Financial service institutions need a revolution, not an evolution

This year’s Barometer (avoid the zombies, innovate for growth) reflects that many financial service institutions (FSIs) are no longer cutting costs just to protect the bottom line. High growth organisations are transforming the relationships with their customers through the re-investment in new products, digital capabilities and untangling the issues of legacy infrastructure as they return to growth.

Years of cost cutting is giving way to refocusing investment in growth areas

The latest set of results from the UK’s largest FSIs provide evidence that for many who have worked hard to cut costs and change the way they operate are starting to reap the benefits. This includes HSBC, RBS and Lloyds who have all seen growth in underlying profit as costs fall faster than expected. Recent press announcements and changes in leadership indicate that banks are focussing less on cost cutting and more to investment in their core banking areas. UBS and Barclays have indicated they are looking to grow their investment banking operations, while RBS is focussing on its retail operations and scaling back in investment banking. Further evidence can be seen in the annual budgeting rounds where the conversation is shifting away from change initiatives dominated by regulation to non-discretionary work with more strategic drivers.

The operating model is under pressure from all directions

The sector continues to ride the wave of change caused by upheavals in the global economy, and there is little sign of respite. Over the next 12 months retail banks will have to respond to the Senior Managers Regime and the lingering effects of PPI; mortgage lenders need to comply with the mortgage credit directive; investment operations will have to adjust to the requirements of ring-fencing, the recovery and resolution directive and MiFID II; and insurers will continue to feel the transformative effects of Solvency II.

New technology, the drive for digital, exploitation of big data, the growth of FinTech and the threat of cyber-based risks is putting significant pressure on FSIs to adapt. This is compounded with the need to resolve issues with legacy technology. The combination of these drivers means that FSI systems and technology require revolution, not evolution, which is currently best demonstrated by Deutsche Bank CEO John Cryan’s commitment to “re-engineering of the bank’s IT systems and operations.”

To sustain growth, the customer relationship must be transformed

The competitive landscape is changing with all participants in the sector focussing on the relationship with their customers. The big banks can no longer afford to be complacent. Regulatory bodies are actively encouraging competition through the CMA’s retail banking review, the FCA’s innovation hub and the PSR’s objective to promote competition in payments. The impact is starting to be felt with the rise of challenger banks who are perceived to offer something different from traditional providers. Fintechs and the technology giants are using both innovative technology and their untainted relationship with their customers to gain market share.

Increasing competition, tighter regulation and radical new technologies are fundamentally changing how FSIs interacts with customers. To succeed in this environment, institutions must fight ever harder to attract, and keep, customers. Putting the customer first can help institutions grow, but to achieve this financial institutions need to adapt their structure, operations and models.

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Author

John Lunn Partner