Insights from leading retail banks worldwide highlight the state of play and expected challenges in the digital banking journey.
Across the globe, banks are exploring ways to convert to a more digital business model. So far, the changes have not been too disruptive, despite aggressive new offerings from non-banks. Besides gradually reducing paper-based interactions, the primary focus has been on enhancing the product suite with value-added services and achieving an integrated channel experience.
Thus, the focus has clearly been on the outside—the customer-facing side. Very few players have fundamentally changed their internal organizations or governance principles. Most customers still belong to branches, and in the back office the preparation for being the central customer interaction coordinator has been timid. Consolidated IT systems have helped reduce cost but do not cater to fast time-to-market and processing.
In addition to this mismatch for banks, the pace of change is increasing: New technology-savvy companies are flooding the market with innovative offers for financial services, customers are becoming more confident in using the full range of e-commerce offerings, and even regulators are reshaping long-established procedures to adapt to new concepts. Some regions are more advanced than others, and the timing of change is hard to predict, but banks are well advised in already preparing today.
Digitization will become more disruptive as value chains break apart, especially around customer interaction, product configuration and transaction processing. Moving forward will require flexible processes, new revenue models armed with new products and services, and sweeping cultural changes—all in sync with the regional environment. Our Digital Banking Readiness Index (DiBRix) can be used to guide this journey.Close
The next five years will be crucial for the global chemicals industry. Which companies will emerge successful?
Measured against the early part of the century, the restructuring and debt buildup that occurred in the chemicals industry from 2006 to 2008 was extraordinary. The industry conducted deals worth more than $330 billion over that period, with the majority of deals valued at more than $5 billion. By contrast, almost two-thirds of the deals made in 2012 were worth less than $1 billion, none were worth more than $5 billion, and the industry’s deals as a whole were worth only $49 billion, the lowest level since 2003.
One result of the debt buildup will arrive soon: a wave of repayments that will come due between 2013 and 2016. At the same time deal activity is expected to increase, thanks to a resurgent U.S. industry seeking project financing for up to 10 new world-scale cracker and derivative plants. Any new deals taking place now are occurring within the context of refinancing the debt from that transaction peak.
To gain an understanding of the debt situation in the global chemicals industry, we analyzed more than 200 companies, both public and private, spanning different industry sectors in all regions.We created two scenarios for the chemicals industry to understand its possible development going forward. Under the first scenario, feedstock availability is already equivalent to the generation of eight new world-scale ethane crackers, but the scale of investment could be much larger if companies exploit liquefied petroleum gas and condensate as well as ethane. Our second scenario, in which the United States maximizes output, shows another 15 million tons per year of feedstock in addition to the ethane story that is already well understood.
Understanding these conditions, this paper answers some of the big questions facing the industry.Close
Return on assets hit a historic low in 2012. Rewriting the script will be the first step toward a rebound.
Some films do not age well. While there is no doubting their merit, there's something about the setting, or the rhythm, or the dialogs that just doesn't seem to resonate any longer.
European retail banking is in just such a situation. Not much has changed over the past few decades, with banks largely offering the same types of products and services through the same channels. Today, interest margins are at record lows and spreads are forecast to continue to narrow through at least 2018; the main product areas seem likely to provide little relief. Nearly all of the 50 retail banking practitioners we consulted in 13 key European markets agreed that income from investment products is unlikely to recover its pre-crisis levels. The only area where nearly everyone expects income growth is in core banking products centered on the current account.
This need not, however, mean the retail banking model is a flop—with a remake, it can maintain its profitability and relevance.Close
Financial institutions that choose innovation will be best positioned to preserve franchise and profits in the new regulatory environment.
With a harsh spotlight shone on banking practices, and legislators and regulators forced to act, banking reforms in the United States and Europe, together with the Basel III international regulatory framework, are aimed at increasing resilience by ensuring sufficient capital. In addition, regulators are enforcing behavioral changes in response to evidence that institutions are more focused on short-term profits than on long-term investment or credit risk.
While it is difficult to predict what will happen next, many of the potential outcomes for banks are unacceptable, and suggest a need for innovation and a reconfiguration of the value chain, at the very least. Five areas in particular should be prioritized:
- Bolster securitization capabilities
- Develop fee-based credit management services for well-funded corporations
- Step up participation in the corporate bond market
- Carve out a role in non-bank financing, such as crowdfunding
- Develop bundled offerings in retail banking based on investment banking concepts
Institutions that embrace the need to change will stand the best chance of emerging as winners.Close
Electronic payments can help governments take on Europe’s massive shadow economy.
Change is coming fast these days. Globalization and digitalization have dramatically altered the way in which we live, work, and communicate. Across Europe, consumers are adopting smartphones—in the United Kingdom and Spain, more than 6 in 10 mobile users own smartphones—providing connectivity anytime, anywhere. An abundance of easily obtainable information has made today’s consumers more sophisticated and demanding of convenience across channels, devices, and applications. A shopper today can go to the local mall to try out several pairs of sneakers, then compare prices to other retailers—and even make a purchase—using her mobile phone.
Paradoxically, as consumers achieve this “modernity,” they still rely primarily on old-fashioned cash for most of their transactions. Dirty and heavy, cash is also easy to hide from authorities, fuelling one of society’s most damaging phenomena: the shadow economy—that blurry area of commerce that includes legal activity hidden deliberately from public authorities. The shadow economy in Europe today is worth more than €2.1 trillion. It is facing increased scrutiny as national governments seek to balance budgets while avoiding the tax increases and benefit cuts that can hamper economic recovery. It is nurtured by several interlocking factors: the predominance of cash, a lack of transparency surrounding transactions, and limited enforcement of laws. The shadow economy offers questionable individual benefits at the expense of many, resisting the world’s increasing digitalization and connectivity and hampering the public good.
A.T. Kearney and Friedrich Schneider, PhD, professor of economics and chairperson of the Department of Economics at Johannes Kepler University in Linz, Austria, have teamed up once again to study the structure of the shadow economy in Europe and identify measures to reduce it. The study is based on an analysis of the shadow economy within 12 industry sectors in six focus countries in Europe. This report examines the findings of our study and how to address them.Close
Recovery remains sluggish for Europe’s retail banks. Future growth will require strict cost scrutiny and a renewed focus on non-performing loans.
While retail banking income is relatively stable and remains a reliable pillar for most European financial institutions, the continued overall economic troubles are weighing on the industry. On a regional level, we are witnessing four different realities within Europe: Nordic countries and Switzerland have left the crisis behind them and are already experiencing solid profitability levels; most Western European countries are suffering from low growth and margin compression, affecting their profitability; Mediterranean countries Italy, Spain, and Portugal saw their risk provisions dramatically increase and are now on an ambitious restructuring route; with a few exceptions, Eastern European countries are slowly getting back to normal. These are some of the main findings of the A.T. Kearney 2013 Retail Banking Radar, an annual index that monitors the dynamics of Europe’s retail banking sector. This year’s findings point to increasing volatility and more difficulty ahead. Depending on a country’s economic prospects and individual institutions’ financial strength, the best actions range from strict cost scrutiny to increased focus on non-performing loans to channel innovation.Close
- European Payments Strategy Report
Banks, mobile operators, e-commerce players, and retailers are battling for a piece of the payments market.
Within this rapidly evolving environment, what is the path to new wealth in the payments industry? How can players in all segments of the market make sure they don't get left behind?
This report, based on A.T. Kearney's benchmarking database for the payments industry, our forecast for the industry's future, and a survey of industry experts, seeks to answer these questions. We examine the state of the industry in Europe, the relevant shifts in volumes, revenues, and products, and the steps companies across the payments spectrum can take to succeed over the next decade.
One-third of the world's roughly 280 billion annual non-cash payments occur in Europe—and this number is growing. In the 27 countries of the European Union (EU-27), the number of non-cash transactions increased from 70 billion in 2005 to 91 billion in 2011, a CAGR of 4.5 percent. Going forward, non-cash payments could grow at 8 percent per year through the end of the decade, to exceed 175 billion transactions by 2020.
The payments revenue pool is set to shift and grow. The Single Euro Payments Area (SEPA), the Payment Services Directive, and other changes have limited many standard revenue sources in recent years, including intra-Europe cross-border payments, card transactional fees, and interchange fees on direct debits. Many payment experts we interviewed for this report anticipate payment revenues will stay flat in the next several years, primarily because of the regulatory and competitive pressures on current business.
In this new world of payments, are banks "dinosaurs" from the past awaiting extinction, or "sleeping giants" ready to awaken? Are alternative payment providers the lonely innovators ready to take charge of the payments industry—or are banks and mobile network operators (MNOs) primed to pounce? Most of the payment experts we interviewed believe banks will maintain a strong position, considering they still own most financial services relationships with customers. But change is on the way as alternative payment providers and MNOs seek a larger piece of the pie.
The bottom line: To be relevant in payments, innovation and the ability to act quickly are crucial. The winners will attract many users and do so quickly. To do this, they can follow several routes: displace cash; capture in online and mobile commerce; address "use cases"; and take advantage of "rich data." This paper examines these routes.Close
It is time for banks to clean out the attic.
Today’s bank customer wants a variety of products and services. Delivering such variety, however, often results in an overly complex product portfolio that can cut significantly into profits. In addition, many of these products have nothing to do with new sales. It is time for banks to clean out the attic and focus on products and features that their customers not only want but are willing to pay for.
Our three-step approach can make an immediate impact and help capture growing advantage.
Clean out the attic: Get rid of the old furniture. Analyze products in light of customers, revenues, and costs to identify the showcase pieces and the dust collectors. And then dig deeper.
Build bank products like the automakers build cars: Just as vehicles built on the same platform differentiate on the accessories to capture economies of scale and to meet drivers’ needs, a portfolio built on the right platform has standard components, a well-defined mix of basic and optional modules, and customized products for key customers.
Match products with customer preferences: While understanding customer preferences is not that difficult, the trick is converting this knowledge into upselling or cross-selling opportunities.Close
Daisuke Yabuki discusses the Bank of Japan's plan to make huge purchases of Japanese government bonds.
- Financial leaders met to discuss financial-services regulations in Europe.
Financial leaders, policymakers, academics, and consultants discuss financial-services regulations in Europe.
Executives from leading financial institutions and think tanks joined policy makers, academics, and management consultants at the Brussels campus of Vlerick Business School for three spirited panel discussions on financial-services regulations in the European Union. Held under Chatham House Rule, this paper does not offer specific attribution on points raised, but draws selectively on the many valuable contributions.
The gist of the debate is that scale and regulatory costs have increased dramatically in the European Union, and that while governments want to tighten control over the financial sector in general, financial institutions as a whole and banks in particular warn that more regulation threatens to become counterproductive, eroding their ability to lend and thus undermining the prospects of new investment and growth.
Everyone seems to agree that strict regulations are both required and desirable, but they must be appropriate, adaptive, sufficient, and transparent. There is widespread doubt that current regulations embrace these qualities. Indeed, regulations really aren't all that appropriate, given the excess focus on retail banking and less on other financial industry segments, such as shadow banking. They may be adaptive, but in the wrong way, as pre-crisis regulations slowly enabled global integration, but post-crisis national tightening has led to fragmented, inward-looking and contradictory policy. Sufficiency is difficult to define, but the current approach may lead to overkill. Lastly, transparency—less since the involvement of various regulators in a single financial institution—leads to contradictory effects. Overall, the equilibrium between free market and regulation remains elusive—and the continuing crisis may affect it even more.Close
The potential is vast for institutions willing to rethink the way they do business.
In developed markets, online banking has been growing by an average of 10 percent per year over the past decade. By contrast, only a third of all GCC bank customers have signed up for online services, and only half of those are active online. A.T. Kearney conducted a study across all six GCC countries to gain a deeper understanding of online banking in the GCC, its future trends and expectations, and the potential areas of improvement. The findings confirm that the online channel will most likely become increasingly relevant, but there is a need for GCC banks to address the online opportunity in a more structured way, by defining a clear strategy and addressing the implications for the banks’ operating models.
This paper takes a closer look at the study findings, the online opportunities available to GCC banks, the expected benefits for key stakeholders, and the ways in which banks can position their offerings to take full advantage of online banking.Close
Banks in Europe still face challenges replacing legacy payment formats as full implementation of the Single Euro Payments Area draws near.
The aftereffects of the financial crisis and a continued recessionary climate in Europe have forced many banks to squeeze costs to preserve or restore profitability. Payment leaders are scratching for investment money in general, and at a time when the rapid evolution of e-commerce and mobile payments is forcing banks to invest large sums, the impending deadline to implement the Single Euro Payments Area (SEPA) merely adds to the already-lengthy list of contenders for scarce resources.
Whatever the implications, SEPA is unavoidable. With this in mind we see five fundamental questions banks must answer as they seek to comply while building for long-term success:
- Are your customers ready for SEPA?
- Are your SEPA solutions strong enough?
- Are you capturing the opportunities in this transition?
- Are you ready for further regulation-driven change?
- Are you competitive in payments for the long term?
In this paper, we answer these questions as the European payments industry reaches the precipice of major change.Close
A.T. Kearney's Insurance Profitability Framework provides 10 ways to reverse the decline in profit margins and define the path to sustainable growth.
Profitability in the Gulf Cooperation Council (GCC) insurance market began declining five years ago, dropping from 28 percent in 2007 to 9 percent in 2011, despite continued growth in overall premiums. This depression in profit margins has signaled a substantial market shift, highlighting the need for insurers across the region to review their operating models, arrest further declines, and pave the way back to margin growth.
Although the market continues to present growth opportunities, insurers across the GCC need to strengthen efficiency across their businesses to meet the sustained and continuous pressure on profitability. To improve overall profit performance and succeed in such a market, insurers should leverage the A.T. Kearney insurance profitability framework.
Based on the 2012 GCC insurance benchmark study of the top 30 GCC insurers, the A.T. Kearney insurance profitability framework is built on 10 core pillars that help achieve immediate impact across the entire organization and create a platform for sustainable, profitable growth.
To ensure this journey brings maximum value, we recommend a five-phase business overhaul.
- Enhance network and claims management.
- Build on the stronger claims and network platform with portfolio optimization.
- Improve underwriting and optimize reinsurance.
- Complete operational effectiveness with sales effectiveness, business process reengineering, organization optimization, and capacity management.
- Optimize IT process and infrastructure, and asset liability management.
Europe, Middle East, and Africa