Financial services in 2010: hallmarks of success

Citation

Gentle, C. (2007), "Financial services in 2010: hallmarks of success", Journal of Risk Finance, Vol. 8 No. 2. https://doi.org/10.1108/jrf.2007.29408baf.001

Financial services in 2010: hallmarks of success

Looking ahead to the end of the decade, the shifting centres of gravity in financial markets will likely transform the financial services industry. Building a business with strong foundations in mature markets allied with a fit-for-purpose emerging markets operating model is likely to distinguish leaders from followers. The race to be successful by the end of the decade needs to be high on the corporate agenda, with actions and priorities set now to ensure the hallmarks for success will be in place by 2010.

The environment going forward will be shaped by two major forces – operational efficiency and a shift in focus to global markets.

Last year 15 major financial groups had more than half their assets abroad[1]. European financial institutions account for nearly two thirds of global banking assets. The rise of China will be determined by the opening up of the market in 2007 under World Trade Organization (WTO) rules and the IPOs of the big four Chinese banks.

Secondly, operational efficiency should play an increasingly important role. The need to streamline processes, eradicate paper, reduce headcounts, and manage related operational risk will affect all parts of the financial services industry. The march to reduce the cost-base is already taking hold.

The journey to create a leading financial institution by the end of the decade should start today. Expect successful financial institutions in 2010 to exhibit the following hallmarks.

Global markets and a business model to match

The financial services industry will become increasingly global as firms in mature markets seek new sources of growth in emerging economies. Success will hinge on creating an exportable, low-cost business model specifically designed to serve these new types of customers (low income, high volume). The need to scale up will be driven by three factors. Firstly, a significant balance sheet will be critical in supporting major corporate clients and in funding future activities. Secondly, many financial products will become commoditised, making margins skinner and economies of scale more important. Thirdly, a multinational market portfolio can be sustained only by major organizations.

Mass efficiency with focused premium service

Shrinking margins will drive an overall trend toward commoditisation. Yet there will also be opportunities to reinvest some of those back-office cost savings into premium service for high value market segments – including “mass affluent” segments that may be underserved today.

Consolidation with a purpose

Merger and acquisition volume will remain high, both at the national and regional levels. For example, Deloitte Touche Tohmatsu expects 700 European banks to disappear through mergers over the next three years. However, acquisitions should not be the only club in the bag. Savvy divestments allied with smart redeployment of capital, can be equally important in creating competitive advantage. Also, business models such as that used by institutions, leveraging direct distribution, can be highly profitable and capital-efficient.

Winning the struggle for growth through enhanced customer relationships

Financial markets reward financial institutions achieving the best relative growth in revenues. Going forward, there will be reduced headroom for growth in most mature western economies; the game will be to solidify existing customer relationships, steal market share and increase share of wallet by relearning the growth habit through innovative practices.

Transparency and compliance as a performance springboard

Regulators and capital markets are demanding greater transparency. But top-performing firms by 2010 will go beyond the minimum requirements, using transparency and compliance as a way to win the hearts and minds of investors, and leveraging their efforts to improve decision-making, cost efficiency, and service quality.

Cracking the IT value code

By 2010 leading financial institutions will be some of the most sophisticated users of technology on the planet. Today the top 25 financial institutions in the world spend in excess of $50 billion on technology in a single year. Financial institutions will need to get improved productivity, enhanced revenue growth and better profitability from this level of spend in the future. The future challenge for financial institutions will be two fold – the digitisation of business and the IT governance.

The differentiator between success and failure is unlikely to be the absolute amount spent but rather the governance of technology within the business. It is imperative financial institutions have a chief information officer with a seat at the top table.

Financial institutions are incredibly complex businesses. Over the next five years, technology must be applied to reducing this degree of complexity by the eradication of paper-based processes. This simplicity will drive new business models and will be integral to forging each of the hallmarks of success identified in this report.

The trends and challenges identified in this report will affect the vast majority of financial services firms. But only the best will profit from them. Big is likely to become beautiful, but in itself will be no guarantee of success. Financial institutions that start building these qualities into their corporate DNA today are the ones most likely to come out on top in 2010.

“Numbers in the news”, Financial Times, 9 March 2006.

Chris GentleDeloitte, London, UK