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Page 1: PwC Banking Survey: Driving Customer Value Through Digital

The new digitaltipping point

www.pwc.com/financialservices

Traditional banking is facing its steepestchallenge in over a generation. We believethat a new tipping point has been reached,with digital at its fulcrum.

Page 2: PwC Banking Survey: Driving Customer Value Through Digital
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PwC The new digital tipping point 1

02 Introduction: Driving customer valuethrough digital

04 Customer relationship primacy is the newsource of value in banking

05 Digital is crucial in addressing changingcustomer behaviour

10 Customers value new digital offerings

12 New digital entrants are disrupting thebanking ecosystem

14 The battle for customer relationshipprimacy among banks has begun

16 Contacts

Contents

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We are in an unprecedented period of increasing regulationand continuing cost pressures for banks. This is beingcompounded by the persistent trend in margin compressionand alarming market uncertainty.

The emergence of new technologies into banking has had apermanent impact, as once traditional banking revenue poolsare now being sucked up by new competitors, especially inthe payments’ space. All of this is happening at a time whencustomer expectations for banking services (both offline andonline) are being reset by the experiences being provided byretailers and online providers, elsewhere.

Finally, to this long list add the general lack of trust customershave in financial services – owing to the credit crunch – andthe general perception that the major banks all contributed tothe global market collapse. We can quickly conclude thattraditional banking is facing its steepest challenge in over ageneration. We believe that a new tipping point has beenreached, with digital at its fulcrum.

Introduction: Driving customer valuethrough digital

2 PwC The new digital tipping point

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Towards a customer-centric valuemodel in bankingBefore the financial crisis, banks reliedheavily on financial leverage to createshareholder value. Today, the economicclimate, increased regulatoryintervention and competitivechallenges are forcing banks todeleverage and look for other sourcesof value. In the ‘new reality’ since thecrisis hit, a new value model is required,based upon securing customerrelationship primacy (the position ofbeing the preferred and main bank fora customer), through efforts to regaintrust and build customer engagement.

Preference for digital is nowglobally pervasive amongbanking customersDigital will play an instrumental role inachieving this strategy. The preferencefor digital is now pervasive across allcustomer segments, globally, andespecially so for Generation Y (thedefinition varies widely, but broadly, itrefers to those people born in the 1980sand 1990s). In fact, for this group, nowat the threshold of deciding primarybanking relationships, the quality of thedigital offering is an important factor intheir decision process. Banks have areal imperative to act now to attractthese customers and thereby lock infuture value. Banks’ digital strategieswill need to move beyond costreduction objectives to do this.

‘Digital’ has evolved from basiconline banking to a broad, richset of capabilities...The full extent of what digital can offercustomers goes beyond the basic mobileand internet banking services that arenow widely provided, although there isstill value to be obtained for manybanks from simply delivering thesebasic services well. Digital banking willevolve into a richer set of offerings,providing new value for banks and theircustomers through a new ‘digitalfeature set’, based on innovations in:user experience; mobile devices andnetworks; social media andcollaboration; customer analytics; andchannel integration. By embracingdigital, banks can deepen their existingcustomer relationships as well as accessnew sources of revenue.

...now disrupting and catalysingchange in the banking ecosystemDigital has also opened up banking to anumber of innovators – big and small –seeking to capture value across thebanking value chain. In markets wherebanking is widely accessible, we believethat while these new entrants willsecure a place as part of the bankingecosystem, there is little evidence tosuggest that they will be successful intaking over the entire customerrelationship from banks. Despitechallenges to this position, banksremain the most trusted providers ofbanking services by customers. Ingrowing markets where the under-banked population is sizeable, thethreat of being out-competed by newentrants could potentially be greater.

Provides a platform forinnovation Mobile is coming of age and is movingbeyond simple banking functionality toembrace mobile payments and otherinnovative offerings such as marketingservices, sophisticated authenticationmechanisms, location-basedpersonalisation, etc. These innovativeservices serve to create a superiorcustomer experience, one that thecustomer is willing to pay for.

Strategic partnerships will pavethe way to success for banksWe believe that banks should acquire orpartner with innovators that are actingas catalysts for change. The alternativefor those banks that accept the need tochange is to develop these capabilitiesalone – an expensive and risky effort.

Traditionally, banks have preferred a‘build’ approach for most changes.However, we believe that in thisscenario, a ‘buy’ or ‘partner’ strategywould be more optimal as this changerequires a new way of thinking andbuilding that is difficult for competitorsto copy.

We believe that the real battle will takeplace between banks, as they seek tosecure primacy of the customerrelationship as the basis of futureshareholder value. Many banks,however, may react late or continue topersist with old ways and methods andas a result, lose market share in thechanging banking landscape. PwC The new digital tipping point 3

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Figure 1: Primacy drives share of wallet

Canada

UAE

France

Poland

Mexico

India

Hong Kong

China

UK

Current bank

“If you were going to purchase a new banking product, how likely are you to buy from the following?”

Canada

UAE

France

Poland

Mexico

India

Hong Kong

China

UK

A different bank

Source: PwC Digital Tipping Point Survey 2011 % of respondents that chose current banking provider or another banking provider in response to the question.Other options included a provider that is not a bank but has a physical presence (e.g. a supermarket chain) andan online provider.

A number of things have driven thischange in banking including increasedregulation, the erosion of public trustwith a series of high-profile bankingfailures, the collapse of liquidity in themarket, increased capital requirementsand a reduced risk appetite amongcustomers. All these have contributed toa difficult environment for banks tooperate in.

In developed markets, growth in bankingis flat or shrinking. The shift from assetsto liabilities, though preferred forfunding, is resulting in lower averagemargins for banks. In these markets, theonly way for banks to maintain and growvalue is to pursue a displacement strategyagainst other banks and increase theirshare of wallet with the customer. Ourresearch revealed that a vast majorityof customers preferred to purchaseadditional financial service products from

their primary banking provider ratherthan any other source (see Figure 1). Thisunderscores the importance of achievingprimacy in a relationship, as it leads to agreater share of wallet for banks.

Although retail banking has benefitedfrom high levels of consumer inertia inthe past, there is now a concerted effortfrom regulators around the world tomake the process of switching bankseasier.1 Evidence from other industriessuch as utilities and insurance suggeststhat this will lead to an increase in thelevel of switching within banking. Theseindustries are typically more regulatedand banks can learn from these as theygrapple with similar challenges.

Banks can  proactively address thismore by using digital to deepen theirexisting relationship with customersand gaining primacy.

Furthermore, the wide availability ofinformation about financial productspropagated over the internet has helpedexpose the gap between price and valuefor banking products to consumersand regulators. This has underminedtraditional pricing strategies, forcingbanks to demonstrate intrinsic value totheir customers.

Banks need to focus their strategies on a customer relationship primacy model, by regainingtrust and building engagement with the customer. In the ‘new reality’ of banking, financialengineering is no longer sufficient to create value and banks need to look at demonstratingcustomer value to remain relevant in the market.

Customer relationship primacy is the newsource of value in banking

4 PwC The new digital tipping point

PwC2 conducted researchwith almost 3,000 bankingcustomers from a range ofsegments across markets todiscover their expectations ofbanking in the digital age. Weselected both emerging anddeveloping markets includingChina, India, Mexico and theUAE, as well as developedmarkets like the UK, Canada,France and Poland.

Our research revealed thatthere is a very high correlationbetween digital engagement andshare of wallet for a customerand that digitally activecustomers tended to have thelargest product holdings. Wealso found that primacy in abanking relationship drivesincreased share of walletleading to higher revenuegeneration from the customerpool.

1 Independent Commission on Banking, Final ReportRecommendations, September 2011, UK

2 In this document, “PwC” refers toPricewaterhouseCoopers LLP (a limited liabilitypartnership in the United Kingdom), which is amember firm of PricewaterhouseCoopersInternational Limited, each member firm of which isa separate legal entity

81% 10%

23.7%

10.8%

20%

18.4%

10.3%

9.9%

11%

14.9%

62.9%

75.3%

61.1%

75.3%

76.9%

86%

79.4%

53.2%

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There are four main considerationsfor a bank to invest in a robust digitaloffering:

1) A number of factors are changingcustomers’ attitudes and behaviours.

2) Preference for digital is globallypervasive.

3) Generation Y, who are now at thepoint of choosing their primaryfinancial services provider, citedigital as an important factor inthis decision.

4) Digital itself, is evolving: the newset of disruptive features of thelatest round of digital innovation isproof enough.

PwC The new digital tipping point 5

Today, a successful digital offering in banking implies the provision of high quality online andmobile banking access. We find that the new digital feature set can be used to meet theincreasing demands of the customer.

Digital is crucial in addressing changingcustomer behaviour

Expectations are beingshaped by experiencesoutside of the bankingindustry wherecontent, interactionsand features are richer,delivering a moreengaging andrewarding experiencefor the consumer.

...expect more ...trust their peers ...are informed ...have choices ...have a voice

The role of banks asthe financial experthas been replacedby ‘word of mouth’peer conversations,or independentinfluencers. The rapidemergence of socialmedia in parallel withthe rise of mobilityhas seen customersincreasingly turn totheir peers forinformation andadvice, rather than tofinancial experts inbanks.

Financial consumersare more savvy today,due to the easy accessto research, data and‘expert’ views. Thishas also exposed thelack of differentiationbetween differentproviders’ bankingproducts. As morefinancial servicescustomers become‘self-directed’, theyare coming to relyless upon traditionalsources of financialadvice.

Comparison andpurchase of alternativefinancial products andservices online is nowstraightforward andwidespread. It hasopened up a widerange of choices forconsumers, someoutside the boundariesof traditional bankingservices, such as peer-to-peer lending.

The rise of social mediaplatforms has alloweda single consumer voiceto be amplified to atremendous degree,and consumers havenot been shy aboutraising it. Stories ofbad customerexperiences rapidlyspread through thesemedia and often causeirreparable damage toassociated brands.

We believe that there are five key aspects of changing customer behaviour

Customers...

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While the preference for digital can be seen across allsegments and markets (see Figure 2), it is especiallyimportant for those customers who form part of GenerationY, now at the point of choosing their main banking provider.

Consequently, banks need to target and acquire thesecustomers now to lock in the future value that will begenerated by this segment. Our research suggests that theextent to which a bank exploits the new digital feature setwill play a very important part in this customer group’sdecision-making process, much more so than traditionallyimportant criteria such as branch location, or even brand.

6 PwC The new digital tipping point

Figure 2: The global usage of internet and mobileusage in banking

100

90

80

70

60

50

40

30

20

10

0

Canad

a

China

France

Hon

gKon

g

India

Mexico

Poland

UAE

UK

Total

n % who currently use mobiles to purchase financial products

n % who currently use the internet to purchase financial products

Source: PwC

In banking, the internet is now widely used by all segmentsaround the world to purchase financial services products.Mobile banking is still in its infancy, but is following asimilar usage curve with China, India and the UAE leadingthe trend in terms of adoption. For the emerging markets,mobile is more than just a new channel, as it provides basicbanking facilities to a previously under-banked market.

The growth of mobile hassignificant implications forbanks. As mobile phones getequipped with more and betterfunctionality, it will transformthe traditional interaction modelwith the consumer. Well-appointed branches and slickwebsites will no longer be enough,as customers expect services onthe move. Location-based offers,timely and relevant content, andinteractive applications will formthe basis of the mobile customer’sengagement with their banks.

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PwC The new digital tipping point 7

Figure 3: Online and mobile are preferred channels, particularly forGeneration Y customers

n Mobile n Online

Combined proportion of respondents who are ‘currently using’ or ‘considering using’ online or mobilebanking services

Source: PwC Digital Tipping Point Survey 2011

Gen Y

Gen X

Babyboomers

Matures

After work

0 50 100

87.8

91

92.3

90.6

85.4

66.8

59.5

45.8

39.9

26.3

Generation Y, or ‘digital natives’as they are sometimes referred to,naturally expect a rich digitalexperience that is both mobileand social, and seamlesslyintegrates their banking needswith their digital lives. This grouprepresents a highly importantcustomer segment for banks, asthey are starting to reach the peakage of financial consumption andwill be an important source ofvalue for banks.

As Generation Y ‘grows up’with digital, it will be moreimportant for banks to matchtheir digital expectations.

The propensity of Generation Y to use mobile channels was higher than anyother consumer segment. Sixty-seven percent of respondents in this segmentsaid that they were either currently using or considering using, the mobilechannel. This number progressively decreases for older customers.

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8 PwC The new digital tipping point

The new digitalfeature set has led to:

• Improvements in user-experiencedesign through interactive,game-like interfaces that arestarting to merge the boundariesbetween the real and the virtual,and bringing data to life throughrich visualisations.

• Advances in mobile devices andnetworks, providing new servicessuch as enhanced digital securityand the ability to access theinternet from anywhere (partiallylimited by high internationalroaming charges).

• The rise of social media andcollaboration tools, empoweringcustomers and employees, andmoving control of the ‘brandmessage’ from businesses toconsumers.

• Innovation in digital analyticsand predictive models, drivingdeeper insight into customers’behaviour and enabling highlytargeted and relevant treatmentstrategies to be executed throughdigital media.

• New channel integrationtechnologies, enabling a moreseamless end-to-end experiencefor customers with their bank.

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The implication for banks isthat as business models aretransformed by the shift todigital channels, it opens up newopportunities for engaging andinteracting with customers tobuild relationships and growrevenues. For banks that manageto engender a similar shift in theirown distribution models, similaropportunities await.

PwC The new digital tipping point 9

The new digital ‘feature set’ will increasingly be exploited to provide a much richerset of banking offerings for the customer. The impact of these digital innovationson banks goes beyond their technology, security and infrastructure capabilities:it is opening up new business models and propositions, redefining the customerexperience, and enabling new potential from employees and business networks.

easyJet, a British low-cost airline,became the first in the UK to launchan e-commerce website in 1998,marketing itself as ‘the web’sfavourite airline’.

As easyJet redefined the market,the rest of the industry includingtraditional leaders like BA had tofollow suit or risk being left behind.By 2005, BA had stopped payingcommission to travel agents,previously its main channel tomarket, as ba.com took over thatmantle. Today, almost two-thirds ofBA’s sales are made through ba.com.

As consumers gravitated towardsba.com, it provided the airline withboth the means and the opportunityto develop new propositions forcustomers in a virtuous circle ofinnovation. The launch of new digitalservices, e-ticketing, online check-inand mobile boarding cards were allbuilt on the success of the channel shiftto ba.com. This channel shift has notonly sparked the redesign of theend-to-end traveller experience, buthas inspired BA to design new digitalservices for which some customers willpay, such as priority seat booking morethan 24 hours in advance of departure(BA charge from £25 for economypassengers to choose seats if it’s morethan 24 hours before the flight; forexit row seats, this charge is £50).3

3 www.ba.com

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10 PwC The new digital tipping point

Figure 4: Appetite for innovative digital services

UK

UAE

Poland

Mexico

India

Hong Kong

France

China

Canada

I can be notified byTwitter/Facebookfor a transactionoccurring

1 My bank will storeloyalty cards andconvert points tocash

2 My bank can offerspending analysistools

3 My bank canoffer me relevantthird-party offers

4 My bank wouldstore key documentsin a virtual vault

5

0 50 100 0 50 100 0 50 100 0 50 100 0 50 100

‘Which of the following would you be willing to pay for, please rank your top 3?’

Level of interest [Scored ranking results (rank 1=100, 2=50, 3=25); average 0-100]

Source: PwC Digital Tipping Point Survey 2011

66.3

67.1

69.0

73.7

85.1

70.5

75.7

75.9

64.6

67.7

61.8

62.8

65.3

67.2

64.1

74.6

62.6

56.1

61.2

66.7

61.3

58.7

58.3

55.4

56.1

58.5

54.0

49.0

53.4

46.4

43.6

52.6

48.7

44.2

56.9

57.0

56.1

47.4

57.2

45.2

50.7

63.9

46.5

54.9

As part of our survey, we tested thewillingness of customers to pay forsome innovative digital capabilitiessuch as a digital wallet for loyalty cards,notifications through social media,spending analysis tools, third-partyoffers and storing documents in avirtual vault (see Figure 4).

In all markets, social medianotifications (except China), anelectronic wallet for loyalty cardsand financial tools were rated amongthe top three from this list.

Our research indicated that acrossdifferent regions a base price can becharged for these digital capabilities,in the range of GBP2–10/month foreach capability. At a time when banksare finding it difficult to sustainrevenue and margin growth, the factthat customers appear prepared topay for the perceived value of usingdigital services that offer new valueto customers, is significant.

Not only does digital deepen levels of customer engagement,it also opens up avenues for the monetisation of new services.In our research, PwC tested the level of interest in a number oftheoretical digital capabilities.

Customers value new digital offerings

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PwC The new digital tipping point 11

Figure 5: Customer willing to pay

Point of marginal cheapness: £3 Point of marginal expensiveness: £5.40

Too Inexpensive Inexpensive Expensive Too expensive

Source: PwC Digital Tipping Point Survey 2011PwC Van Westerndorp pricing analysis

0 2 4 6 8 10

Optimal price point:£4.20

Tolerance

UK willingness to paySample proposition – My bank will store loyalty cards and convert points to cash

Research (see Figure 6) has shown thatacross markets in the world, customersdemonstrate a willingness to pay apremium for products or services fromcompanies who have offered them goodcustomer service in the past.

This translates to a higher willingnessto pay for perceived excellence ofbetween 5% and 10% more forproducts and services, highlighting thevalue for customers and companieswhen they get this right.

Considering the likely uptake of digital,especially among younger, affluentcustomers, there is a real opportunityto enhance ROI by investing in digitalcapabilities that drive additional valueand better service for customers.

Figure 6: Consumers will pay more for good service

US

Canada

Mexico

France

Germany

Italy

UK

Spain

Netherlands

Australia

India

Japan

n Percentage of consumers who say that they have spent more on a product orservice because of a history of good customer service with that company

n Average percentage more, a customer is willing to spend for perceivedexcellent service

Source: American Express Global Customer Service Barometer 2010

0 20 40 60 80

The percentage of respondents whosuggested that they would bewilling to pay for loyalty servicesprovided by a bank in the UK was65%. They suggested they would bewilling to pay an optimal price of£4.20 per month for this service.This would translate into an annualfee income of approximately £50per customer.

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Customers across all groups continue to put their trust in banks (see Figure 7)to manage their financial affairs, despite their continuing relative unpopularity.When asked about who they would trust with their current accounts, customersstill prefer banks to any other financial services provider. We do believe, however,that despite this, innovative challengers will continue to act as catalysts of changein banking. Banks should look for strategic acquisitions, or partnerships with thesefirms to secure their long-term positions in the battle against other banks forcustomer relationship primacy.

There are several new entrants competing for inclusion in thebanking value chain and we believe that a number of these willbe successful in securing their position as part of the bankingecosystem. Our research suggests, however, that these areunlikely to displace banks as the primary provider of financialservices, especially in markets where banking is widely accessible.

New digital entrants are disruptingthe banking ecosystem

12 PwC The new digital tipping point

Figure 7: UK ‘trust’ in current account providers

Building societies andcooperatives

Existing banks

Payment networks

Retailers

Technology companies

Newer providers

Mobile companies

Percentage of respondents who chose trust absolutely, or trust somewhat when asked about the extentto which they trusted these providers with their current account

0% 10% 20% 30% 40% 50% 60% 70%

Source: PwC survey

61%

55%

44%

38%

28%

22%

17%

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PwC The new digital tipping point 13

Figure 8: The emerging challenge to the banking ecosystem

Handset manufacturers

Banking incumbents Access holders andnetworks

Digital innovators

Attackers

Large retail banks

Remittance

Card issuers

Card networks

Defenders

Mobile operators

Technology firms

Personal financeplatforms

Source: Company websites, press releases and annual reports, PwC analysis

‘Defenders’ are marketincumbents that havetraditionally controlled their ownsegments in the banking valuechain. While almost all of themaspire to move into the digitalinnovator space, few are equippedto do so without external help(through acquisition orpartnerships).

‘Attackers’ are new entrants whoare trying to wrest share awayfrom the incumbents byintermediating themselves intothe value chain. These includeestablished players in technologyand mobile as well as smaller andmore nimble start-ups. We believethat while these players may beable to secure positions on thevalue chain, they will be unlikelyto displace banks as the primaryprovider of financial services

Existing role

Aspirational role

Incumbents in emerging markets thathave a large share of unbanked, orunder-banked consumers are likelyto experience a greater threat fromnew players. Here too, a strategicpartnership between a bank and aninnovator has the best chance ofcreating the winning combination toacquire and retain new customers,assuming banks act. However, it mustbe acknowledged that a game-changinginnovation by a pure play provider (e.g.in growing or emerging areas such asmobile payments or digital wallets)may also prove successful, especially ifbanks fail to act.

We have analysed the banking ecosystemand identified that there are both‘defenders’ and ‘attackers’ in the market.

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We believe the most importantelements in getting started are:

Develop a vision and strategy:Acknowledge that the new digitalfeature set is changing the wayconsumers interact with their banks.Understanding the different needs ofdifferent customer groups is essential,as a one-size approach will proveinsufficient to meet the range of needsof customers. Developing a vision anda digital strategy – with the customerat its heart – is the first step towardssucceeding on this journey.

Be prepared to partner: Banking willnecessarily become increasinglyintertwined with customers’ digitallives. New business models and meansof interaction will be required in orderto be successful in this changingbusiness context. In most cases, it willprove more effective to worksuccessfully with innovators fromtechnology, telecommunications andother non-traditional banking providers,than to go at it alone. Identifyingpartners to acquire or help deliver thevision becomes of critical importance.

Achieve first-mover advantage, orbecome a high-quality fast follower:Given the benefits that digital canbring – both for existing customers aswell as Generation Y – banks need toact now to avoid being displaced. Whilemany banks have traditionally copiedtheir competitors, this strategy maynot be suitable for this scenario as firstmovers will have tied up the mostinnovative partners and banks will findit expensive to replicate thesecapabilities in house.

Banks face the dilemma of having tochoose one of two available pathsopen to them: whether to stay withtraditional banking models that haveserved banks well until now, or embracechange and serve the customer ina way that the customer wants.

We believe that the perfect stormbanks are facing today will producesome clear winners. The victors willbe those that recognise the changingecosystem and set out a clear digitalvision for securing customerrelationship primacy. Others will seethe challenging environment of todayas a distraction at best and continuepersistently with old ways andmethods, eroding value in the processby disengaging the customers.

With the battle lines being redrawn amongst banks, thewinning bank should focus on taking steps to develop deeperrelationships with their customers. Focusing on gainingtrust, building engagement and creating value for theconsumer should be the guiding principles for doing this.

The battle for customer relationship primacyamong banks has begun

14 PwC The new digital tipping point

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PwC The new digital tipping point 15

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Contacts

16 PwC The new digital tipping point

Scott BauerPartner (PwC UK)+44 (0) 20 780 [email protected]

Matt HobbsPartner (PwC UK)+44 (0) 20 721 [email protected]

Sean MahdiDirector (PwC UK)+44 (0) 20 721 [email protected]

Jan-Willem WeggemansDirector (PwC UK)+44 (0) 20 721 [email protected]

Stephen WhitehousePartner (PwC UK)+44 (0) 20 780 [email protected]

Acknowledgments Jack Cooper Aishwarya JayakumarWoosung Kim Gorham Palmer Anton Ruddenklau

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This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon theinformation contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy orcompleteness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents donot accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the informationcontained in this publication or for any decision based on it.

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Our team brings the appropriate talent to bear toaddress your particular business problem, augmentedby subject matter experts and alliance partners whoare leaders in their specialised areas of expertise. The ability to draw upon talent when and whereneeded ensures that our shared solution covers theoptimum breadth of topic areas, from customerexperience to technology to business and beyond.

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© 2011 PricewaterhouseCoopers LLP. All rights reserved. In this document, "PwC" refers to PricewaterhouseCoopers LLP (a limited liability partnership in the UnitedKingdom), which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.