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"Retail Banking 2020" study by Ernst & Young and the University of St. Gallen: Swiss retail banks face growing need for action
Zürich (ots) - Although Swiss retail banks generate relatively high value added compared to their European neighbors, they too will come under pressure. Banks wishing to maintain their profitability will need to make numerous adjustments to their business model. This is the conclusion of the study "Retail Banking 2020" carried out by Ernst & Young and the University of St. Gallen. As cost pressure mounts in the face of technological advances and increased regulatory requirements, further steps will be needed to boost efficiency. This will help drive a new wave of consolidation - not even the cantonal banks will escape this trend.
ZURICH, 10 DECEMBER 2012 - Retail banking as a standardized business model for the mass market is a steady source of income for Swiss banks. But this important earnings contribution is endangered by fundamental changes in the financial industry, ranging from economic challenges to technological innovation and additional regulatory demands. The study "Retail Banking 2020" by Ernst & Young in cooperation with the University of St. Gallen highlights the opportunities and threats facing banks until 2020. The study was based on a survey of CEOs and retail banking heads from 20 of the largest banks in Switzerland.
"Retail banking has - wrongly - been overshadowed by private banking in the debates on Switzerland as a financial center. But retail banks also face a range of challenges and it is up to the banks to implement the necessary measures and take a proactive role in shaping the future. The study aims to raise awareness of these issues," says Iqbal Khan, Partner and Leader Banking & Capital Markets Switzerland at Ernst & Young.
Various challenges The study reveals a clear need for action in retail banking. With margins already under pressure, stricter regulatory provisions are driving up costs for banks. "If banks dig their heels in and refuse to move with the times, they will be up against serious threats in the future. Retail banking in its current form will not be a profitable business model in 2020. The experts polled were divided about how the sector will develop and what direction it will take. What is clear is that banks need to lay the groundwork now to make sure their retail business remains profitable in the future," says Dr. Dirk Schäfer, Senior Lecturer in Financial Management at the University of St. Gallen.
Outside competition Technological progress is an important aspect. The internet and general digitalization of everyday life give competitors from other industries a helping hand in entering the market. Telecommunications companies are increasingly involved in mobile payments. In the consumer loans business, retail banking faces growing competition from electronic marketplaces. As a result, retail banks are seeing transaction fees dwindle and are at risk of losing their customer interface. "The experts are aware of these risks. Retail banks must strive to remain attractive, especially when it comes to innovative technology. Besides developing their own solutions, retail banks can also consider entering into business partnerships with new competitors and thereby play a role in introducing future-oriented technologies for financial services," says Prof. Dr. Andreas Blumer, Partner in Audit Financial Services at Ernst & Young Switzerland.
Retail banks do not want to let go of the customer interface. Banks are not just concerned about the income from payment transactions, they also want to keep control of client data. Personal contact continues to be a central aspect of banking as a service. So it is all the more important for banks to secure the trust of their clients. Retail banks will not be successful unless they can acquire new clients and retain existing ones. "It is interesting to observe that all of the banks surveyed aim to differentiate themselves on the strength of their advisory service. This will require investment in training and processes. Another suitable measure would be to install a Customer Experience Officer whose role would include responsibility for client satisfaction," explains Andreas Blumer.
The branch of the future Over the last 20 years, banks have continuously downsized their branch networks. However, this development is not to be encouraged: despite the high costs and an anticipated decline in the number of visits to branches, experts firmly believe in the value of staffed offices. Generating maximum customer benefit while keeping costs in check will involve remodeling branches or seeking out new locations. It is possible that we will see branches develop into competence centers or some other kind of showroom or venue. "The general objective is to achieve high customer frequency and upgrade the traditional branches to a marketplace for information," says Dirk Schäfer from the University of St. Gallen.
Boosting efficiency Banks can expect high costs if they are to keep up with technological change and at the same time satisfy the regulatory requirements. This cost pressure is forcing the retail banks to boost efficiency even further. In the experts' view, process industrialization is necessary. This will involve retail banks sharpening their focus on core competences. Other points along the supply chain will be outsourced or optimized by entering into cooperative arrangements. One example mentioned the creation of a Swiss-wide rating agency to assess mortgage applications centrally. "If customers request quotations for a mortgage from three different banks, the banks incur unnecessary costs, especially considering that they often use exactly the same standard procedure. Experts agree that this interbank assessment model will attract a growing number of proponents as the level of strain at banks rises," says Dirk Schäfer.
The next wave of consolidation Size is becoming a decisive factor in retail banking and can drive consolidation in the industry. The products offered are part of the commodity group, meaning that economies of scale can be realized by bundling larger volumes. For smaller banks especially it can be worth focusing on individual services; other products and services can be bought from third parties while back office functions can be outsourced. Strong structural change has already dominated the past ten years, with the number of regional banks and savings banks shrinking by around a third in this period. "Smaller banks will continue to be harder hit by consolidation in the future. However, it looks likely that cantonal banks will also undergo change. Some of them will struggle to pursue their existing business models independently. It is also conceivable that some cantons will want to sell their investments in cantonal banks to restructure their public finances. After 2020, a few institutions could emerge from among the cantonal banks as regional market leaders that will absorb the other market participants. The current shareholder structure will prevent this for the time being, however, which is why we can expect new business partnerships and cooperative arrangements first," says Ernst & Young's Andreas Blumer.
About the study This study was prepared by Ernst &Young in cooperation with the Institute of Accounting, Controlling and Auditing at the University of St. Gallen. It is based on surveys carried out among experts in the summer and fall of 2012. Those experts comprise CEOs and retail banking heads from 20 of the largest Swiss banks operating in the retail banking sector, including the two major banks as well as Raiffeisen banks, cantonal banks and regional banks. The study can be downloaded from our website, www.ey.com/ch.
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