Academic journal article The McKinsey Quarterly

Can Retail Banks Learn from Each Other?

Academic journal article The McKinsey Quarterly

Can Retail Banks Learn from Each Other?

Article excerpt

Deregulation, new technologies, changing customer needs, and more aggressive competitive behavior set the tone of the retail banking industry in the second half of the 1990s. In a time of rapid change, most players see their profits come under pressure. But for the strongest and most successful competitors, such an environment may provide opportunities to increase profitability. Many retail banks - those institutions serving individuals and small corporate customers - are thus striving to manage their business even more professionally and are keen to learn from international industry leaders. For those that aspire to be world class, there are core competencies In which it is necessary to excel, no matter whether they operate in Europe, America, or Asia.

What can European, US, and Japanese banks learn from each other? Very little, most bankers would probably have replied up to now, pointing to the varying regulatory structures in the different geographies. While European banks have always been able to offer a complete range of financial services, government regulations have limited what US banks could offer, especially in the securities business, which was largely the preserve of specialists. The broader array of products open to European banks has given them a larger share of private household assets than that held by their US counterparts (Exhibit 1).

From a global perspective, however, it is possible to see an interesting convergence in the strategic development of banks worldwide. From their various different starting points, European, US, and Japanese banks are moving toward the same retail model: an integrated financial services provider offering private individuals and small corporate customers services differentiated by segment. In moving toward this model, each bank faces a different set of tasks:

* For European banks, the main challenge is breaking down their still very monolithic structures. In retail banking, it will be vital to develop distinct business concepts. This means establishing a marketing-oriented, systems-based business with standardized product lines, a strong sales culture, and corresponding core capabilities and compensation systems. Leading banks will manage their business in a more professional manner in the future, dividing their operations into separate units serving, for instance, private, affluent, and mass market customers.

* For US and Japanese banks, on the other hand, the task is one of Integration and knowledge building. Since deregulation, US banks have been able not only to operate nationwide but also to sell investments; in the medium term, they will probably be able to sell insurance as well (Exhibit 2). Given that bank deposits are declining in importance, and populations are growing older and more prosperous, developing knowhow in the investment business with mutual funds and other securities will become increasingly important.

The model of the integrated yet differentiated financial services provider of the future lies essentially mid-way between the various separate starting points of the European, US, and Japanese banks. These banks' current strengths are different, but complementary. The value to be gained by learning from one another is greater than ever before.

This also means that the notion of "best practice" must be revisited. The search for success factors and core competencies for the retail bank of the future must adopt an international perspective and also take account of financial services providers other than banks.

What is best practice?

While international benchmarking of best practice is more or less the rule in other industries, it is still the exception in banking. Analyzing best practice should begin by establishing which banks have achieved a superior financial performance. The leading retail banks in the US and Europe have earned a return on equity of more than 20 percent before tax in the past five years, compared with an average of 14 percent for the majority of banks. …

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