sluggish growth, banks need to get even smarter about customer
service and the products they offer, according to a major new study
from IBM. Some 90 percent of industry practitioners interviewed for
the research were adamant that banking profits will be harder to
A ‘state of the industry’ banking report
from US technology giant IBM has suggested that the “new world
order” for the financial services industry now developing will see
banks disposing of non-core businesses in an effort to reduce
operating costs by at least 20 percent.
The study, Towards Transparency and
Sustainability, interviewed 2,754 industry figures including
1,700 bank executives and government officials.
The report says that much of the profits
generated over the past decade came from “pockets of opacity”,
generated through creating, buying and selling complex products via
lightly regulated entities. But, concludes IBM, this method does
not promote sustainable value and banks should look elsewhere in
order to thrive in future.
That is a sentiment echoed by the executives
interviewed for the survey: some 90 percent agreed that the returns
of the past are over. Future paths are less clear-cut, however.
“Where is the value? This is what I want to
know. This industry is very good at destroying value, but not very
good at creating value,” the chief administrative officer of a
large US bank told the survey authors.
A rigorous regulatory
One prerequisite for establishing
this sustainable value, according to the study, is to oversee the
creation of a rigorous regulatory framework that will nonetheless
be flexible enough to foster innovation.
A key way of way of ensuring this architecture
is established is to provide incentives that balance “returns to
society” with “returns to shareholders”, the report says.
Yet interest in corporate social
responsibility (CSR) among customers appears minimal at best – just
2 percent of bank clients, also interviewed for the survey, said
they would be willing to pay a 15 percent premium for CSR-related
or ‘green’ services (see bar chart), and only 25 percent
would be willing to pay a 5 percent premium.
That ties in to one of IBM’s core suggestions:
banks should gain a better understanding of what their clients
really want. The advice is not new, of course. Financial
institutions have long placed a strong emphasis on customer
service. But the research indicates there remain large gaps between
banks’ belief in customers’ willingness to pay more for certain
products and services and those customers’ own inclinations to do
A related problem is an inability by banks to
honour their own brand promises, touting the institution’s
superiority, forward-looking nature and customer-centric
programmes. Just 23 percent of industry executives believe their
firms are effective at understanding the needs of clients; only 26
percent believe their firms manage client relationships
effectively; and only 18 percent believe their firms are proficient
at managing the risks associated with new products or markets.
The customer’s point of view, perhaps
unsurprisingly given the current climate, is that banks still offer
products that serve their own interests rather than those of the
client. More remarkably, over 40 percent of industry executives
actually concur with this view.
The extent to which the current crisis has
shaken up the status quo is difficult to underestimate – some 80
percent of executives interviewed said that the aspect of their
business that worried them most was their business model
The answer is to
One answer is to specialise rather than
attempt to cover all bases (which is what a bank like Citigroup has
tried to). IBM’s own figures show that revenues at specialist
financial institutions grow by 30 percent more than those at
universal banks, with operating margins of 25 percent at specialist
firms comparing to the 16 percent commanded by universal banks.
Ultimately, however, the next wave of change
is likely to come from regulators rather than banks themselves –
hardly surprising given the amount of money governments have pumped
into the global financial system over the past 12 months.
Over 30 percent of those surveyed expect
regulations requiring more bank transparency to be imposed within
the next five years, while over 20 percent similarly expect new
regulations on capital requirements to be introduced over the same