2014 What will shape the future of banking/media/Publications and Reports...the future environment...

2014

What will shape the future of bankingSee the world differently

Flash Forward | Future-Focused insights

16050127-hs-00163-DSI case studies.indd 1 05/05/2016 16:05

Introduction Banking is an industry undergoing huge change.

Multiple forces are playing out simultaneously,

although often at different speeds and at varying

intensities across the globe. understanding what is

shaping the industry, and more importantly, how

to optimise your strategy in response, is crucial in

crafting a sustainable competitive advantage.

unfortunately, human beings are hard-wired to be poor

at understanding the future. in our attempts to predict

events to come, we typically take our experiences and

data from the recent past and extrapolate forward.

we hate uncertainty. to avoid it, we either pretend it

doesn’t exist or we create ever-increasingly complex

models and forecasts to help determine what we

should do today in order to be successful tomorrow.

as Pierre wack, the pioneer of scenario thinking at

royal dutch shell, observed, “Forecasts are not always

wrong […] and that is what makes them so dangerous.

[..] But sooner or later forecasts will fail when they

are needed most: in anticipating major shifts in the

business environment that make whole strategies

obsolete.” You don’t need to have worked in financial

services for long to know that Pierre has a point.

so how can we be more constructive and thoughtful in

understanding what the future of banking may bring?

First, we should acknowledge that there are three types

of driving forces or mega-trends that shape the future:

1. Pre-determined forces –what we believe

we know to be true; as it turns out, this

is actually a shockingly short list;

2. Forces we assumeto be true –typically we make

this a list much longer than it should be; and

3. Fundamental uncertainties–events or forces

we simply can’t predict, but the way they play

out will be significantly important in shaping

the future environment within which we

and our organisations need to operate.

so, which forces should we focus on to better

understand how the banking landscape will

evolve over the next 10 plus years?

there are five key uncertainties we should pay

particular attention to. the way they play out will

shape the global banking industry, determining

winners and losers, survivors and casualties.

Exhibit 1. World Population Trend, 2010-2050Population in billions

1 2 3 4 5 6 7 8 9 10

2010

2015

2020

2025

2030

2035

2040

2045

2050

Asia and OceaniaAfricaEuropeLatin America and the CaribbeanNorthern America

Source: “World Population Prospects, the 2012 Revision –MEDIUM”. United Nations, Department of Economic and Social Affairs. 2012.

2 What will shape the future of banking


1. “Changing PlaCes, Changing FaCes”

traditionally demographics has been closest t

traditionally demographics has been closest to a pre-

determined force, however with the increasing influence

of globalisation and connectivity driving ever-increasing

migration, even these trends are harder to predict, let

alone understanding the consequences for banking.

un demographic models tell us that the world will

become more populous. From 7.2 billion today,

there will be 8.2 billion of us by 2030 and 9.6 billion

by 2050. that growth will not be evenly distributed.

there will be a heavy skew towards africa and india,

with the latter forecasted to overtake china as

the most populous country on the planet around

2028, when both populations hit 1.48 billion.

europe, on the other hand, is predicted to shrink, only

acerbating the well-publicised demographic time bomb,

as dependency ratios collapse from 4:1 to 2:1 by 2050.

ageing will not be the only challenge of restructuring

population pyramids. a number of significant

countries, including india, saudi arabia and other

Middle eastern states, will have rapidly growing

sections of the young. they will need jobs, housing

and food. even if you have vast wealth to pay many to

do nothing (and most do not), this wouldn’t seem to

represent a very stable or sustainable future society.

urbanisation is an ever-popular “mega-trend,” and a

major driver of economic growth and prosperity. More

than 50 percent of the world’s population now lives

in a city. we already have 23 megacities (population

in excess of 10 million), with another 14 forecasted to

join those ranks by 2025, the majority in asia. the un

projects that this trend will continue so that by 2050,

the urban population will represent 70 percent of the

planet. to repeat, 7 in 10 of us will live in cities by 2050!

what does this mean for banking? we will have

another one billion people entering the consuming

class by 2025, injecting up to $30 trillion into the

global economy. there will be increased investment in

infrastructure and housing. aspirational lifestyles will

need to be funded. economic activity will intensify.

all seemingly good news for a bank seeking to serve

individuals and organisations requiring finance, credit,

risk intermediation and financial transactions.

however, increasingly expensive welfare systems

will need to be funded. aging populations will

have to save more for retirement, potentially

squeezing the supply of risk capital. higher taxation

to meet increasing and unfunded liability gaps

will dent consumers’ ability to, well, consume.

This frames up the first uncertainty; how will changing demography, migration and urbanisation impact the world economy’s ability to grow?

Constrains & Inhibits Facilitates & Increases

Impactof “New

Demographics” on Global Economic

Growth

Heidrick & Struggles 3


Exhibit 2. Megacities 2011 vs. 2025

1. Tokyo 37.2m

2. Delhi 22.7m

3. Mexico City 20.4m

4. New York-Newark 20.4m

5. Shanghai 20.2m

6. São Paolo 19.9m

7. Mumbai 19.7m

8. Beijing 15.6m

9. Dhaka 15.4m

10. Calcutta 14.4m

11. Karachi 13.9m

12. Buenos Aires 13.4m

13. Los Angeles-Long Beach-Santa Ana 13.4m

14. Rio de Janeiro 12.0m

15. Manila 11.9m

16. Moscow 11.6m

17. Osaka-Kobe 11.5m

18. Istanbul 11.3m

19. Lagos 11.2m

20. Cairo 11.2m

21. Guangzhou 10.8m

22. Shenzhen 10.6m

23. Paris 10.6m

38.7m 1. Tokyo

32.9m 2. Delhi

28.4m 3. Shanghai

26.6m 4. Mumbai

24.6m 5. Mexico City

23.6m 6. New York-Newark

23.2m 7. São Paolo

22.9m 8. Dhaka

22.6m 9. Beijing

20.2m 10. Karachi

18.9m 11. Lagos

18.7m 12. Calcutta

16.3m 13. Manila

15.7m 14. Los Angeles-Long Beach-Santa Ana

15.5m 15. Shenzhen

15.5m 16. Buenos Aires

15.5m 17. Guangzhou

14.9m 18. Istanbul

14.7m 19. Cairo

14.5m 20. Kinshasa

13.6m 21. Chongqing

13.6m 22. Rio de Janeiro

13.2m 23. Bangalore

12.8m 24. Jakarta

12.8m 25. Madras

12.7m 26. Wuhan

12.6m 27. Moscow

12.2m 28. Paris

12.0m 29. Osaka-Kobe

11.9m 30. Tianjin

11.6m 31. Hyderabad

11.5m 32. Lima

11.4m 33. Chicago

11.4m 34. Bogotá

11.2m 35. Bangkok

11.2m 36. Lahore

10.3m 37. London

Source: “World Urbanization Prospects -The 2011 Revision”. United Nations, Department of Economic and Social Affairs. March 2012.



2. “new sheriFF in Town”For more than 40 years, globalisation has driven the

growth of banking. that form of globalisation was very

much in the image of the “washington consensus” – a

market-driven, u.s.-dominated economic model. that

consensus is now being challenged on two fronts:

is continued unfettered global integration still a positive?

in a post financial-crisis, post-snowden world, many of

the assumptions about greater transparency, relaxed

regulation, increased and unchecked flow of capital,

information, goods, services and labour are all being

challenged. while george w. Bush originally secured the

agreement of the g20 at the start of the financial crisis to

avoid increased protectionism at all costs, the concept of

“gated globalisation” seems to be gaining currency. trade

flows have stagnated since 2008. capital flows, having

reached all-time highs of over £11 trillion in 2007, have

collapsed by more than 60 percent since. with increasing

concerns over security and privacy, not to mention the

embarrassing revelations from edward snowden, even

german chancellor angela Merkel is suggesting creating

a “regional internet” outside of u.s. control or influence.

a key question therefore remains: is this slowdown

in global connectivity cyclical (a “speed bump”)

or a longer-term structural trend that may

reverse many of the factors that have been

responsible for the growth of global banking?

will state-sponsored capitalism dominate marketdriven economies?

as The Economist noted back in January 2012, “the

defining battle of the 21st century will not be between

capitalism and socialism but between different versions of

capitalism.” one can argue that the financial crisis and the

discrediting of western market-economies has only

accelerated the prevalence in influence of so-called

state-sponsored capitalism. not only did the economies of

china, Brazil, india and parts of the Middle east come

through the crisis in better shape, but they also appear

better equipped to deal with the continuing political and

economic volatility.

“The defining battle of the 21st century will not be between capitalism and socialism but between different versions of capitalism.”the economist, Jan 21-27, 2012.

the implications for banking are enormous. For an

industry that has essentially been built as a leveraged

play on globalisation, the nature and the extent to

which this trend continues is hugely significant. not to

mention the impact on and of regulation. as financial

markets re-regulate, the nature and pace at which

different jurisdictions do so will have significant impact

on the relative competitive position of global, regional

and national players. opportunities for regulatory

arbitrage, and in particular the difficulties of managing

multiple sets of rules, will hamper many if there is

continued fragmentation of global governance and

markets, instead of a shift towards great harmonisation.

This dilemma therefore frames our next key uncertainty:

Nature of GlobalisationStalling/Fragmenting Accelerating/Integrating



3. “advanTage Big daTa?”historically, product innovation in financial services

equalled the addition of complexity, opacity and, if we

are honest, the opportunity to charge a greater margin.

Many products developed under these concepts helped

to create a disconnect between risk and reward; very few

understood what they were really buying and perhaps

more importantly, the risks they were taking. this was

undoubtedly one of the causes behind the financial crisis.

the challenge for banking now is to find the “simplicity on

the other side of complexity” as oliver wendell holmes Jr.,

former associate Justice of the supreme court of the u.s.,

put it. rather than doing things to our customers / clients,

how can we do something together, to mutual benefit?

how do we achieve that well-worn cliché of the win-win?

Mining big data to drive innovation may well be the

answer. there is no lack of data in the world and it is

increasing at quite an alarming rate. iBM estimates that

90 percent of the world’s data has been created in the

last three years. that means everything from socrates to

shakespeare to J.K. rowling only makes up 10 percent.

however, obtaining genuine insights from the mass

of big data is harder than one might imagine. as the

economist tim harfordnoted in the Financial Times

in March 2014, “’Big data’ has arrived, but big insights

have not. the challenge now is to solve new problems

and gain new answers – without making he same old

statistical mistakes on a grander scale than ever.”

“Every two days now we create as much information as we did from the dawn of civilization up until 2003.”eric schmidt, ceo, google

Exhibit 3. Key Big Data Facts

90% of the data in the world was created in two years

2.5quintillion bytesof data are created each day

40 zettabytesof data will be created by 2020, an increase of 300 times from 2005

30 billion pieces of contentare shared on Facebook every month

1TBof trade informationis captured by the NYSE during each trading session

Source: “The FOUR V’s of Big Data”. IBM.



assuming you can derive new insights, how organisations

use that information about their customers is supremely

important. target stores found this out the hard way. in

early 2012, a gentleman stormed into his local store in

Minneapolis, Minn. demanding to know why his 16-year-

old daughter had been sent a coupon booklet filled with

discounts for baby clothes and products – “what kind of

ideas were they trying to put into her head?” the store

manager was red-faced and extremely apologetic.

Behind the scenes, however, target had developed a

“pregnancy probability score” based on a customer’s

purchase of products such as food supplements,

skin creams, etc. the man’s daughter had scored

extremely high and therefore was sent a customised

coupon booklet focused on baby products.

when the manager called a week later to once again

apologise, this time it was the father who was red-

faced as he had since learned his daughter was in fact

pregnant. a+ to the data miners at target, but perhaps

d- for execution and sensitivity to individual privacy.

interestingly, target still continues with the

pregnancy probability work, but now sends a

coupon booklet with baby products disguised

among other random items they sell, so as to not

be seen to explicitly “target” pregnant women.

in another example, banking marketing executives

at BBVa noted that men who never go overdrawn

on their checking accounts very rarely crashed

their cars. this allowed BBVa to offer these specific

customers a special deal on their car insurance – a

genuine win-win. as a result, BBVa gained both

increased market and wallet share from a relatively

simple insight from customer data, while customers

received a lower premium for their insurance.

For many years, the holy grail in banking has been

the cross-sell; how many products can we sell to the

same customer? the new mind-set should be, “how

do we better meet our customers’ needs with the

insights we can garner from our relationship, without

infringing their sense of privacy or independence

as a valued client?” how much will customers allow

a bank to know about them? what’s the upside

for them in allowing a bank into their worlds?

Hence:

MarketResponse

to Insights fromBig Data

Reject and Resist Accept and Embrace



4. The “ConneCTed CusTomer”we know that the impact of technology and the

digitisation of markets has significantly changed

behaviour, and yet, in many ways we have perhaps

only seen the tip of the iceberg. Power has shifted to

the consumer. expectations of service and experience

have been raised significantly. a direct comparison

of experience online across multiple industries is

readily available and presents deep challenges

to many financial services organisations as they

essentially compete in terms of customer service

with built-for-the-‘net-age products and services.

who should i trust? whose opinion do i listen to? who

do i feel is working on my behalf? customer loyalty

is now an asset that is even harder to win and much

easier to lose. as salesforce.comnotes, 89 percent of

consumers have started to do business with a direct

competitor following a poor experience. similarly,

it can take up to 12 positive customer experiences

to make up for just one negative encounter.

ironically, in consumer banking, the most valuable

customers (those with investable assets over $1 million)

are the least loyal, with the lowest net Promoter score

(nPs) across all the retail financial client segments. i have

heard bankers defend this phenomenon by pointing out

that intention is very different than action. “stickiness” in

banking is traditionally measured in decades –not years.

this would appear to be a “toxic orthodoxy” ripe for the

challenging. the increasing digitisation of banking will

only make it easier to switch. in fact, in the u.K., regulators

have introduced the seven-day banking switch guarantee.

in the last five months since the regulation was brought

in, the level of switching has grown by over 60 percent.

Exhibit 4. Impact of Bad Customer Experiences

2x89% of consumers have stopped doing business with a company after experiencing poor customer service

50% of consumers give a brand up to one week to respond to a customer service question before they “break up” with the company

Consumers are

more likely to share their bad customer experiences than they are to talk about positive experiences

It take 12 positive customer experiences to make up for 1 negative experience

Source: “Customer Service Stats”. Salesforce.com. October 24, 2013

What will customers want from their banks? Perhaps more importantly, what will they be willing to share with their banks? Will banks become an increasingly commoditised service with little differentiation?

Nature ofCustomerDemand

Price/Transaction Driven A�nity/Advice Driven



5. Banks vs. Banking – a new Paradigm?Bill gates observed in 1994 that, “Banking is necessary,

banks are not.” when the internet first hit the banking

world back in the mid to late ‘90s, there was a huge fear

amongst the traditional players of being left behind; the

old dinosaurs were to be outsmarted by the nimble start-

ups, unencumbered by legacy systems and processes.

For a while, especially after the dot.comcrash, it was

easy for banks to become complacent. the internet

was just like the credit card or the atM –an important

innovation but one that doesn’t fundamentally alter

our business model or how the industry works.

this is no longer true. across the banking landscape,

from consumer to wholesale, alternative banking

business models are emerging through a confluence

of stricter regulation of traditional banks and

connective technologies. Peer-to-peer lending is

becoming mainstream. lending club, the number

one player in the u.s. which issued over $2 billion

in loans in 2013, is experiencing triple-digit growth

and now boasts such luminaries as John Mack,

Mary Meeker and larry summers on its board.

“Banking is necessary, banks are not.”Bill gates, Founder, Microsoft

in the u.K., tesco is getting back into financial services

in a big way. having originally launched loan and

credit card services in a joint venture with rBs, it is

now bringing its own products to market, including

a current account, hoping that the new seven-day

switch guarantee will drive business its way.

electronic transfers and transactions are reshaping

the field of financial services. From mobile phone

banking, to digital currencies and crowd funding,

new service providers are challenging the incumbent

banks with faster, cheaper, more accessible

and more relevant services to customers.

in wholesale, shadow banking continues to thrive, filling

the vacuum left as the regulated banks’ activities are

curtailed by dodd-Frank, the Volcker rule and Basel iii

capital ratio requirements. the Financial stability Board

(FsB) estimates that between the specialist credit funds,

hedge funds, private equity, etFs, asset managers,

sovereign wealth funds, etc., the shadow banking sector

now stands at $70 trillion in assets and growing.

arguments flow both ways in terms of the value that

this group of capital providers adds, from offering vital

credit and risk intermediation, filling the void left by the

traditional banks, to unregulated, opportunistic entities

that some believe may cause the next financial crisis.

So as we look out 10 years, which entities will be the dominant providers of banking services –the banks, or the alternatives?

Evolutionof Financial

MarketsBanking Dominated Bank Dominated



where do we go From here?creating a list of mega-trends can be intellectually

interesting. understanding which of these trends

are truly pre-determined, assumed or fundamentally

uncertain will start to unlock a better comprehension

of the future of banking. however, it is not until these

driving forces and uncertainties are combined into

multiple narratives of the future (what we call scenarios)

that the logic, dependencies and implications of

the future for an organisation start to unfold.

using scenarios to explore strategic options will

create a different type of conversation amongst

senior decision makers – one focused on “what if”

and “so what,” rather than “i know” or “i predict.”

the former will lead to more creative “outside-in”

discussions and asking better questions before

coming to more robust and better answers.

the single largest threat to incumbent banks is that

they become consumed by shortterm “urgent” and

operational imperatives, largely driven by regulatory

requirements, while missing the seismic, structural

shifts in the broader industry environment that may

make their “finely tuned” business models obsolete.

leveraging scenario thinking frees banking executives

from the pressure to accurately predict the future (a

somewhat futile notion at best), allowing them to

concentrate their energy in agreeing and aligning behind

a robust set of strategic options that anticipates their

customers’ needs, matches their organisational ambitions

and is consistent with their overall risk appetite.

ultimately, using scenario-based thinking to develop

and stress test their strategies, will allow banks to

better prepare for the uncertain future to come.



heidrick & struggles is the premier provider of

senior-level executive search, culture shaping, and

leadership consulting services. For more than 60 years

we have focused on quality service and built strong

relationships with clients and individuals worldwide.

today, heidrick & struggles’ leadership experts

operate from principal business centers globally.

www.heidrick.com

Copyright © 2016 Heidrick & Struggles International, Inc. All

rights reserved. Reproduction without permission is prohibited.

Trademarks and logos are copyrights of their respective owners.

hs-00163


2014 What will shape the future of banking/media/Publications and Reports...the future environment...

Documents

Transcript of 2014 What will shape the future of banking/media/Publications and Reports...the future environment...