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What will shape the future of bankingSee the world differently
Flash Forward | Future-Focused insights
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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.
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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
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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.
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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
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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.
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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
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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
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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
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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.
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