our financial services work - frontier economics · our financial services practice. 2 financial...

OUR FINANCIALSERVICES WORK

FRONTIER ECONOMICS 1

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FRONTIERECONOMICS

We apply economics to markets, organisationsand policies.

We help our clients to analyse andunderstand their markets and to formulate strategies based on soundeconomics. The methods and models weuse are often complex, but our adviceis always succinct, clear and honest.

We use our analysis to provide insightinto complex situations, giving clientsjargon-free opinions and results that canwithstand even the closest scrutiny.

We advise across sectors and countriesand are one of the largest economicconsultancies in Europe (with officesin Berlin, Brussels, Dublin, Köln, London, Madrid and Paris).

We’re enthusiastic about what we do.Whatever the task in hand - reviewingstrategy, dispute support or getting bestvalue for taxpayers – we tackle it withenergy, expertise and determination.

Frontier is an economics consultancy that understandsthe intricacies and interrelationship between markets,organisations and government policies. We support ourclients on some of the most interesting, topical andhigh-profile issues across these areas.

Our financial services practice.

2 FINANCIAL SERVICES

Challenges: old and newFinancial services are constantly evolving. Our advice helps our clients to make better decisions in this changing world.

Financial services companies today are facing many challenges: regulatory change, political scrutiny, financial market crises, and disruptive technologies. As well as constantly changing consumer expectations.

But these pressures are well known to economists and we can provide some of the answers.

Our approachWhat we do is defined by economics.This helps us home in fast on market dynamics – the behaviour of customers and competitors. It helps us design robust strategies and frame powerful regulatory arguments.

Our practice integrates world-class capabilities.

Consumer insight: Our leading retail and consumer capability includes: customer centric banking and insurance, behavioural economics, research and trial design, segmentation and loyalty.

Strategy and advantage: Truly understanding the sources of advantage, our practice covers corporate, business unit, customer and regulatory strategies.

Competition and regulation: World class competition capabilities including regulatory brand, full inquiry support for EC and national authorities, and expert witnesses.

Economic and financial modelling and analysis: Rigorous and deep specialism in data mining including big data sets, financial modelling, branch network analysis and econometrics.

Catherine Johnson, Group General Counsel, Legal and Regulatory Strategy, London Stock Exchange

The great – and in my experience unique – thing about Frontier is their ability to add real value through a pragmatic,

flexible and real-world approach that doesn’t rely on convoluted and jargonistic explanations of economic

theory to impress!


The Independent Commission on Banking; the Single Euro Payments Area directives; the Dodd–Frank Wall Street reforms; Basle III; Solvency II; multiple competition investigations; changing prudential and consumer protectionAll of these and many others affect the financial services sector, both in individual markets and the overall structure.There are risks and opportunities presented by each of these (often long-running) regulatory developments. Our extensive experience advising financial services companies and regulators suggests that companies that have a clear regulatory strategy, consistent with their commercial activities, and backed with sound economic evidence are better able to navigate the changes, to manage the risks, and ultimately gain competitive advantage.

Regulatory pressures will continue.

Consumers are smart. They usually know a good deal when they see one, and recognise poor service. Sometimes they may not appear ‘rational’, but a combination of behavioural science and economics can help us get closer to the real drivers of their behaviour. What customers expect from their bank will be influenced by new offers, the press, social networks, and friends as much, if not more, than by what their bank tells them. Convenience, transparency and the ability to switch will mean banks and insurers need to understand their target customers better than ever. Traditional product-centric customer research or ‘treating customers fairly’ is not enough. Our extensive work with global clients in retail financial services and in other consumer facing sectors, combined with our economics and behavioural science toolkit, helps us to keep in close touch with the most fundamental driver of markets: the customer.

Customer expectations will change.

Whether it is electronic trading, telephone banking, price comparison websites, the rise of social media or mobile banking, technological change will continue to disrupt the status quo and offer opportunities and risks. Opportunities exist to reach new customers or to keep existing ones, to trial new forms of marketing or services, to reduce the cost to serve, or to deliver a game changing multi-channel offer. But, equally, change can put at risk the capital invested in existing fixed assets and teams of people. And new entrants with disruptive business models can make investment returns even more uncertain. Economics can’t predict the future of these technologies, but it can help companies to navigate the related commercial and strategic challenges, to inform their decisions, and to design better tests and trials to mitigate these risks.

Technology will change the way financial services are delivered.

For as long as there have been markets, there have been crises: from the South sea bubble, to the dot.com boom and irrational exuberance, the Asian contagion, and the Eurozone crisis. These all lead to pressures on financial systems, on returns, and on politicians and regulators to act. Navigating in a storm requires the ability to think clearly and act quickly, while holding true to your goals and principles. We help clients do just that, providing independent and clear advice, firmly grounded in economics. Advice that helps our clients to make better decisions.

And, crises will continue to hit the financial markets...

Banking.


Frontier works with some of the world’s premier banks. We advise clients in retail, SME and wholesale banking. This includes all the major product areas and channels. We also work for clients on risk management and strategy, and on other corporate centre functions such as competition and legal.

We help our banking clients with issues ranging from better understanding customer behaviour (for instance through

the practical application of behavioural economics) to designing and testing new commercial and service propositions.

We help banks assess the economics of branch networks and specific formats, drawing upon our experience with other retailers. We conduct full strategic reviews, including choices for acquisitions and disposals.

Lord Burns, Chairman, Santander UK

We enjoy the analytical rigour you bring to our thinking and look forward to more innovative insights.

I have worked with Frontier over a number of years, and they are my number one choice for any economics work. Whether this be issues of competition, contract tenders or industry issues. I couldn’t recommend them more highly.Peter Jackson, Chief Executive, Travelex

Examples of our work:


Game-changing propositions in retail banking. Frontier helped develop and then explore the economics of new and radically different propositions in the major retail banking markets. Not the usual stuff of incremental change or product development, but completely new approaches. Frontier helped stretch thinking, not just in terms of how products are designed and delivered, but also in how markets work. The impact of such propositions are difficult to predict. But by combining consumer insight with economic modelling (estimating likely competitor and regulator responses by using game theory) we put the client in a position to conduct controlled customer trials. The bank used these insights to develop both its product strategy and its dialogue with regulators.

High level strategy for retail banking joint venture. Frontier undertook a high level review of the JV between a retail bank and a leading supermarket. Insights from the review fed into in the JV’s strategy and helped the team make specific decisions on the future of their product propositions.

Customer segmentation and PCA strategy for a high street bank. Frontier helped a major high street bank to analyse the profitability of different customer segments within its current account business. We also helped assess the effects of making changes to current account products, by identifying profit opportunities and assessing the potential costs of changes to fee structures that resulted from new regulations. The client made changes to its current account ranges using Frontier’s advice.

Advice for a ‘challenger’.Frontier provided strategic advice to a ‘challenger’ bank in the UK. We started by developing an economic framework for the client’s business around which we could, together, conduct a fundamental strategic review. The bank retained Frontier to continue to provide a range of strategic advice, including: assessing the implications for its internal structure and KPIs; helping to set up a customer insights team; and providing detailed financial analysis on a range of individual products to help refine product design.

Economic modelling for improved decision making. Working for a major retail bank, Frontier built a series of detailed financial decision-making tools for each of the bank’s main products (mortgages, savings, unsecured personal loans and bank accounts). These tools were used to review the profitability of products and customer segments, and to develop new product propositions and strategies.

Digital strategy in a multi-channel world. Working with a major bank whose customers are able to choose between a full range of channels, we deployed a range of behavioural economics techniques to help understand and influence the way customers were using the different channels. These insights helped the bank to look again at propositions and the way it tested and learned from changes to its offer.

Insurance and re-insurance.


Helping both insurers and re-insurersAt Frontier we support clients across the full range of insurance and re-insurance markets, including general, life and pensions. We work across all parts of the value chain from actuarial analysis and product development to sales, underwriting and claims management. Our advice is not just theoretical: we help our clients to take a more structured approach to using financial and customer information, better understand the root cause of changes in business performance and, in turn, improve their corporate decision making.

Economics toolkitWe help our clients with issues ranging from regulation and litigation support to efficiency analysis and proposition design. We use root-cause analysis, financial modelling, simulation techniques, behavioural economics, customer lifetime value modelling, econometrics and market analyses. We use these tools to give clear, evidence based advice.Our techniques might be complex, but our advice is always clear.

Andy Watson, MD, UK Retail, Ageas

I have very much valued their advice, support, intellect and direct approach working with us.

26%The share of the UK’s total net worth managed by the insurance industry(ONS 2012)



Spend or save? Advertising review for a general insurer. Our client, a general insurer with multiple brands, wanted to understand better the economics of advertising online versus investing in price for its motor and household insurance products. We helped them review their allocation of advertising spending across these products and channels and assess the impacts on customer perceptions and actions.

Policy analysis of specialist insurance markets. Frontier undertook an analysis for the UK Financial Services Authority of the professional indemnity insurance (PII) market for personal investment firms (PIFs). The aim was to identify and understand any problems with how the market functioned, then to recommend policy options for mitigating these. The analysis required detailed investigations of both the PII and PIF markets, a cost benefit analysis of a series of policy options and practical recommendations. The FSA published the analysis.

Loss claim defence. Frontier advised an insurance company that was contesting a claim for loss of profits made by a manufacturer of industrial and farming equipment. The Frontier team undertook statistical analysis to estimate the extent to which the failed equipment was attributable to manufacturing deficiencies or raw materials that were not fit for purpose. The analysis was used as a part of a successful defence by our client.

Retail insurance product assessment. Our client, a bank-assurance and retail joint venture, wanted to review the economics of new insurance products. Frontier undertook a financial review of the proposed changes to our client’s insurance products and related credit card proposition before it was launched.

60%of all private car policies sold

via price comparison websites(Post Jan 2012)

Understanding the environment.Understanding the changing market environments in which our banking and insurance clients operate is vital for delivering effective advice and for building effective strategies. Frontier not only advises major banks and insurers in financial services. We also advise some of the world’s leading institutions who provide the markets and platforms for payments and other infrastructure necessary for the smooth working of capital markets. It is here that we apply many elements of our economics toolkit.

Potentially disruptive technologies raise important questions of strategy for many clients. Economics can help to understand better both consumers and the economic incentives that influence the actions of key players, which together drive strategic advantage.

We advise on business-wide issues in financial services, including sector financial performance, benchmarking, competition, and commercial strategy.

Sir Andrew Foster, Deputy Chairman, Royal Bank of Canada (Europe)

I always found Frontier staff bright, well informed and pragmatic

- this worked well for us.


Markets and payments infrastructure.



Economics of equity markets from the stock exchange perspective. Frontier helped the London Stock Exchange assess the outlook for UK equities as an asset class and what this implied for future performance. The work was used to inform both investor relations and strategic decision-making.

Economics of payment card services. Frontier has worked for a major card payment platform in Europe on many inquiries into that sector, givingregulatory advice and competition inquiry support.

Cost benefit analysis of central cheque clearing system. Frontier advised the Payments Council on how to conduct appropriate cost benefit analysis to support the decision on whether to close the central cheque clearing system in the UK.

Impact of OTC (over-the-counter) derivatives on the markets for underlying assets. Frontier carried out a study for the EC’s Directorate-General for Internal Markets and Services DG-MARKT.

Business case assessment for Chinese subsidiary of retail FX business based in Hong Kong and trading mainly through airport locations.

Economic analysis of ATM Interchange Network. Frontier advised LINK on a number of competition and regulatory issues, including the anticipated Transaction Network Services (UK) joint venture and LINK multilateral interchange fees Competition Act exemption.

Study of the contribution of private equity to economic performance. Frontier conducted a study of the economic contribution that private equity has made to the economy.

80%of people with a contactless card have never made a contactless payment (YouGov poll Jan 2012)

The number of cheques still cleared every banking day in the UK, despite a 75% fall since 1990.

(Payments Council Nov 2012)

2.8MILLION

Regulatory and competition policy advice.Advising on the nature of competition in a market requires the ability to rapidly identify the salient market features, the drivers of the competitive process and the sources of competitive advantage. Frontier’s competition practice is one of the largest and most respected in Europe. We have advised clients and competition authorities in many of the defining cases in financial services of the last two decades. This includes assisting banks and insurers through every stage of UK and European competition inquiries and merger reviews.

The financial services practice work closely with Frontier’s competition practice on issues that concern our clients. This covers all aspects of competition policy, at EC and national authority level.

We advise on market definition and market power, merger analysis, abuse of market power, horizontal and vertical agreements, and state aid.

We work alongside clients and legal counsel,providing not only technical support but also advice on case strategy. Our clients place a high value on our ability to identify and address the central issues from the outset, thus maximising the chances of success.

In financial services, we have developed expertise in cases covering EC state aid, major mergers and acquisitions, the Independent Commission on Banking, private motor insurance, European payment card interchange fees, payment protection insurance (PPI), personal current accounts, savings products (cash ISAs), store cards and many more.

Beyond helping clients in live regulatory inquiries, Frontier also advises clients on regulatory risk assessments, broader regulatory strategy and engagement. Frontier has also helped its clients to develop their own regulatory brands – the consistent and credible narrative that explains their commercial business and is the foundation for influencing regulators and government.




Cost modelling for an Office of Fair Trading (OFT) investigation. Frontier advised a leading High Street retail bank in investigations by the OFT under both the Unfair Terms in Consumer Contracts Regulations and competition policy frameworks. This required assessing the profitability of the product in question, including a detailed estimate of the direct costs associated with the product and the fixed costs involved in providing it.

Developing the ‘regulatory brand’. Strong customer brands are crucial in most areas of the financial services sector. Companies often invest heavily in building and maintaining strong customer brands, but do not invest as much in defending the brand from attacks by media, regulatory authorities and policy makers. We helped our client develop their ‘regulatory brand’: that is their brand and positioning with respect to regulators and leaders of opinion. This can be a source of competitive advantage in financial services as with other highly regulated industries in which Frontier works. Frontier helped the bank to understand how regulators viewed it and to develop and articulate brand positioning as part of their regulatory strategy. Importantly, this had to be compatible with the corporate brand and how the business acts. A strong regulatory brand helped strengthen the power of the bank’s arguments in the ongoing debate on the future shape of banking regulation in the UK and Europe.

Economic support throughout the Independent Commission on Banking (ICB) inquiry. Frontier advised a leading UK bank on its strategy and delivery throughout the ICB investigation into stability and competition in banking. Frontier helped define the bank’s overall approach, build evidence in support of key narratives, and develop innovative propositions to address questions raised by the inquiry to further improve competition in the UK markets for retail and SME banking.

Economic impact of regulatory proposals. For a major universal bank, Frontier conducted a study that reviewed the likely costs and benefits of proposed special regulatory treatments for universal banks.

Niamh Grogan, Group Director of Competition, Lloyds Banking Group

A deep understanding of competition economics and a real-world understanding of commercial organisations means that Frontier’s advice is second to none.

Martin Lord, Head of Government Relations and Public Policy, HSBC

... you’ve guided HSBC through a huge number of regulatory inquiries, all with successful outcomes - and we’ve even managed to have fun along the way!

Where you can find us.

DublinFitzwilliam HallFitzwilliam PlaceDublin 2D02 T292IrelandT: +353 (1) 669 8531

Paris29 Rue Vernet75008 ParisFranceT: +33 (1) 83 79 08 30

KölnKranhaus SüdIm Zollhafen 2450678 KölnGermanyT: +49 (221) 337 13 0

MadridPaseo de la Castellana 6028046 MadridSpainT: +34 (91) 343 2350

For more information please visit: www.frontier-economics.com

BerlinSatellite Office – Römischer HofUnter den Linden 1010117 BerlinGermanyT: +49 (30) 767 598 440

London71 High HolbornLondonWC1V 6DAUnited KingdomT: +44 (20) 7031 7000

BrusselsPlace StéphanieAvenue Louise 65, Box 111050 BrusselsBelgiumT: +32 (2) 588 2580

our financial services work - frontier economics · our financial services practice. 2 financial...

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