| [This roundtable was moderated by Rick Wolfe of PostStone]
Overview
Introduction
This Report summarizes the principles established by of the executive roundtable on Canadian banking.
These principles should be regarded not as conceptual, but as the basis for tangible actions. Such actions are clearly being put into practice by the panelists and many of the participants. Success will come in how each organization applies these principles to its own situation.
Purpose of the roundtable
The roundtable brought together a group of executives and managers from the Canadian banking industry for a forum on the new processes, practices, and business models now needed in Canadian Banking.
The context for the round table was
- the financial market shocks and gathering recession, and
- the clear need for radical transformation of retail banking business models.
The roundtable was conducted by the Access Group and held in Toronto on Tuesday December 9, 2008.
The roundtable panel
The panel consisted of five industry experts representing a range of specialization. They are listed at the end of this report.
Three principles emerged
These three main principles emerged in the roundtable discussion:
- Customers no longer trust their financial institutions the way they did, which requires rebuilding brand, customer experience, and relationships.
- Banking is conflicted between simplicity and complexity and each FI must decide which is more appropriate for their customers and business strategy.
- Looking to the future, the industry will have to rebuild infrastructure to satisfy changed demands, regardless of legacy systems investment.
In this Report
This Report outlines the key insights for each of these three main principles.
Principle 1: Rebuild Brand, Customer Experience, and Relationships
Principle
Customers no longer trust their financial institutions the way they did, which requires rebuilding brand, customer experience, and relationships.
A fundamental shift in relationship model The power of information in financial services has shifted from vendor to buyer. This shift has caused a further shift away from the traditional bank/customer relationship model.
This shift
- began before the current financial crisis, dating back to 2005 and earlier, as clients developed access to market knowledge, and
- has accelerated during the current financial meltdown with - a severe loss of confidence in financial institutions, and - serious damage to regulatory and governance reputations.
What this shift means
The crisis highlights that the traditional bank/customer relationship model is not working: Few customers have a real relationship with their bank beyond the current transaction.
Here are some reasons that the traditional bank/customer relationship has eroded:
- Lack of confidence in financial institutions means that qualified customers now wonder “will I get access to credit and will my bank be there when I need it?”
- The banks’ difficulty in convincing customers that the liquidity crisis has raised the banks’ cost of funding (the increased costs of returning to pricing for risk) will not be well received by consumers.
- The decline the traditional relationship between customer and bank is producing churn, previously unseen in financial institutions.
Example: Customers at mortgage renewal switch institutions for a small rate benefit.
The Canadian banking industry is more stable than that of the U.S. This is thanks in part to OSFI’s
- understanding of market risk, and
- ability to communicate this to the FIs.
What banking must do
Understanding this shift requires banks to likewise shift, to reinvent banking by rebuilding brand, customer experience, and relationships.
Banking reinvented is an urgent need following the meltdown:
- Bankers must replace their traditional internal and en masse market perspective with attention to their individual customers; the customer segment of one, talked about for more than a decade, is now a matter of urgency.
- Bankers must ensure the reliability of out sourcing partners to responsibly handle access to customer credit information to build customer trust.
- Bankers must provide customers with access to more individual advice and products geared to a risk rather than a growth economy.
- Bankers must communicate differently than before, such as emphasizing capital preservation over cross selling -- which many have manifestly not done.
“The market crisis is underscoring IBM longstanding focus on value. Our clients want help to exploit opportunities, acting with speed and urgency. This means recognizing customers’ emotional connections, not just improving costs, controls, and concentration.” - IBM
Principle 2: Balance Complexity and Simplicity
Principle
Banking is conflicted between simplicity and complexity and each FI must decide which is more appropriate for their customers and business strategy.
Complexity not justified by demand Banks have added massive choice to individual products, creating complexity that may not be justified based on demand.
- Normal segmentation strategies cannot predict customer demand to choose specific channels relevant to them at the time of transacting.
- Bank product is overly complicated, with a proliferation of options that only a few customers actually choose.
Telco Example: Beware that an extensive selection of pricing options inadvertently destroys loyalty and drives customers to competitors.
- Customer loyalty to branch and store networks will remain and cannot be eliminated, even though mobile banking is said to be the wave of the future. Mobile banking is predicted to be 35% of bank transactions by 2010, compared to 1% today.
- Newer, specialized FIs, such as Wal-Mart, present more competitive challenges to established FIs, since they are new entrants without legacy systems or preconceived attitudes.
- Trying to be all things to all people appeals
- more to the older generations, and
- less to the younger generations for whom relationships are not as important.
- The following will continue to be critical to increase the size of wallet:
- top line revenue enhancement for markets-of-one, and
- ‘tweaking’ and repackaging of products and services.
- Expenses need to be managed
- with business effectiveness measures, and
- not with simple cost-cutting that may not deliver desired long-term business results.
What banking must do
Banking must balance complexity with simplicity:
- Bankers must revisit the fundamental design of processes.
Process examples:
- integrating credit card operations into the rest of the bank
- overcoming costly and time consuming bureaucratic constraints
- building in relevancy and convenience.
- Bankers must become more cost effective with judicious outsourcing, not just of IT but also
- selected commoditized processes or
- processes without competitive advantage.
Examples cited:
- co-sourcing partnerships with suppliers such as network providers
- contracting with outside mutual fund manufacturers
- outsourcing transactional support functions like HR, Legal, Finance and Accounting, etc.
- Bankers must re-justify formerly sacrosanct items, such as
- providing a full range of products and services, and
- traditional bricks and mortar branch networks.
“Business strategy is the touchstone on which enablement of business transformation is based. Where a Financial Institution is able to differentiate and/or add value through its capabilities and competencies, these strengths should be leveraged and exploited in order to optimize its success.” – Canadiana Management Group
Principle 3: Rebuild Infrastructure
Principle
Looking to the future, the industry will have to rebuild infrastructure to satisfy changed demands, regardless of legacy systems investment.
Infrastructure issues
The current banking infrastructure is leading to the following issues:
- Market ‘pain’ is being felt
- in executive suites, but
- less so in the rest of the organization (so far) where some parts are performing well, others not.
- Product diversity is being introduced at the front end without fully taking into account back office implications.
Result: This results in manual work-arounds that lead to less than optimal processes and customer experience.
The future back office
The back office of the future will need an efficient cost base that both
- eliminates previous excessive redundancy, and
- delivers value that respects the needs of individual customers and their channels of choice.
What banking must do
Bankers must rebuild the banking infrastructure:
- Bankers must mobilize middle managers and the rest of the organization to translate executive suite pain into strategy and then action.
- Bankers must replace back office status quo (‘It’s done this way because it’s always been done this way”) with attention to customer needs.
- Bankers must re-understand risk at a model level,
- relying not just on models that assume a normal distribution curve of risk, but
- reassessing risk algorithms for multiple abnormal trading days.
Note: The panel perceived current risk models as still being out of alignment.
“Today, banking is so complicated that even banking does not understand it. Financial institutions must think about what information truly defines the business, what the policy actually says, and re-learn how to serve customers.”
- Information Mapping Canada
Thanks and Credits
Our thanks go to our panelists, sponsors and the participants for their contributions.
Panelists
John Fursey, Partner Financial Services Sector Leader Canada, IBM Global Business Services
Ron McClure, Vice President of Transformational Initiatives, RBC Financial Group
Sandra Henderson, Vice President & Managing Director – GTA, BMO Harris Private Banking
Trudy Fahie, Vice President of Financial Services, Wal-Mart Canada
Bob Adams, President/Managing Partner, Canadiana Management Group Inc.
Sponsors
IBM Information Mapping Canada
SAP
Cisco Systems Inc.
Access Group
Taimour Zaman, Founder and Managing Director
Moderator
Rick Wolfe, President, Poststone Corp.
Report
Robert Angel, President, The Gilford Group Limited
Report Mapped by Information Mapping Canada
Access Group’s Kitchen Table Conversation is a product/methodology developed by PostStone Corporation
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