Academic journal article
By Milani, John
Journal of Performance Management , Vol. 24, No. 2
Financial institutions are struggling to improve revenues in a sustainable way. Across the industry, operating revenue growth (net interest income plus non-interest income) has stagnated over the last three years.
Consolidation has brought a dramatic increase in competitive pressure. Today there are half as many financial institutions as there were in 1980. As of 2011, 86% of banking assets were controlled by less than 100 financial institutions. Net interest margins have declined by over 100 basis points in the last 20 years. Despite technological advances that have created new fee generating products and services, non-interest income hovers at 36% of operating income.
Consumer access to information has brought even further challenges unforeseen 20 years ago. The consumer now holds in their hand a smart phone capable of researching competitors' prices and consumer reviews of your products and services in your store. Social networks accelerated protests against bank debit card fees at viral speeds, resulting in public relations disasters and eventual removal of the fees. For sustainable improvement in revenues, financial institutions are no different than any other industry and the strategy is the same: To be a leader in an industry, a firm needs to create a compelling value proposition that the customer recognizes, is willing to pay for, and in the most ideal case - pay a premium.
To survive, financial services must move away from the model of selling products, providing access convenience, and competing on price. This approach has seen its day and is fast becoming obsolete.
Customers are now demanding a model based on seamless service processes and relationship pricing. Some firms have recognized this but have failed at attempts to move in that direction. . . because of the cost, lack of technology, or they didn't take the necessary enterprise approach in shifting their model.
The good news is the same technical revolution that has brought about social networking and mobile payments has also introduced web services, open source frameworks, open protocols, and user-driven software configuration - technology that can enable this transformation. The bad news is that financial institutions are unable or unwilling to face some stark realities: their model has been superseded; and although within reach, the new model will require substantial business process change and investment to move forward.
The purpose of this article is to outline a realistic, sensible way for financial institutions to adopt a service and customer-focused model, and demonstrate how a new approach and capability is well within most firms' reach. This paper will describe how to recognize the shortcomings of the old environment - and then provide an understanding of what key business processes and technological investments must be made to transform their institutions. The "so-what" of this transformation is to convey a powerful value proposition to current and prospective customers. . .where firms can compete for the premium price and get more than their fair share of what is perceived as a commoditized market place, all through what we call a Customer Service and Revenue Management® capability.
What is Holding Back Sustainable Revenue Improvement?
A quick scan through public documents shows most financial services firms have dedicated business units for mortgage lending, consumer lending, retail banking, corporate banking, investment banking, insurance, leasing, factoring, brokerage, and wealth management - just to name a few. Most firms get to this structure by reacting to the regulatory environment and aligning their businesses around the product regulation to help ensure regulatory compliance.
These business unit verticals tend to invest in systems and processes unique to their operation. These business units also tend to limit the scope of their systems and processes to within the walls of their vertical, as they are unwilling and unable to justify additional investment within their business cases to do otherwise. …