Optimizing banking business and operating models – from strategy to implementation

The banking sector in Switzerland – and worldwide – is undergoing the most radical changes it has ever experienced. New regulations, technologies, client expectations and economic environments are shaping the very ground we walk on. And, like the Red Queen in Alice in Wonderland, banks and bankers have to keep running faster and faster just to stay in the same place. The banks that are peeking around the corner, indeed planning with insight, understand these tectonic paradigm shifts and have put “change the bank” programs on Mach-6 tempo in place.

Banks will be more focussed, possibly smaller, and definitely less risky

As banks become more focused and decentralized, they tend to become smaller but also less risky. The correlations are clear. As we observe the role of banking supervisory authorities, for example in Switzerland, we even see this mandated in the case of UBS and Credit Suisse – to protect clients and investors. Many moan, but the change is unavoidable. In the past, banks were allowed to be more opportunistic regarding markets, client segments and product and service offerings. Today, banks are required to focus their resources more specifically to fewer markets, certain client segments with specific and more limited offerings for these clients – and they are being held accountable for it. This change process is hard work requiring tough decisions, not just on where you don’t want to be, but deliberate decisions on where you want to be in the future, and then taking all the necessary steps to get there. Less is more. Fewer is better. Banking will be less complex in the future. This will result in more efficient operations, higher profits and happier clients.

You can’t get back to “growth” without going through “relevance”

The “new normal” is that banks must acclimate to a low growth environment, especially in the developed world, for the foreseeable future – necessitating massive cost-cutting, often called “industrialization”, programs. Some banks are challenged to even make their cost of equity, much less show growth. The name of the game used to be growth and relevance. Today, the focus is more heavily focussed on relevance: knowing what you want to be, for whom and with which products and services and at what price. Most banks are so focused on the regulatory-stick that the growth- and profit-carrots are getting lost in the shuffle. New operating models with real cost cutting measures and outsourcing of non-USPs are desperately needed, but must be carefully undertaken as most one-offs creep back in less than 18 months.

Improve your technology … now

Improvements in technology across the board are needed to accommodate these new business and operating models. Because IT architectures, core banking software systems, management information systems (MIS) in most banks are only patchwork solutions, they can only be limited in their trustworthiness, effectiveness and efficiency. Everyone knows that a strong IT system is a must, but it seems that few banks are willing to deeply invest in this time of low growth. But this approach, this shortsightedness will be punished – if not by the markets, then by the supervisory authorities; doing the right thing and investing in systems will be rewarded. Whereas updating IT systems is the core of change, a focus on enhanced technology is also required. Straight-through processing, automated compliance mechanisms, digitalization of the business, all the way to the front. Client demand for apps, mobile banking, and the like is still in its infancy. The best banks will invest now to delight – and not just keep – their clients.

Have a clear roadmap

Despite the overwhelming ever-increasing regulatory changes and the reactive cost-cutting focus of target operating models, a clear, deliberate business model, {read: strategy!} is the driver of growth, profits and relevance. It has been – and will continue to be – a rough road for the next couple of years. One recent study by the University of Zürich shows, for example, that only 18 percent of all Swiss banks can be categorized as “over performers” with regard to the relationship between profitability and efficiency. Is your bank in the top fifth? Delivering outstanding profits and operating exceedingly efficiently? Chances are, you are probably in the other four fifths. Therefore, it is imperative to have a strong strategic plan and navigation system providing different perspectives of your planning and progress: a satellite view – showing the strategic and financial goals for your business; a traffic view – highlighting all the regulatory-traffic issues; a terrain view – a plan for the most efficient target operating model; and, perhaps most importantly, a hybrid – a view which pulls it all together in one coherent master plan.The best banks are doing this at all layers (front, middle, back office) across the factors of clients, technology, products and governance.

Is yours? What are you doing about it?