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Dr. Peter Leukert, Strategy Global Financial Institutions, FIS Industrialization strategies that enable banks to reduce cost and complexity while improving customer service. - Driving forces for industrialization in banking - Transforming front and back office - Regulatory trend towards localization (industrialization without globalization?) - Taking cost and complexity out of the value chain
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What does Industrialization really mean for Banking October 2013
Capco confidential - © Capco - -2 What does Industrialization really mean for Banking
Agenda
Driving forces for industrialization in banking Transforming front and back office Regulatory trend towards localization
(industrialization without globalization?) Taking cost and complexity out of the value chain
October 2013
Capco confidential - © Capco - -3 What does Industrialization really mean for Banking
Driving force: Lack of trust Reputational challenges have hit the financial industry across the globe
October 2013
Percentage of survey respondents who place trust in given industry, 2012*
Tech Auo Food Telecom Pharma Energy Media Banks0
10
20
30
40
50
60
70
80 79
66 64 62
5653 51
47
* Participants assessed trust of every industry on a 9-point scale from “trust them a great deal” to “don’t trust them at all”, Source: Edelman trustbarometer
Capco confidential - © Capco - -4 What does Industrialization really mean for Banking
Driving force: Regulation Increasing regulatory challenges for the financial industry
October 2013
Compressed profitability: Reduced margins whilst increased fixed costs
Restrictions on business activitiesVolcker, ICB, compensation
Additional taxesBank levies, transaction taxes
Basel IIICapital, leverage and funding
Consumer protectionDisclosures, distribution
Changes to fundamental structures and business models
Changes in consumer protection:MiFID II, RDR
Changes to compensation levels
Capco confidential - © Capco - -5 What does Industrialization really mean for Banking
Driving force: Cost pressure Between 21% and 33% cost reduction still needed to deliver 15% RoE
October 2013
Sample of 8 global banks. Representing 15% of total global banking cost base.
Equity
Income
Expenses
Profit
0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000
Target 15% RoE, income decline 10% Target 15% RoE, stable income 2011 2006
USD Million
Expenses
2006
2011
Income flat between 2006 and 2011
58% rise in share-holder equity between
2006 and 2011
33% expense reduction needed to deliver 15% RoE if income declines by 10%
21% expense reduction needed to deliver 15% RoE
15% rise in expenses between 2006 and 2011
Capco confidential - © Capco - -6 What does Industrialization really mean for Banking
“Industrialization is a period of profound change whereby social, economic and technological advances coincide to deliver a rapid modernization of society”
October 2013
Driver Enabling trends Propensity to influence financial services
1.Technological Internet Cloud Miniaturisation Componentisation Standardisation
High
Banks have been leading adopters of technology…focus now on gaining strategic advantage as quasi-tech companies
2. Economic Intense cost pressure Surplus capacity New entrants/business models Supply chain disintegration Emerging economies
High
In the face of stiff economic headwinds, vertical disintegration of the value chain appears inevitable
3. Social “Electronification” of society Loosening of networks Trust based on data, not relationships Brand/product switching Mass empowerment
Medium -> High
Trends already seen in the buying of commodity Financial Services (insurance, mortgages) will accelerate as consumer behaviour trends towards mass empowerment
Capco confidential - © Capco - -
Let’s review one of the most revolutionary ‘industrializations’ of all time: 70 years of the electronic computer
October 20137 What does Industrialization really mean for Banking
1944 1960 1970 1980 1990 2000 2010
Un
it p
rice
of
com
pu
tin
g p
ow
er/U
SD
/byt
e
1000
100
10
1
.1
.01
.001
.0001
.00001
.000001
.0000001
.00000001
First 1 GB disk drive
“Worldwide market is for no more than 5 computers” (Thomas Watson, CEO, IBM) Apple, which no
longer manufactures computers, is the most valuable company on earth
Monolithic computing companies (IBM, HP, ICL, Olivetti), rise of the mainframe
Rapid break up of the value chain through changes in technology and supply chain logistics
Rise of the network and the PC, mass customisation trend (Dell)
Rise of the Internet and the ubiquitous computer
Total specialisation of the value chain
6th commercial computer completed by 1953
First electronic computer built -‘Colossus’
Capco confidential - © Capco - -8 What does Industrialization really mean for Banking
Applying these trends to Financial Services, the banks of tomorrow will look radically different to the banks of today…
October 2013
Product
Aggregation
Today
Customerservice
Fulfilment
Technology
Infrastructure
Channelintegration
Bank
Bank
Bank
ThirdParty
ThirdParty
3 years 5 years +
Social and technological drivers further re-shape relation-ships between customers and banks
Threat of dis-intermediation as the way consumers buy banking services fundamentally changes
ThirdParty
Economic and technological drivers to industrialise bottom end of value chain
Thirdparty
Capco confidential - © Capco - -9 What does Industrialization really mean for Banking
Transforming front and back office
October 2013
Front office Back office
Improve customer experience Offer more convenience, choice
and control Improve connectivity to customers
and employees
Improve quality Reduce waste Reduce complexity Virtualize services Integrate channels
Virtuous cycle
Capco confidential - © Capco - -10 What does Industrialization really mean for Banking
In manufacturing industrialization corresponded to globalization
October 2013
Distributing/selling products to customers across the globe
Production sites and suppliers across the globe
Cost of transport less and less relevant
Capco confidential - © Capco - -11 What does Industrialization really mean for Banking
However in Banking regulation drives towards localization
Home market regulators pressuring banks to curtail and / or ring-fence their external activities either through explicit rules (e.g. ICB in the UK) or through the lens of resolution planning (e.g. in Italy).
Home market regulators seeking to limit proprietary trading activity, or ring-fence this from retail deposit-taking activity.
Host regulators in the key hubs limiting, and seeking greater transparency and control, over risk-taking conducted overseas but booked into the hub (e.g. UK PRA).
Host regulators in the hubs and other markets pushing for increased capital and liquidity to be held locally, as well as onerous (and at times unpredictable) governance requirements (e.g. local risk appetite frameworks, local limit frameworks etc.).
Host regulators pushing for foreign bank branches to become subsidiaries, or treating them as if they are subsidiaries, heightening the level of scrutiny and supervision.
October 2013
Industrialization without globalization? Impact on business model, legal entity structure, operating model?
Capco confidential - © Capco - -12 What does Industrialization really mean for Banking
Characteristics Many expensive process breaks in value chain All process steps executed in-house
Many expensive process breaks in value chain Non-core process steps outsourced to third parties
Inefficient process breaks are eliminated Non core process steps outsourced to third parties
Smart Sourcing Solutions Manufacturer offers business partner solutions
Value chainLevel
Traditional manufacturing
Manufacturingpartially sourced
Straight ThroughProcessing
Business PartnerSolutions
1
2
3
4
Evolution of value chain in manufacturing
October 2013
Capco confidential - © Capco - -
Y
X 1
2
3
Taking cost and complexity out of the value chain
October 201313 What does Industrialization really mean for Banking
Un
it c
ost
s
Size of firm
Regulatory burden re-duced through sharing
Overall cost reduction of 15%+ is only achievable through industrialisation
Regulatory burden takes most or all of this cost saving back…
Uncompetitive zone
Industrializing to reach new cost position: Sharing across banks to realize economies of
scale (e.g. sharing investments for regulatory changes)
Reducing complexity, by e.g. Standardization Eliminating redundancy Removing non value-adding variety
Traditional re-engineering and off-shoring within a single bank can only go so far...
Capco confidential - © Capco - -14 What does Industrialization really mean for Banking
Difficulty in benefits realization
Val
ue
of
ben
efit
s re
aliz
ed
Hig
hM
ediu
mL
ow
– m
ediu
m
Standard Medium Complex
Improve cost management
Leverage utilities & suppliers
Commercialization of assets
Location
Premises
Expenses
Headcount
Vendors
Application real estate
Applicationsupport
Settlement & clearing
Collateral management
Asset servicing
Market data
Infrastructure
Referencedata
Risk management
Electronic trading white labelling
Reference data
Paymentsprocessing
Infrastructure pooling
ML Online (wealth mgmt white label)
Externalize research offering
Global markets client portal
Wealth mgmt for masses (non-US)
Wealth mgmtasset sale
Global researchasset sale
Investment bankasset sale
Derivatives industry gateway
Legal entity optimization
>10 competitors >5 competitors >1-2 competitors
Productrationalization
Enhanced cost transparency
IT simplification
Cost/ticket reduction
Activities ripe for industrialization?Strategizing across three categories will help banks realize significant benefits
October 2013
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