Ceo briefing 2014 the agenda for banking

CEO Briefing 2014:
Banking Industry

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THE CEO BRIEFING 2014: BANKING INDUSTRY IS AN ACCENTURE
REPORT, WRITTEN BY THE ECONOMIST INTELLIGENCE UNIT TO PROVIDE
A BLEND OF MACRO-ECONOMIC, STRATEGIC AND GLOBAL BUSINESS
INSIGHTS. THE REPORT DRAWS ON THE VIEWS OF MORE THAN 1,000
C-SUITE EXECUTIVES – INCLUDING 115 FROM THE BANKING SECTOR –
ON PROSPECTS FOR THE GLOBAL ECONOMY AND THEIR COMPANIES,
AND EXPLORES HOW DIGITAL TECHNOLOGY IS TRANSFORMING
INDUSTRIES AND CHANGING THE WAY BUSINESS OPERATES.

2


IN AN INDUSTRY
WHERE ANY POSITIVE
SIGNS CONTRAST THE
TUMULT OF RECENT
YEARS, BANKERS ARE
IN AN OPTIMISTIC
MOOD. HOWEVER,
RE-REGULATION IS
FORCING SWEEPING
CHANGES ON THE
INDUSTRY AT A TIME
WHEN BANKS NEED
TO ADAPT TO AN

ERA IN WHICH THE
CUSTOMER IS IN THE
DRIVER’S SEAT.

The question is whether banks have the
bandwidth to handle these demands while
also capitalising on the growth they see in
emerging markets and embracing fully the
digital technologies that many believe could
transform the sector. This is becoming more
urgent as corporations in other sectors
such as retail, telecoms or software enter
segments of traditional banking.
While economic data and industry experts
point to continuing challenges for the
sector—from stagnating returns to changes
in consumer behaviour and competition
from new players—a sense that the worst is
over appears to be driving an upbeat mood.
Among respondents to The Economist
Intelligence Unit’s survey for CEO Briefing
2014, many are positive about their
prospects, with more than 70% expecting
increases in profits and revenue in the
coming year.1
“There’s cautious optimism,” says Charles
Murphy, professor of management at New
York University’s Stern School of Business
and a former investment banker. “They’ve
been beaten back so badly in the past five

years that anything that looks like a sunny
day is going to make them feel better.”

FIGURE 1. SECTORS VOTED TO HAVE THE BEST GROWTH PROSPECTS OVER THE NEXT
12 MONTHS

WHICH INDUSTRIES ENJOY THE BEST GROWTH PROSPECTS
IN THE NEXT 12 MONTHS?
39%
30%

29%
25%

FINANCIAL
SERVICES

BANKING

MANUFACTURING

Given the continuing challenges facing
the industry and the mountain of new
regulations to which banks must adapt,
their enthusiasm should be viewed with
caution. Still, as new rules governing the
industry emerge, institutions can focus more
on designing their next business models
and less on fighting fires. “The regulatory
environment is becoming clearer,” says Mr

Cowles. “Banks are doing a better job of
getting themselves in a strong position to
comply with those new regulations.” The
question is whether bankers will move faster
than their new competitors.

30%
20%

PHARMACEUTICALS
/BIOTECHNOLOGY

Banker respondents are more bullish than
most about their own industry’s prospects,
with 72% expressing optimism about the
12 months ahead for their industry (slightly
more than the 69% overall). However, their
favourable perception of the state of their
industry is not matched by the view of
senior executives in other industries. When
asked about which industries were likely to
do best in the next 12 months (Figure 1),
banking respondents cited their own sector
in far higher numbers (39%) than average
(19%).1 This places banking as one of
the sectors most likely to see itself more
optimistically than its peers do.

26%

25%

19%

Asked about the global economy over
the next year, more than half (51%) the
respondents from the banking sector
expressed optimism (compared with 44%
overall).1 “The good news is that the US
and UK are coming through with growth of
around 3% and while growth in emerging
markets is more subdued than in recent
years, many emerging-market countries
will still realise mid- to upper single-digit
growth,” says James Cowles, CEO for Europe,
the Middle East and Africa at US bank, Citi.

CONSUMER
GOODS

19%

ENERGY, OIL
AND GAS

OVERALL AVERAGE

Source: CEO Briefing 2014, Economist Intelligence Unit, January 2014

3

EMERGING OPPORTUNITIES
IN TERMS OF
OPPORTUNITIES FOR
EXPANSION IN THE
NEXT FEW YEARS, THE
CONTINUED GROWTH
OF EMERGING MARKETS
WILL BENEFIT THE
INDUSTRY AS A WHOLE.

By 2017 these markets will account for
31% of banking-sector assets, according to
forecasts by The Economist Intelligence Unit.
We estimate that in 2013 some 77% of bank
assets were located in rich-country markets,
with just 23% in developing countries.1
“You have millions of people whose real
incomes are increasing, and that’s allowing
a growing amount of consumers to buy cars,
televisions, mobile phones and washing
machines,” says Nathaniel Karp, chief
economist at BBVA Compass, a US-based
subsidiary of Spain’s BBVA. “Clearly on the
financial side of that, this opens new doors
that were non-existent before.”

FIGURE 2. BANKING RESPONDENTS - GROWTH PERSPECTIVE FOR EMERGING MARKETS

MAJOR EMERGING
MARKETS WILL
EXPERIENCE
STRONG OR
STABLE GROWTH

MAJOR
EMERGING
MARKETS WILL
EXPERIENCE
A SLOWDOWN

38%

62%

Source: CEO Briefing 2014, Economist Intelligence Unit, January 2014

4

Mr Cowles agrees. “In emerging markets,
often the growth of the financial services
sector is one-and-a half to two times
greater than real GDP growth, which is
encouraging for the sector,” he says.
Survey respondents from the banking
industry share this enthusiasm, expressing
more confidence in emerging markets than
others respondents. Some 62% predict
strong and stable growth for these markets

(Figure 2) and 75% believe that changes to
monetary policy in the developed world will
not damage the outlook in these markets.1
Recent turbulence in several developing
markets suggests that there will be
volatility, but so far a wholesale slowdown
appears unlikely.
However, prospects for banks in the
coming years vary widely by region,
and many banking firms will face
more difficult conditions than other
types of industries. In one sense, their
portfolios are unbalanced: their financial
activities and assets are overwhelmingly
concentrated in developed countries,
which are mature markets experiencing
sluggish economic growth, and in some
cases ageing or declining populations.
In addition, developed-world incumbents
will find it hard to take advantage of growth
overseas because of restrictions in those
markets, new regulatory regimes and their
own, frequently still-poor financial health.
This is before confronting often highly
competitive local champions.
“You have a financial services sector
that’s more highly capitalised, more highly
regulated and less profitable,” says Ian
Ewart, an executive committee member and
head of products, services and marketing

at Coutts, a UK-based private bank. “The
upshot of that is that it’s harder to do
business; it’s not necessarily harder to do
good business, but it’s harder to do marginal
business.” Higher leverage is no longer an
option for increased profitability. This leaves
companies in need of a new approach.


5


SHIFTING BUSINESS MODELS
IN THE POST-CRISIS
ERA, BANKING
EXECUTIVES HAVE
REALISED THAT THEIR
COMPANIES CANNOT
BE EVERYTHING
TO EVERYONE.
“Banks are going through the process of
deciding which businesses they want to be
in, who the clients are that they want to
serve and where they have a competitive
advantage versus their peers, and are really
focusing on those parts of the business,”
says Mr Cowles.
Many banks have refocused on traditional
service delivery, concentrating on deposittaking and simple commercial and
household lending. Others are targeting

wealthier market segments, “They are more
aggressively moving into private wealth
management and asset management
because that’s where they see the future
business model,” says Professor Murphy.
Meanwhile, fewer firms will dominate risky,
sophisticated capital markets activities,
which will be increasingly walled off from
traditional banking and governmentguaranteed deposits.
This is likely to lead to consolidation in the
industry, something that many view with
trepidation. In the survey, consolidation
emerges as the second-biggest concern for
those in the banking industry, with 32%
citing this as a top risk.1
Not all bankers believe that this process is
a bad thing for the industry, however. “You
may have consolidation in terms of market
share with fewer players,” says Mr Cowles.
“But by definition those should be the
strongest players to compete.”

6

Meanwhile, new non-traditional players—
from supermarkets to online companies
such as Amazon, Google and PayPal—
are entering the business of providing
financial services. Such developments raise
another concern for survey respondents.

Among banking executives, 30% point to
competition from new market entrants as
the greatest risk that their organisation
faces in the next 12 months.1
For some, the strategy involves giving
up global ambitions and pulling back to
domestic markets. In this environment,
banks are cementing existing relationships
at home. While many respondent
companies (36% of respondents in all
sectors) have the ambitious strategy of
selling new products and services to new
customers in their domestic markets, only
29% of those in the financial sector say
that this will be their strategy (Figure 3).
Instead, they favour selling new products
and services to existing customers, with
45% saying this will be the case (compared
with 32% overall).1 This is part of a wider
endeavour to regain customer trust and
deepen their client relationships. This
extends to greater transparency and public
communication. Indeed, in the survey,
the number-one means of increasing
transparency for bankers (45%, compared
with 33% overall) is more frequent
communication with customers.1
However, Brunon Bartkiewicz, head of retail
banking international, rest of Europe, at
Dutch bank, ING, sees the evolution of the

relationship with customers as going far
beyond transparency. He predicts that the
internet, technological innovation and the
accessibility of information will lead to a
“tsunami” of change that could potentially
be “bigger than any changes relating to
the economic crisis or to changes in the
regulatory environment.”

While many of the changes relate to
industry consolidation and the presence
of new market entrants, Mr Bartkiewicz
says that banks also need to adapt to a
world in which “customer centricity” is the
common denominator behind widespread
transformations in the way banks do
business. “The asymmetry of knowledge
in the relationship between banking and
customers is changing dramatically,” he
says. “Either people in banking change their
mind-set and adjust their business model to
changing customer needs or they will start
to suffer.”


FIGURE 3. DOMESTIC MARKET GROWTH STRATEGIES

Selling new products/services to existing customers

BANKING

AVERAGE

45%

32%

18%

19%

29%

36%

8%

13%

Selling existing products/services to new customers

Selling new products/services to new customers

Selling existing products/services to existing customers

Source: CEO Briefing 2014, Economist Intelligence Unit, January 2014

7

DIGITAL CHALLENGES
AND OPPORTUNITIES
A CRITICAL TOOL FOR
BANKS IN ADOPTING
THIS NEW CUSTOMERFACING APPROACH IS
DIGITAL TECHNOLOGY.
AS COMPETITIVE
PRESSURES GROW,
TECHNOLOGY IS
BOTH A CHALLENGE
AND A SOLUTION.

With customers increasingly demanding
banking services that resemble those
offered by companies such as software
giants, niche online providers or peer-topeer lenders, banks need to respond.
“Digital technology is changing customers’
behaviour and the way they interact with
the bank,” says Marta Marín, head of multichannel banking and innovation at Spanish
bank, Santander. “We need to adapt to
where our clients are—and it’s an ‘anywhere,
anytime’ concept.”
Financial-sector executives certainly see
digital technology as transformative,
with 58% of respondents agreeing
(compared with 52% of survey respondents
overall).1 Much of this transformation

FIGURE 4. IMPORTANCE OF DIGITAL BUSINESS TOOLS TO THE BUSINESS

53%

DATA ANALYTICS
61%
53%

MOBILE
52%
47%
BANKING

OVERALL AVERAGE

Note: Proportion of respondents saying “extremely important” and “moderately important”
Source: CEO Briefing 2014, Economist Intelligence Unit, January 2014

8

For bankers approaching these challenges,
cloud computing and digital analytics are
seen as key business tools. While 45% of all
respondents surveyed say cloud computing
is “extremely” or “moderately” important
to their business, this rises to 53% of those
in the financial sector (Figure 4), with fully
30% saying this technology is “extremely
important” (versus 19% overall). When it
comes to data analytics, 61% of surveyed
bankers also see this as critical (versus 53%
overall), with 34% citing it as “extremely

important” (versus 24% overall). Given the
data-centric nature of the business, one
needs to wonder what the remaining 39%
of banking executives are thinking.1
Respondents also favour mobile technology
slightly more than other industries, with
52% of bankers citing it as important
against 47% overall.1

CLOUD
45%

has started to take place. Financial
activities are increasingly conducted
not in bank branches, but via mobile
devices or in new locations such as
inside supermarkets, while bill payments
and stock trading take place digitally.

For Mr Karp, mobile technology presents
huge opportunities to offer services to the
unbanked and underbanked in developing
countries without the need to build
infrastructure such as branches. “With new
technology such as mobile banking, it’s
a completely different ball game—you’re
jumping a development stage,” he says.
“Instead of developing branches, all these
people have a mobile phone and suddenly
they become bankable.”

CAPITALISING ON
DIGITAL’S PROMISE
Given the shifting demands of existing
customers and the opportunities to service
the unbanked, financial institutions need
to become more agile and ready to adapt
to shifts in the marketplace. This means
embracing new business models, such as
branchless banking, increasing internal
innovation and embarking on joint ventures
or informal alliances.
Yet despite the potential for digital
technology to help banks secure new
customers, particularly in emerging
markets, many in the sector still see it
principally as an efficiency tool. Most
respondents in the banking sector (70%,
compared with 59% overall) point
to digital technologies as a means of
enhancing operational efficiency, with only
a minority primarily focused on growth.1
“Innovation has not been a centre
point of our industry,” says Mr Karp.
“Products like the plastic credit card
and the cheque book have been with
us longer than we can remember.”
Compliance is one reason that banks
appear slow to adopt new technologies

and business models. For example, when it
comes to social media, rules on how banks
communicate with customers and clients
means that they have to tread carefully.
Unlike many consumer-facing industries
that can capitalise immediately on new
technologies, banks must first surmount
regulatory hurdles. “The challenge is how
to accomplish what market trends and
technological change would lead you to
develop in an environment that almost goes
against many of these features,” says Mr
Karp. “Because you have to convince the
regulators that what you’re doing is safe, so
you have to test it and ensure there is no foul
play—but that takes time and it’s costly.”

This means that, despite the rapid advance
of developments in technology, banks
exercise caution. “Part of the problem is
that a lot of new products fizzle out pretty
quickly as a consequence of the continuous
state of advancement in technology,” says
Professor Murphy. “So many banks are
taking a more conservative tack to see
which one wins out before they decide to
change their business model.”
Added to this, institutions face various
organisational obstacles. In the survey,
change management emerges as the biggest

barrier to implementing digital technologies
in the financial sector. Other barriers
mentioned include lack of funding, skills
shortages, lack of senior-level support, low
customer demand and internal silos (each
cited by roughly one-third of respondents).
However, the difficulty of managing change
stands well above these, highlighted by 52%
of surveyed bankers.1 This is something that
Mr Bartkiewicz argues financial institutions
need to overcome. “It’s about changing
the mind-set—we need to create more
connected companies and collaborative
circles within our companies,” he says. “And
you do that or you die.”

“PART OF THE PROBLEM
IS THAT A LOT OF NEW
PRODUCTS FIZZLE OUT
PRETTY QUICKLY AS A
CONSEQUENCE OF THE
CONTINUOUS STATE
OF ADVANCEMENT
IN TECHNOLOGY.”
CHARLES MURPHY, PROFESSOR OF
MANAGEMENT AT NEW YORK UNIVERSITY’S
STERN SCHOOL OF BUSINESS

For many institutions, however, this will
prove challenging simply because they are

adapting to change on so many fronts.
While complying with new regulations
and rebuilding customer trust, banks also
need to work out how to respond to new
competition from non-traditional players
and bolster their domestic businesses as
they scale back their global ambitions.

9


10


CONCLUSION
Given this difficult environment, it is
perhaps surprising to find that many in the
industry believe they will do well in the year
ahead and appear unconcerned about their
industry’s dramatically changing landscape.
However, this may also explain why banking
respondents’ approach to technology
has tended to be defensive, focusing on
increasing efficiency rather than prioritising
growth. In this environment, banks want to
play to their strengths before moving into
new territory.
While strengthening their base as they
recover from a difficult era is essential,
banks must also explore new ways of

delivering services and alternative business
models. Some innovation is already taking
place, particularly in emerging markets
where, for example, institutions are working
with telecom companies to provide mobile

banking services. But further opportunities
lie in rethinking the way that banking
services are delivered. Perhaps even a future
in which bank accounts are portable, just
as mobile-phone numbers are, or when
digitally personalised investment services
are available to the masses.
Given the regulatory constraints, the sector
clearly has to tread carefully. Still, if banks
are to continue to expand their markets and
prevent new market entrants from stealing
their business, they need to use technology
and innovation for more than just cutting
the cost of errors and reducing operational
risk. Given the new landscape in which
demand is rising in emerging markets for
financial services and, in mature markets,
meeting changing customer and client
demands is a priority, banks that want to be
successful had best move quickly.

11

Reference
1. CEO Briefing 2014, Economist Intelligence
Unit, January 2014

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