structurally reducecosts, reduce operational risk and prepare forthe next era of banking.
Banks need to start with the customerand ensure they truly understand whatcustomers want, and what they are unhappywith. They need to consider their businessmodels in light of this the package ofproducts and services they offer. They
need to consider their organisationalcapabilities and alignment, their operational
processes and their technology platforms.
Redesigning the bank operating modelrequires a fundamental shift in how retailbanks think about their operations productsimplification; integrated distribution;shared service infrastructure; riskmanagement at a customer not product level;streamlined compliance processes.
Finally, banks need to arm their executiveswith information and tools to continuouslymanage costs, once the new models areput in place. Too often there is insufficienttransparency around unit costs, cost drivers
and what is best in class.
The most successful banks are learning fromother industries. Many consumer productscompanies (Adidas, Apple) do not ownthe entire value chain. They focus on whatmakes them distinctive product design,marketing, distribution and contract outmuch of the rest to third-party specialists.Leading banks will know their customers
intimately; they will design solutions to meettheir needs, provide advice and capital, andmanage risk. Much of todays infrastructureis not a source of competitive advantage.We expect the continued rise of industry-wide or multi-bank utilities with morebanks outsourcing processing activities.We expect leading banks with scale toinsource effectively from others, or createindependent utilities to do so. If customerand risk skills are the core of future banking,then the entire manufacturing process is acandidate for outsourcing.
Figure 10: Bankers believe simplification will...
Improve service 69%
Improve profitability 59%
Decrease costs 58%
Increase customer base 46%
Improve time to market 42%
Financialinstitutionsglobally believesimplificationwill delivera myriad ofbenefits.
Source: PwC Banking 2020 Survey
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30 PwCRetail Banking 2020
Leading banks will make simplification a
priority. They will strategically redesigntheir business model, end-to-end. They willdevelop multi-year change programmes.And they will ensure that they have theorganisational capabilities necessary toachieve the change.
Banks that get this right will achieve
dramatic results. In our experience, bytaking such an end-to-end perspective, wehave seen clients realise 50% performanceenhancements on key customer metrics,together with 25%+ cost reductions andreduced levels of operational risk.
Simplifying thebusiness andoperating model
Products
Channels
Integrated Compliance
Market, Credit, Reputational and Operations Risk
Shared Operations
Shared Applications
Operations Operations Operations
Applications Applications Applications
Figure 11: Banks that move towards solution-oriented integrated operations will be the winners in 2020
Current State Current State
Regula
tions
Need 1 Need 2 Need 3
Products
Channels
Operations
System
Applications
Risk
Products
Channels
Operations
System
Applications
Risk
Need 1
Solution 1
Need 2
Solution 2
Need 3
Solution 3
Solution-oriented, intergrated operationsProduct-oriented, siloed operations
Products
Channels
Operations
System
Applications
Risk
Source: PwC Banking 2020 Survey
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Our client, a global provider of financingsolutions, was facing the familiar pressuresof rising customer expectations, increasedcost of capital, growing competition andongoing pricing pressure. Like many players,they were highly siloed by functions,businesses and products. Turnaroundtimes and error rates were higher thanthey desired, driving too many customercomplaints. Their cost-to-serve was higherthan the industry average. Processes werenon-standard and involved multiple hand-
offs. Employee satisfaction was low.
Over an 18-month period we helpedthem design and deploy an i nnovativenew scalable and sustainable operatingmodel, in this case without touching theunderlying technology platform. It achievedresults. They reclaimed 50% of sales team
time to focus on revenue generation. Theyreduced cost-to-serve by 25%. Processingperformance improved 45%. Turnaroundtimes and error rates have reducedsignificantly. Processes were standardised,and handoffs reduced (from an average 20 to
3). Customers and employees are happier.
This tried and true approach yielded real,rapid benefits. And it realised sufficientsavings to enable our client to then reinvestin transforming the underlying technologyplatforms so enabling even greater savings.
The critical elements of our approachincluded:
Developed a detailed current stateunderstanding.Conducted voice-of-the-customer analysis to align customer needs,value proposition and service del ivery.
Leveraged lean to identify current stateissues and opportunities. Analysed spans,layers, location and headcount to identifygaps and opportunities. Conductedcompetitor benchmarking to inform andunderscore case for change. Conductedstakeholder readiness analysis to informchange management strategy. Developedrobust and realistic business case.
Designed and tested the revisedoperating model.Leveraged lean toredesign and optimise processes, anddevelop a revised operating model.
Streamlined processes, and functionallyaligned the organisation. Conductedwargame simulations to test the newprocesses and provide baselines andtargets for the revised operating model.
Managed the deployment to success.Developed critical programmemanagement, change management andcontinuous improvement infrastructure.Created a detailed incentive structureto align the performance frameworkwith strategy. Established performancemanagement, monitoring and reporting with KPIs and detailed information. Builtorganisational capabilities trained over50 client leaders on internal continuousimprovement, to facilitate empowerment
and build culture of improvement.
Executing on todaysimperatives.
Banks need todramatically simplifytheir business andoperating modelsto enhance customerservice and
structurally reducecost. We leveragedour battle-testedStrategic BusinessDesign approachto help one clientachieve preciselythat.
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32 PwC Retail Banking 2020
Customers (and banks themselves) now
generate exponentially more informationthan ever before. Leading players willharness both structured and unstructuredinformation from traditional sources (suchas credit scores and customer surveys) andfrom non-traditional sources (such as socialmedia, and cross-channel bank customerinteraction data). They will wire their
own operations to build the informationrigour more typical of the manufacturingindustry. And they will collect and purchaseother behavioural data (such as mobilelocation and purchase data) particularly as
customers grow accustomed to forgo some
degree of privacy for proven value.
Leading players will develop advancedanalytics capabilities to integrate thisvast library of data, analyse i t and createactionable insights. 57% of bank executivesconsider these capabilities to be veryimportant (with 92% considering them very
or somewhat important). Three-quartersof institutions are making investments.Yet, only 17% believe they are very well-prepared.
Banks will use these capabilities to create
an enhanced and connected customerexperience to understand a customersneed and be present at the time of need witha relevant offer. For example, spotting thata current bank customer is walking into acar showroom, and sending a message thatthe customer has been pre-authorised forfinancing (based upon analysis of existing
accounts and spending behaviours).
Banks will enhance their credit, risk andpricing models (adding, for example, socialmedia reputation scoring). For example, abank may be able to detect the beginningsof trouble at a small business, well beforereceivables and turnover start to show signsof weakness, by identifying negative trendsin social media enabling a much higherquality of risk management and customerservice.
Finally, banks will develop a much more
sophisticated view of their cost structuresand the key drivers of that structure.They will use analytics and benchmarksextensively to constantly measureperformance with defined metrics and best-in-class competitors.
Obtaining aninformationadvantage
Getting this right will be a game-
changer. Fast movers will createcompetitive advantage in ever yarea of the bank customerexperience, underwritingand pricing, operations, risk
management and financial/cost management. Few banks
will be able to master the skillsto integrate, analyse and actupon the insights from the ever-increasing mass of data. Executivesexpect the largest banks to be thewinners. We expect third-party
providers to emerge to helpthe others.
4
Figure 12: Advanced analytics Who will benefit, who will be most threatened
nMost threatened nBenet most
Global Banks
National Commerical Banks
State-owned Banks
Non-Traditional Retail FS Providers
Community Banks/ Credit Unions
Regional Banks
Banking Platform Providers
0% 10%10% 20%30% 20% 30% 40% 60%50%
Source: PwC Banking 2020 Survey
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PwCRetail Banking 2020 33
Bank executives (54%) expect only the
largest global and national banks to masterthis capability in line with their capacityto invest. We expect those players to gainsignificant competitive advantage, until thesecapabilities are available to all. Other bankswill need to forge partnerships wit h thirdparties to match this advantage. We expectinnovative service providers to emerge and
assist smaller banks in competing with largerinstitutions. Among others, we expect todaystechnology services providers to developthese offerings it will not be enoughin the future to provide technology and
processing platforms, without informationand analytics. This will enable the rest of thebanking industry to catch the leading playersand reduce their early advantage.
To master these capabilites, banks will needto learn how to create an open, agile andinnovative organisation. They will needto attract and retain a new sort of talent(seen by executives as the biggest barrierto success). They will need to pay moreattention to foundational data managementand data governance.
Building these capabilities will createsignificant advantage in the near/medium term, and be critical to successfulcompetition in 2020.
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Social media has created both opportunitiesand risks. Opportunities include greaterengagement and proactive risk management.For example, 90% of customers trustrecommendations posted on social mediawebsites, and 71% are more likely to make apurchase based upon social media referrals.Banks can gather customer feedback togenerate leads, tailor products, improvecustomer experience and spot trends earlier.And leading indicators can enable banksto spot operational risk breaches, andproactively address reputation issues early.However, social media also brings greaterrisks lower bargaining power and influence,
and greater risk of brand damage. Customersare empowered to voice grievances widely,and have much greater transparency tofeatures and price.
One client wanted to capture theseopportunities and manage these risks developing actionable insights andrecommendations well beyond their existingcapabilties. We helped them, leveraging ourSocialMindtoolkit. This combines best-in-class social, web and text listening, andanalytics capabilities, leveraging both project-based analysis and ongoing tools.
Our client identified loan modification issuesat competitors, enabling its own proactiveoperational management. They identifieda fake bank website scam, and took stepsto proactively manage complaints and
their reputation. They identified customercomplaints about loan transfers, and usedthese inputs to enhance their product. Theyset up the following new capabilities:
Peer benchmarking allowing volumeand sentiment comparisons across a seriesof categories, and enabling focused issueidentification.
Trend and control analysis allowingidentification of anomalies and variancesfrom the normal range of volume mentionsand sentiment ratings, and enablingidentification of root causes.
Early warning radar allowingidentification of emerging issues and topicsranging from regulations to customerexperience to operational risk, as measuredby acceleration in volume or sentiment.
Executing on todaysimperatives.
Understandingand LeveragingSocial Data. Socialphenomenon, alongwith other trends,has shifted the
balance of powerto consumers,accelerating theneed for greaterengagement. PwCsSocialMind candeliver actionableinsights from social
media.
PwCs Integrated SocialMind Platform
Data Aggregation Analysis & Synthesis Actionable Insights
Emerging Trends
Peer Benchmarking
Monitoring & Alerts
Social Data
Natural LanguageProcessing
Customer SentimentScoring
Taxonomy Model
PwC SME Insights
Electronic Data
Once upon a timeOnce upon a timeOnce upon a timeOnce upon a timeOnce upon a time
Source: PwC34 PwC Retail Banking 2020
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Innovation will be the single most important
factor driving sustainable top- and bottom-line growth in banking over the next fiveyears. Innovation is doing things differently.Not just new products or a new customerexperience, but doing things differentlyacross the entire business model includingtransforming the business model itself.
Innovation within the banking industry
is considered to be somewhat or veryimportant by 87% of respondents, yet instark contrast, only 11% believe they are veryprepared. And there are significant regionaldifferences over 60% of executives in Asia-Pacific and the emerging markets view openinnovation as very important; however, only40% of European executives and 28% ofUS executives agree. We believe developedworld executives need to take more of anemerging markets view of the importanceof innovation, particularly once the newregulatory framework stabilises.
Executives believe that the large global andnational banks will benefit most and thatsmaller community banks and credit unionswill be the most threatened.
Executives report that their main focusareas for innovation are customer interfacesand channels (57%), followed by customerneed identification (53%), products (52%)
and core platforms (52%). In Asia-Pacific,there is much less focus on interfaces andchannels (44%), likely reflecting the greaterpenetration of mobile banking, and muchmore focus on c