Views from the European retail banking industry
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17 Ianuarie 2012 |
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ERNST & YOUNG S.R.L. |
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Introduction
European retail banks are facing continued macroeconomic, regulatory and reputational challenges.
Three years after the financial crisis emerged, it shows little sign of abating. Problems in the Eurozone continue to cast a dark shadow over the sector. Banks with large exposure to sovereign debt in troubled European economies face theprospect of significant write-downs, the need for further capitalization and the prospect of further losses on non-performing loans. Investor confidence in the banking sector has plummeted. The MSCI Europe Banks Index, which tracks the performance of European companies involved in the banking sector, has fallen significantly over the past year.
New regulation created in response to the financial crisis will intensify the pressure on retail banks. Higher capital and liquidity requirements and tighter wholesale funding markets, combined with recovery and resolution planning regimes could reduce lending capacity and the profitability of banks. Thosedeemed to be systemically important financial institutions (SIFIs) will face especially strict capital and liquidity requirements.
The relationship between retail banks and their customers also remains at a low ebb. Many institutions are struggling to rebuild reputations that have been severely damaged by the financial crisis. New consumer protection rules and financial stability regimes in some European markets could help to give customers greater confidence, but they will also increase the cost and complexity of serving them.
Against this highly challenging backdrop, the banks that succeed will be those that can differentiate themselves by offering a truly customer-centric service or moving to a high efficiency business model. This will require a combination of service innovation across multiple channels and a relentless focus on increasing the efficiency of internal processes and the customer orientation and productivity of the workforce. This will be no small feat, but it will be essential if retail banksare to generate adequate returns in a heavily regulated and lower growth world.
In order to better understand banks’ main concerns and how they are evolving in this environment, the Economist Intelligence Unit, on behalf of Ernst & Young, globally surveyed 654 bankers of whom 298 were senior executives at retail banks in the UK, France, Germany, Italy, Spain, Switzerland and the Netherlands. The respondents included chief executives, CFOs, CROs, COOs and heads of business.
Executive summary
The key challenges facing retail banking over the next five years, according to survey respondents, are falling margins, the cost of regulatory compliance and increased competition. This potent combination is likely to drive down returns on equity and make it increasingly difficult for retail banks to return to the performance levels seen prior to the financial crisis.
There is no question that retail banks face considerable pressure. Poor economicprospects will ensure that consumer confidence remains low for the foreseeable future. With wholesale funding markets remaining subdued, demand for retaildeposits will increase, putting even more pressure on margins. Deleveraging among consumers and SMEs continues to reduce asset volumes, while a shift away from complex investment products towards more straightforward products and the regulators’ desire for transparent charging are causing a decline in fees.
Banks must find ways to stem rising rates of attrition.
Almost six out of ten respondents say that levels of customer attrition haveincreased since the financial crisis. The rates can be high, with one in four banksexperiencing customer attrition rates of 10% or greater, although this proportion is even higher among respondents from France (45%), Spain (38%) and Switzerland (40%). New regulation to make it easier for customers to switch accounts in some markets adds to the challenge for banks.
The costs of dormancy and attracting new customers are considerably higherthan those that are incurred to retain them. With the added cost of opportunitylost from upselling and cross-selling, the survey highlights the importance of retailbanks understanding the drivers of high attrition rates and stemming furtherincreases. Our respondents say that high fees and complex charging structuresare the key causes for customers to leave, although a poor branch experience,processing errors and a lack of personalized service also figure highly. Banksshould respond by increasing transparency over fee structures, ensuring that products and services are tailored to different segments and redoubling efforts tomake service more personalized and efficient. Customer analytics and end to endprocess transformation can play a powerful role in helping banks to develop a more complete picture of customer behavior that can then be applied to serve customers better.
The majority of banks are investing in improvements to customer service.
Although the vast majority of respondents think that their institution is alreadycustomer-centric, banks also recognize the need to invest in customer service. More than half of respondents say that they are planning significant investmentsto improve the customer experience. These levels of investment can be substantial: almost half of respondents say that they will invest more than US$100m to transform customer processes in the near future.
