Perspective
by Daniel Durham, Financial Services LeadWho will be the winners and who will be the losers in the new post-crisis landscape? What must financial services companies do now in order to position themselves for competitive advantage in this uncharted time within the industry?
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North Highland has identified eight key imperatives that have major implications for our clients. We believe that how well companies address these imperatives will determine their success in the next three to five years:
Taking Advantage of Adversity: Banks are challenged to get back to pre-recession Return on Equity (ROE) performance. Cyclical factors such as non-performing loan provisions and narrow net interest spreads are contributing to this challenge. Systemic factors, such as higher capital requirements and reduced fee income due to regulation, are another major cause. This challenge presents the need and the opportunity for banks to reform, retool, and reposition their businesses and operational models for future high performance.
Risk and Regulatory Compliance: Banks are dealing with a plethora of new regulations that will mandate people, process, and technology changes for the foreseeable future. It is uncertain what changes will be required as the regulatory rulemaking process plays out and the political landscape potentially shifts. It is also uncertain what unintended consequences may arise from this cocktail of change. It will be vital for banks to implement these changes at the right time and in a way that optimizes their business models.
Cost Optimization: Flat revenues and high compliance costs are exerting heavy cost pressure on banks. Industry wide, revenues are down 17% from their peak in 2007, while compliance costs are up 159% since 2000 and costs are fully expected to increase exponentially with added regulations. In response to these pressures, many companies are making painful, short-term cuts such as across-the-board headcount reductions. We believe companies that are able to strategically optimize their cost base will be in a better competitive position than those that respond primarily with short-term cuts.
Shifting Customer Dynamics: Many customers have lost trust in the banking system. Furthermore, customers (and regulators) are requiring more transparency in practices, pricing, and fees. As a result, customers are demanding better pricing and service. Paradoxically, banks need to charge more for these services to offset revenue loss resulting from new regulation. Banks must focus on restoring trust and profitability levels by developing relationship-based solutions and clear value propositions that resonate with customers.
Next Generation Analytics: Banks must get better at leveraging their information and using analytics to both satisfy regulator demands and enable their business strategies. Banks will be required to develop improved credit and market risk analytics in order to more accurately measure risk and asset exposure. Additionally, real-time analytics combined with a true 360-degree view of the customer are essential to organic revenue growth, retention, and optimized risk/return.
New Channels, Mobility, and e-Payments: The means of payment and the number of payment intermediaries have increased dramatically in the past decade, and the level of change shows no signs of abating. Banks must adapt in the rapidly evolving payments space by developing cross-LOB approaches that focus on balancing innovation with investment in declining payment channels, and influencing customers toward win-win payment vehicles.
Human Resource Transformation: Due to mergers and acquisitions, organizational structures and workforce capacities are not optimized and are stressed to breaking points. Additionally, shifts in customer experience strategy are disrupting boundaries between and across organizations. There is also pressure to reduce cost and complexity without sacrificing customer experience. An institution‰??s ability to respond to the challenges and demands of the changing industry depends to a very large degree on the quality and productivity of its workforce. As a result, financial services companies are reliant on human capital more today than ever before.
Merger Integration: The financial crisis spawned many mergers and acquisitions within the industry. While many companies have completed their basic integration efforts, we believe that some basic integration has resulted in business models are encumbered with legacy issues. In addition to significant inefficiencies, these legacy business models have not created value equal to their potential. Companies that are able to strategically integrate beyond converting the basics are better positioned for optimizing their cost basis and generating accretive revenue growth.
North Highland is focusing its capabilities and expertise to help clients understand the implications and address these eight imperatives. Watch for more detail on each in the weeks to come.
