world retail banking report 2008

8/3/2019 World Retail Banking Report 2008

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WORLD RETAILBANKING REPORT

2008


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5 PricingInde

27 OrganicGrowth inDomesticMarkets

53 Appendi:Methodology

58 AboutUs

Contents

2008 Capgemini. All rigts reserved. No part of tis document may be reproduced or copied in any formor by any means witout written permission from Capgemini.


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For the f ifth consecutive year, Capgemini, ING, and the European Financial Management & MarketingAssociation (EFMA) have cooperated to develop this latest annual examination of the global retail bankingmarket. As in previous years, it provides overviews and insights into the global retail banking industrysdynamics. This years edition adds two new countries, Singapore and Denmark, raising the number of countriesto 26 and increasing the banks studied from 180 to 194.

We continue to investigate the worldwide pricing of day-to-day banking products and services, and this yearsedition continues to highlight the evolution of bank prices for these products and services around the world.Our website, www.wrbr08.com, provides dashboards that offer more detail on each countrys national banking

industry. A sample dashboard is included later in this publication.

As in earlier editions, our 2008 report adds a spotlight section that focuses on a current retail banking issue.This years spotlight highlights the problems banks face as they search for ways to maximise their retail banksgrowth in a changing market, and how some top performers are making strategic choices that ensure theirretail operations will sustain the banks market performance in the years ahead. Based on case studies, in-depthinterviews with banking executives in each market around the world, and quantitative analysis, the spotlightsection concentrates on the operational levers and client value propositions that can help retail banks grow in thehigh-income domestic markets in which they operate today.

All of us welcome the opportunity to offer this 2008 edition of the World Retail Banking Reportto the financialservices community. We hope it will stimulate debate and provide bankers with information they can use

effectively as they negotiate the difficult strategic terrain of todays retail banking landscape.

BertrandLavayssireManagingDirectorGlobalFinancialServices

Capgemini

PatrickDesmarsSecretaryGeneral

European Financial Management

& Marketing Association

FeliPotvliegeHeadStrategy&BusinessDevelopmentofRetailBanking

ING Group

Preface


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2008 World Retail Banking Report


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5

Thisyeartheaverageannualpriceofcorebankingservicesacrossthe26studiedcountrieswas70forthelocalactiveuser,withpricelevelsrangingfrom52inAsia-Pacificto79inNorthAmerica.

Theaveragepricefellslightly(1%)fromlastyear.

Wehaveconfirmedagainthatasanationseconomymatures,theproportionofitsGDPpercapitaallocatedtobankingservicesdeclines.

From2006to2008,intheirstruggletocompete,banksusedpricetoinfluencecustomerbehaviour:

Bankscutthepriceofsalesinfluencers(e.g.currentaccounts,cards)by0.8%ayeartopromotesales.Behaviourinfluencersoftwokindslowercostproducts(e.g.onlinebankingorwithdrawalsatATMs),whosepricesbankscutby0.2%ayeartoencouragetheiruse;andhighercostproducts(e.g.chequesorwithdrawalsatdesk),whosepricesbanksraisedby0.9%ayeartodiscouragetheiruse.Unseenservices(e.g.eceptionshandling),forwhichpricesremainedunchanged.

NorthAmericaspricerosethemostaveraging5.7%resultingprimarilyfromhigherpricesforpaymentsandcashutilisation;itspricehaddeclinedduringthethreeprevious

yearsduetofiercecompetitiononaccountmanagementfees.Asia-Pacificspricefellby11.1%thisyear,essentiallybecauseofintensifiedcompetitioninAustraliaandIndia,particularlyinpaymentsandaccountmanagement.

Europeanpricesremainedstable,withonlya0.8%priceincreaseacrossboththeeurozoneandnon-eurozonecountriesstudied.

WiththeadventofSEPA,pricesofpan-Europeanpaymentshavestabilisedintheeurozone,and(ecludingIreland)evendecreasedfasterinEuropeeurozonethanintherestoftheworld.

Pricediscrepanciesbetweenbanksdroppedsignificantlyatboththecountryandregionlevels;thiswasparticularlystrikinginNorthAmerica,althoughpricingdifferencesintheeurozoneremainedthesmallest.

PRICING INDExKey

Findings

PRICINGINDEx


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METHODOLOGY

For this 2008 edition, we expanded the geographicscope of the pricing index and spotlight to 26countries, adding Denmark and Singapore, and thenumber of participating banks rose from 180 to 194(see Figure 1.1). Once again, we compared retailbanking in four regions: Europe eurozone, Europenon-eurozone, North America, and Asia-Pacific.

We collected most of the data for this 2008 editionof the World Retail Banking Reportduring the lastthree months of 2007. We continued to focus on fourcategories of banking products and services: accountmanagement, cash utilisation, exceptions handling,and payments. Figure 1.2 shows the components ofeach category.

RegionNew Countries

in 2008 WRBR

Countries in

2007 WRBR

Number

o Banks

EuropeEurozone

Austria 6

Belgium 4

France 10

Germany 7

Ireland 5

Italy 6

Netherlands 6

Portugal 6

Spain 18

EuropeNon-eurozone

Croatia 7

CzechRepublic 5

Denmark 4

Norway 6

Romania 9

Poland 11

Slovakia 6

Sweden 6

Switzerland 6

UK 5

NorthAmericaCanada 6

US 9

Asia-Pacific

Australia 5

China 9

India 9

Japan 20

Singapore 3

TOTAL countries/banks 26/194

Figure 1.1Banks Surveyed


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To compare prices from the consumers point ofview, a local expert defined a basket of products andservices reflecting the typical consumers bankingbehaviour in each country. We call these localprofiles, which we divided into three frequency-of-use categories: less active, active, and very active users(also shown in Figure 1.2). The price index built onthese local profiles measures what consumers in aparticular country, at these frequency-of-use levels,pay annually for their day-to-day banking services.

To compare prices around the world, we alsodeveloped a global profile. It is not governed by localproduct usage, which obviously varies by country,but by a standard basket of products for all countries.While it is not as precise as the local profile, it is theonly practical way we can effectively compare globalbanking prices.

When comparing prices over more than one year, weconsistently use prices based on profiles as updatedfor this latest edition.

Core Day-to-Day

Banking NeedsNineteen Products & Services

Account

Management

CurrentaccountOn-linebanking

Callcentre

Cash Utilisation

DepositatdeskDepositatATMWithdrawalatdeskWithdrawalatbanksATMWithdrawalatotherbanks

ATMnetworks

Exceptions

Handling

Debitcardstoppayment

ChequestoppaymentDocumentsearchBankersdraft

Payments

ChequeDebitcardCreditcardInternalwiretransferEternalwiretransferStandingorder(fiedamounttransfer)Directdebit

Figure 1.2 Scope of Products and Services in the Global and Local Pricing Indexes

PRICINGINDEx

Two Proiles

Local

Proile

Productsfrequenciesofuseareestimatedforeachcountrytoreflectlocalconsumptionpatterns

Measurescostofbasicbankingneedsfordomesticcustomers

Global

Proile

Identicalfrequencyofuseforallcountries

Allowsthecomparisonofpricelevelsbasedonasingleprofile

Source: Capgemini analysis, 2008.

Three Usage Patterns

Less

ActiveUsers

Represent20%of

userswiththelowestfrequenciesofuse

Active

Users

Accountfor60%ofthepopulation

Very

Active

Users

Represent20%ofuserswiththehighestfrequenciesofuse


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8 2008 World Retail Banking Report

NEW COUNTRIES IN OUR 2008 REPORT

DenmarkDanish banks have a long-standing tradition ofpartnering, which facil itated a large consolidationmove that started in the 1990s and continues. Fourbanks now dominate Danish retail banking, and twoof them, Danske Bank and Nordea Bank Denmark,control over 50% of the market.

Deploying new technologies, notably for credittransfers, is an established industry strength in

Denmark. Danish banks recently successfullydeveloped packages with free standard productsand services for Internet users, and as a result,Danish Internet prices are among the lowest inEurope eurozone. Its fee structure is similar toother Nordic countriesheavily dependent onpayments (79%) and, less so, on cash utilisation(19%), with almost free account management.

Pricing between Danish banks varies significantly,and cannot be explained by geographicfragmentation. This signals a market in which

customers view relationship quality as important,and where packaged offerings make it diff icult forcustomers to compare prices.

SingaporeThe Singaporean retail banking market is veryconcentrated, with three banksDBS Group, UnitedOverseas Bank, and Overseas Chinese BankingGroupcontrolling 67% of the market. Transactionbanking is stil l the prevailing business model, withfast-growing demand, but the large banks are tryingto develop cross-selling into the burgeoning mass

aff luent market. Singaporean banks for many yearshave been leaders in using new technologies in retailbanking, such as contactless payments and mobilebanking.

Singapores prices are comparable to Australias,but its fee structure is closer to those of China andJapan, with a very large share of fees derived frompayments (83%) and very limited fees from accountmanagement (5%). The minor differences betweenbank prices in Singapore reflect a very competitive,transaction-oriented market.

GENERAL PRICING ANALYSES

Local ProfileLocal active users pay an average of 70 a year fortheir day-to-day banking needs. As Figure 1.3illustrates, price levels varied from one region toanother, ranging from a low of 52 in Asia-Pacific to79 in North America. The average price less activeusers of bank products and services paid was 35,compared to the very active users much higher 122(about 3.5 times more).

Again, these are averages, and the situation varies byregion. In Europe eurozone, for instance, the pricesmost banks charge the three groups do not varywidelyvery active users pay only twice as muchas less active users. In contrast, Asia-Pacific bankscharge very active users as much as five times theprice they charge less active users.

Global ProfileTo develop a price benchmark of banks regardless oftheir clients behaviours, we computed prices based ona single global active user profile, as detailed in the

Methodology section above. Measured on this globalprofile price index, Europe non-eurozone (118% ofthe world average) and North America (141%) remainthe most expensive regions (see Figure 1.4).


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Figure 1.3 Average Local Profile Price for 2008 ()

0

50

100

150

200

250

AverageAsia-PacicNorth AmericaEurope Non-eurozoneEurope Eurozone

Very active user price

Active user price

Less active user price

101

136

197

104

122

45

31

49

22

35

75 7479

52

70


Figure 1. Global Profile Prices for 2008 Active Users ()

0

50

100

150

AverageAsia-PacicNorth AmericaEurope

Non-eurozone

Europe

Eurozone

83

117

140

57

99


PRICINGINDEx


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Price AnalysisThe average price for active users decreased 1% thisyear. Prices followed a similar evolution this year forlocal less active users (-0.1%) and for local very activeusers (-0.9%).

To assess why banks have changed their pricesfor certain products, we have classified bankingproducts into three categories according to theirimpact on customers:

Sales influencers: Products whose prices primarilyaffect a consumers decision to buy banking servicesor change banks. Current accounts and credit/debitcards fall into this category, because theirs are theonly prices consumers commit to pay up frontwhen they open an account or buy a card.

Behaviour influencers: Products whose pricesinf luence a consumers behaviour, but fall outsidethe direct buying situation. We have split themaccording to their production cost for banks:

Less-costly products for banks: On-line banking,deposits and withdrawals at ATMs, direct debits,transfers, and standing orders

More-costly products for banks: Call centres,deposits and withdrawals at desk, withdrawalsat other banks ATM networks, cheques

Unseen services: Services for which consumers haveto pay without having had any choice or decision,such as exceptions handling.

Based on this product categorisation, we analysedbanks pricing policies from 2006 to 2008 tounderstand their actions and underlying objectives(see Figure 1.5). Banks built loyalty and won newclients by reducing prices on sales influencerproducts,which they cut by 0.8% a year. Banks also reachedfor this objective in several markets by creatingpackaged offerings.

Many banks reduced their cost of operations byinf luencing clients behaviour, using the prices ofbehaviour influencerproducts to move their customerstowards less expensive channels or payment meansand away from more expensive products and services.Banks cut the average price of the less-costlybehaviour influencer products by 0.2% a year toencourage their adoption. At the same time, theyincreased the price of the more costly influencers by0.9% a year to discourage customers from using them.

They might also have enhanced their earnings byraising prices on unseen serviceproducts, yet mostbanks let these prices stand, at least part ly held incheck by consumer associations or regulators.


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Products/CategoryAverageyearlychange

from2006to2008

Sales inluencers -0.8%

Currentaccount 0%

Debitcard -1.3%

Creditcard -1.0%

Behaviour inluencers, less costly -0.2%

Callcentre -2.3%

On-linebanking -0.6%

CashdepositatATM 0.0%

WithdrawalatbanksATM -0.5%

Directdebit 0.3%

Eternaltransfer 1.1%

Internaltransfer 0.9%

Standingorder -0.3%

Behaviour inluencers, more costly 0.9%

Cashdepositatdesk -0.4%

Withdrawalatdesk 0.2%

Cheque 1.9%

WithdrawalatotherbanksATMnetworks 2.0%

Unseen services (exceptions handling) 0.0%

Bankersdraft 0.4%

Chequestop 1.2%

Debitcardstop -1.6%

Documentsearch 0.1%

All products -0.1%


Figure 1.5

Product and Service Variations,

2002008 (%)

PRICINGINDEx


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Figure 1. Percentage Cost of Banking, by GDP per Capita

0 10,000 20,000 30,000 40,000 50,000 60,000

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

PercentageofacountrysGDPpercapita

paidforcorebankingservices(%)

GDP per capita ()

Country


Cost Based on GDP/CapitaCharges for core banking services consumed anaverage of 0.55% of GDP per capita across the 26countries we studied. As illustrated in Figure 1.6,bank pricing as a proportion of per capita GDP ishigher in less-developed countries. The proportionof GDP per capita al located to banking servicesdeclines as an economy matures, at least partly

because consumers in a mature economy begin toregard these core banking serv ices as a commodity.


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REGIONAL PRICING ANALYSES

In contrast to other banking activities, such as assetmanagement or investment banking, retail bankingis essentially a local business. National retail bankingmarkets for the most part are not affected by othernational markets, although economic integration atthe regional level (European Community, NAFTA) isbeginning to have an impact. Based on what we have

learned from past editions, we know that the regionalapproach will generate the most accurate results.

Figure 1.7 Evolution of Local Profile Prices, 20072008 (%)

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

AverageAsia-PacicNorth AmericaEurope

Non-eurozone

Europe

Eurozone

0.8% 0.8%

5.7%

-11.1%

-1.0%


PRICINGINDEx

As il lustrated in Figure 1.7, overall prices remainedessentially stable across Europe (up only 0.8%), butthey soared in North America (up 5.7%) and fellprecipitously in Asia-Pacific (down 11.1%).

Each region or even country is shaped by its history.We have used the data collected for previous editionsto put this years changes in perspective, as the

regional analyses below indicate.


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North America registered the biggest price increase.North American prices went up by 5.7% (4) forlocal active users over last year. This price increasewas general across the whole continent, and reflectsthe growing market power large banks have gainedby growing, mostly through consolidation. NorthAmerican banks are currently trying to compensatefor their past low pricing strategies now that theirearnings ratios are threatened by the sub-prime crisis.

North AmericaThe structure of North American pricing evolvedslowly over the years, characterised by free accountmanagement since 2005, which was balanced by theimportance of two other fee categories: payments(as much as 79% in the US, and stil l growing) andcash utilisation (48% in Canada, higher than in anyother country) (see Figure 1.8).

Figure 1.8 Sources of Fees for Core Banking Services in North America (%)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

CanadaUSA2008200720062005

Edition of World Retail Banking Report Country (2008)

57% 60% 63% 64%

6%7%

7% 7%

31%

33%29% 29%

6%0% 0% 0%

79%

49%

10%

3%

10%

48%

1% 0%

Payments

Exceptions Handling

Cash Utilisation

Account Management



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policy to influence customer behaviour towardsmore cost-efficient means of payment. In the cashutilisation category, withdrawals at other banksATM networks accounted for most of the increase,because raising this price was unlikely to impair abank s competitive edge, and consumers might evenblame a bank s competitors.

Figure 1. Product and Service Price Variations vs. Last Year for Local Active Users in North America ()

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Standing

order (xed

amount

transfer)

Internal

wire transfer

External

wire transfer

Direct

debit

Cheque

(price per

cheque)

Withdrawals

at other

banks' ATM

networks

Withdrawals

at desk

Withdrawals

at bank's

ATM

-3

-1

1

3

PaymentsExceptions

Handling

Cash

Utilisation

Account

Management

1.1

0.10.2

-0.2

2.0

0.2

1.0

-0.3

0.10.0

1.4

2.7

Cash Utilisation Payments


PRICINGINDEx

The main price increases over the year were inpayments and cash uti lisation (see Figure 1.9). Inpayments, raising external and internal transferprices rather than prices for cards or cheques reflectsthe banks competitive intent to keep prices lowon products that are most important in customersminds when choosing their banks, rather than a


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Asia-PacificThe Asia-Pacific region has had a more consistentpricing structure across the four product and servicecategories (see Figure 1.10). Its overall structureresults from the combination of two sets of countries:China, Japan, and Singapore, which follow theUS pattern of free account management and heavypayments fees, in contrast to Australia and India,where fees derived from exceptions handling greatlyovershadow those from payments, much like in theUK. Account management fees, which have fallen

from 22% to 15% since our 2005 report, may be ona downward trend.

Figure 1.10 Sources of Fees for Core Banking Services in Asia-Pacific (%)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

SingaporeJapanIndiaChinaAustralia2008200720062005


43% 44% 47%

10%

24% 24%26%

51%

11%16%

13%

11%

22%

16% 15%

28%

44%

83%

43%

10%13%

2%

0%5%

Payments

Exceptions Handling

Cash Utilisation

Account Management

49%

23%

13%

16%

84%

1%

14%

1%

92%

0%

8% 0%



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Europe EurozoneThe Europe eurozone fee structure is nothomogeneous, although a slow price convergencetrend is evident as Germany, Italy, and theNetherlands progressively reduce their emphasis onaccount management fees (see Figure 1.12). Cashutilisation fees have increased steadily over the pastthree years, a clear signal that euro unif ication has notsignificantly reduced the cost of using cash. It is notsurprising that, given SEPA, the cost of using cashis a major item on the agendas of both the EuropeanCommission and the European Central Bank.

Figure 1.12 Sources of Fees for Core Banking in Europe Eurozone (%)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

52% 58% 54%

49%

5%

5%6%

9%

6%

31% 31%

8%

37%

5% 9%

34%

25%

45%

5%

5%

11%

8%

59%

42%

Payments

Exceptions Handling

Cash Utilisation

Account Management

55%

6%

8%

31%

82%

14%

0%

4%

43%

1%

57%

0%

63%

6%

4%

27%

71%

1%

22%

6%

34%

13%

24%

29%

78%

1%

2%19%

Ire

lan

d

Ita

ly

Spa

in

Portug

al

Ne

therland

s

German

y

Franc

e

Be

lgium

Austr

ia

200

8

200

7

200

6

200

5




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In Europe eurozone, prices remained relatively stable,with only a 0.8% (0.6) rise. The changes in Europeeurozone were much smaller than those outsideEurope. They were mainly related to payments (seeFigure 1.13). Banks raised the price of internal wiretransfers at desk to compensate for the developmentof Internet origination (generally free), while theprice of external wire transfers decreased under theinfluence of SEPA. Account management pricesremained essentially stable, because a price increasein current accounts was offset by a cut in the price ofon-line banking.

Figure 1.13 Product and Service Price Variations

vs. Last Year for the Local Active User

in Europe Eurozone ()

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

Internal

wiretransfer

External

wiretransfer

C

heque(price

percheque)

On-line

banking

Current

account

-3

-1

1

3

PaymentsExceptions

Handling

Cash

Utilisation

Account

Management

-0.1

0.4

-0.5-0.6

1.1

0.0

0.5

-0.1

0.2

PaymentsAccount

Management


PRICINGINDEx


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Figure 1.1 Price of Pan-European Payment Means for the Local Active Profile, 2008 ()

0

20

40

60

80

100

120

140

ZYXWVUTSRQPONMLKJIHGFEDCBA

130.0

14.8

39.3

56.7

19.3

73.7

63.7

57.1

50.8

30.626.2

31.933.433.037.3

32.032.4

56.850.8

26.224.3

18.1 16.512.2

8.1

3.5

Europe Eurozone Rest of the World

Average Eurozone

48, similar to 2007

Average Rest of the World

33 vs. 34 in 2007


The Single Euro Payment Area (SEPA) will lead tolower prices. We have continued last years effort totrack SEPAs impact on prices. The expected resultis that a standardised payments structure across theeurozone will lead to tougher competition and lowerprices. To check this hypothesis, we created thepan-European payments means, which we definedas the basket of products that will progressively begoverned by SEPAs pan-European standards andregulations. These include internal and external wiretransfers, direct debits, credit and debit cards, andtheir underlying current accounts. This year theseproducts accounted for 64% of the fees paid by localactive users in Europe eurozone.

The price of this basket of products has stoppeddecreasing in Europe eurozone, and stabilised at 48.The result would be much better except for turmoilin the Irish market, without which the price wouldhave fallen by 6.3%from 41 to 38 (see Figure1.14). As a comparison, outside Europe eurozone theprice of this same basket of products has droppedby only 1, from 34 to 33 (a 3% drop). SEPA,therefore, is probably still drawing prices down inEurope eurozone.


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Europe Non-eurozoneThe fee structure in Europe non-eurozone fallsbetween North American and Europe eurozonepatterns (see Figure 1.15). This results mainly fromthe combination of Nordic countries, which featureUS-style fees heavily dependent on payments, alongwith Eastern Europe countries, where banks chargerelatively high prices for account management andcash utilisation. The UK, however, does not fit ineither of these categories, but instead features anoriginal pattern that relies on exceptions handling.

Figure 1.15 Sources of Fees for Core Banking Services in Europe Non-eurozone (%)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

9%9%

9%

1%

14%

23%20%

15%

18%

12%16%

26%

1%

1%

19%

27%

2%

40%

Payments

Exceptions Handling

Cash Utilisation

Account Management

9%

16%

19%

75%

11%

4%

10%

2%

32%

21%

4%

32%

32%

1%0%

0%

2%

1%

22%

52%

0%

5%

UK

Switzerland

Sweden

Slovakia

Romania

Poland

Norway

Denmark

CzechRepublic

Croatia

2008

2007

2006

2005

1%

41%

46%

59%56% 55% 58%

79%

32%

55%

44%

33%

99%

75%

43%

12%

Country (2008)Edition of World Retail Banking Report


PRICINGINDEx


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In Europe non-eurozone, prices increased by 0.8%(0.6) for local active users. In payments, banksincreased credit card fees, but this was offset bycuts in the prices of external and internal wiretransfers (see Figure 1.16). While ca ll centrefees decreased, prices of the two other accountmanagement productscredit account and on-linebankingwere raised across Europe non-eurozone.

Figure 1.1 Product and Service Price Variations vs. Last Year for Local Active Users in Europe Non-eurozone ()

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

Internal

wire transfer

External

wire transfer

Credit cardWithdrawals

at desk

On-line

banking

Current

account

Call

centre

-3

-1

1

3

PaymentsExceptions

Handling

Cash

Utilisation

Account

Management

0.4

-0.3

0.4

-0.2

0.8

-0.2 -0.2

-0.1

0.5

-0.2

0.4

Cash

UtilisationPaymentsAccount Management



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PRICE DISCREPANCY IS DECREASING

An important feature of banking markets lies inthe differences between national banks prices.Prices are closer together in more mature markets,because consumers consider banking services to becommodities, and tough competition prevails onstandardised products.

Retail banking is still mainly a national business,and we examined price discrepancy first at thecountry level (see Figure 1.17). Large discrepanciesare usually associated with fast-changing markets,such as Spain and Ireland in Europe eurozone;Denmark, Romania, and Slovakia in Europe non-eurozone; or China and India in Asia-Pacific. Forthe countries we studied both last year and this year,the average national price discrepancy decreasedfrom 27% to 25%.

Figure 1.17 National Price Discrepancy for Local Active Users (%)

0%

20%

40%

60%

80%

100%

120%

140%

160%

9%

50%

23%

7%

17%12%12%

20%17%

12%16%

23%

46%51%

18%23%

47%

154%

27% 27%

4%

12%

37%

68%

21%

10%

Europe EurozoneNorth

America

Singapore

Japan

India

China

A

ustralia

Canada

USA

UK

Switzerland

Sweden

Slovakia

R

omania

Poland

Norway

D

enmark

CzechRepublic

Croatia

Spain

Portugal

Netherlands

Ireland

Italy

Germany

France

Belgium

Austria

Europe Non-eurozone Asia-Pacific


PRICINGINDEx


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At the regional level, the general trend was a lsotowards reducing discrepancies, although quickerthan within national boundaries (see Figure 1.18).It was especially fast in North America, where pricedifferentials were cut almost in half in two years.This result is consistent with our earlier interpretationof price increases led by fast-growing retail banks.

The evolution in Asia-Pacific has been very different.It reflects Australian prices (the highest of the region)moving downward, and Japanese prices (the lowest)going up. In the European regions, the trend towardsreduced price discrepancy has slowed in Europenon-eurozone, and even stopped in Europe eurozone,despite SEPAs intended harmonising effect.

Nonetheless, price discrepancy in Europe eurozoneremains the smallest today.

Figure 1.18 Regional Price Discrepancy for the Local Active User, 20052008 (%)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Asia-PacicNorth AmericaEurope Non-eurozoneEurope Eurozone

39.1%

34.1%

30.4%32.0%

46.2%44.7%

39.5%37.6%

57.1%59.0%

41.7%

33.8%

83.5%86.6%84.2%

75.5%

World Retail

Banking Report

Edition: 2005

2006

2007

2008



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25

On a global scale, the price for core banking services, based on the local active user profile, declined by 1% fromlast year, averaging 70 in our 2008 study.

Our results indicate that price evolution at the product level can effectively be categorised according to the waycustomers perceive them. Prices ofsales influencers (current accounts, cards) decreased fastest (0.8% per year),reflecting the banks desire to remain as competitive as possible with the product prices customers can see clearlyand rely on to make their buy and leave-or-stay decisions.

The behaviour influencers (channels and payment means), which banks can use to attract customers towards orrepel customers from certain products or services, were clearly being used for that purpose based on the pricingdata. Banks cut the prices of those they found to be less costly by 0.2% per year, and raised prices on the morecostly ones by 0.9% per year.

Prices for unseen services (such as exceptions handling), which customers incur without choice or intent, remainedflat. Although they have often been used in the past as an easy way to raise revenue without impairing sales, notusing them now probably reflects a reluctance to further provoke concerned regulators and consumer associations.

A geographic analysis revealed radical and persistent discrepancies in banking fee structures. Important pricevariations between countries and world regions are hidden behind a quasi-stability at the global level. This isparticularly true for Asia-Pacific and North America, the first of which experienced an 11.1% price decrease,

while the second saw a 5.7% price increase. European prices, meanwhile, remained stable.

Although retail banking is still essentially a local business, there are a few signs of internationalisation and anincrease in competition at the regional level. Under the influence of SEPA, prices of pan-European paymentmeans decreased faster in Europe eurozone than in the rest of the world (excluding Ireland). Price discrepanciesbetween banks decreased signif icantly this year, at both the country and regional levels. This trend wasespecially fast in North America, but the price discrepancy in Europe eurozone is still the smallest.

PRICINGINDEx

Conclusion


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27

ORGANIC GROWTh IN

DOMESTIC MARKETS KeyFindings

Theworldretailbankingmarket,basedonnetincome,was1,280billionin2006,andforecastsindicateitwillriseto1,900billionby2017,withhalfofthenewincomecomingfromhigh-growthmarkets.

Althoughthehigh-incomeportionoftheworldretailbankingmarketwilldropfrom75%in2006to65%in2017,itwillremainveryimportanttobanks.

Overthepastfiveyears,mostoftheworldsleadingbankshavegrowntheirdomesticretailbankingrevenuesfasterthantheircosts,significantlyimprovingtheircost/incomeratios.

Fourpillarshavesupportedleadingbankseffortstoachieveprofitableorganicgrowthintheirdomesticmarkets:combiningfasttimetomarket,innovation,andlocalclientintimacy;fullmulti-channelintegrationandoptimisation;increasingsalesproductivitythroughdynamicbranchmanagement;andleveragingamulti-brandportfoliotocreateattractivevaluepropositionsforeachmarketsegment.

Alargeproportionofthe52topbankseecutivesin15countriestoldustheyhaveusedthesefourpillars,andepressedtheircontinuingconfidenceinthem.

Mostassumptionsonwhichpastretailbankinggrowthstrategieswerebasedarechallengedbytodaysstructuralchangesinthemarket,includingtougherregulations,morefleibletechnology,moredemandingclients,andnewcompetitors.

Recognisingthatstructuralchangeswillincreasecompetitionanddrawpricesdown,wesimulatedthiseffectineightwesternEuropeancountries;thesimulationsindicatedthatbankswouldlose36%oftheirprojectednetincome(andlosemorethan50%incertainmarkets).

Banksthathavealreadybuiltstrongclientrelationships,andcapturedfromtheirclientsagoodshareofwallet,needtorenewtheirdistributionstrategiesanddevelopbusinessorganicallyintodayssaturated

andslowlygrowingdomesticmarkets.Successfulbankscanusethreedistributionstrategiestogrowbeyondthetraditionalretailbankingbusinessmodelinhigh-incomemarkets:Bettersell,tobetterfitdiverseclientsneeds;Largeroffer,etendingtheofferingtonon-financialproductsandservices;andIndirectbusiness,sellingthroughotherdistributors.

The52interviewedbankersselectedthreemodelsasthemostlikelytohappen:TrustOperator,DiscountBank,andGeneralBroker.Manybanksevenadmittohavingtheirownprojectsusingthefirsttwomodels.

BankerintervieweesidentifiedDiscountBank,GeneralBroker,andOpenSourceBankaspotentiallythemostdisruptivemodelsintheretailbankingbusiness,becausethesemodelscouldcausetheirtwoworstfearstocometrueapricewarandcompetitionforclientrelationships.

Thebestperformerswillcombineseveralofthesedistributionmodelsandperhapsstillotherstosucceedinthefutureretailbankingmarket.

ORGANICGROWTHINDOMESTICMARKETS


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Retail banking is a major activity for most largebanks, helping them grow profitably and maintainingtheir stock value. Succeeding in the past has neverbeen easy, but severe challenges lie ahead. Our teamsin the 15 countries we studied for this years spotlighthave interviewed 52 banking executives to understandhow they intend to succeed in the future. Using theseobservations, combined with the views of Capgeminiexperts in the field, this years spotlight outlines someof the best paths banks can take to remain major

retail marketplace players in the years ahead.

THE IMPORTANCE OF

DOMESTIC RETAIL OPERATIONS

The global retail banking market is huge, with 2006net income of 1,280 billion, and it is expected toreach 1,900 billion by 2017 (see Figure 2.1). Thepotential increase of 620 billion will be generated innearly equal amounts in high-income and other high-growth markets. Despite a slower growth rate, weexpect retail banking to remain a major force in high-income economies over the next ten years, falling only

slightly from its current 75% of global net revenues to65% in 2017.

Figure 2.1 Retail Banking Revenues in 200 and 2017F (bn)

ME and

Africa

Rest of

Asia-Pacic

IndiaChinaRest of

Europe

Rest of

America

AustraliaJapanWestern

Europe

North

America

433

580

350

460

125

160

3040

95

145

85

145

35

110

25

63

35

90

5065

Revenue 2006 (bn)

Forecast Revenue

2017 (bn)

Y2006: 1,280 billion

33%

28%

10%

2%

Y2017F: 1,900 billion

31%

25%8%1%

High-income Markets

900bn = 75%aHigh-income Markets

1,200bn = 65%a

Source: Capgemini analysis, 2008; World Bank statistics; UNDP.

Notes: Revenue = net interest income + net fees and commission income + oter income; 2017 forecast calculated based on eac countrys GDPgrowt forecast; fees and interest rates based on Capgemini price inde researc; ME is Middle East; Rest of America is all America ecludingte US and Canada.

a hig-income markets definition by United Nations human Development Researc; ere tey are Nort America, Western Europe, Japan, and Australia.


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2

The top worldwide banks retail banking operationsare primarily located in high-income markets, andthese banks have but little potential for furtherexternal expansion. Moreover, except for six banksBNP Paribas, ABN AMRO, BBVA, Santander,HSBC, and Citigroupthe proportion of domesticnet revenues for most banks is greater than 50% (seeFigure 2.2). Their market development has up to nowbeen achieved mainly in their domestic markets.

Because a few large banks hold dominant positions inhigh-income markets, regulators now tend to discouragefurther mergers and acquisitions. They want to ensurefair competition and avoid excessive concentrations ofrisk. Domestic growth through acquisition, therefore, isno longer a viable option in most high-income markets.Alternatives are also limited, and in any case promiseonly moderate returns.

A banks organic growth in its domestic market is,

therefore, likely to hold the key to a banks successover the next ten years. This years spotlight is trainedon that issue, and investigates the challenges banksface as they attempt to grow organically in saturatedmarkets during a period of sluggish economic growth.

Figure 2.2 Domestic as a Percentage of Global Retail Banking Net Revenues, 2002200

0%

20%

40%

60%

80%

100%

Resona

SMBC

Mizu

ho

MUFG

We

llsFargo

Wac

hov

ia

Ban

ko

fAmerica

Ca

jaMa

dri

d

Pos

tban

k

Dres

dner

Ban

k

Cr

ditMu

tue

lCIC

Ca

isse

d'Epargne

Banques

Popu

laires

Nordea

Han

de

lsban

ken

La

Ca

ixa

Dex

ia

Sanpao

lo

Banca

Intesa

CBA

Wes

tpac

NAB

Cr

ditAgrico

le

Swe

dban

k

HBOS

ING

Ra

bo

ban

k

ANZ

RBS

Barc

lays

Un

iCre

ditBanca

Fort

is

KBC

Soc

itGn

ra

le

SEB

Deu

tsc

he

Ban

k

Citigroup

BNPPari

bas

BBVA

ABNAMRO

HSBC

San

tan

der

50%

Source: Capgemini analysis, 2008; World Bank statistics; UNDP.

Notes: Revenues = net interest income + net fees and commission income + oter income; 2017 forecast calcu lated based on eac countrys GDP growtforecast; fees and interest rates based on Capgemini price inde researc.



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RETAIL BANKINGS BEST PERFORMERS

STRATEGIES IN DOMESTIC MARKETS,

2002200

Benchmark and market analysisWorld-leading retail banks1 have performed wellglobally in their domestic markets, increasingrevenues while controlling operating costs, andin this way, reduced their cost/income ratios.2 Toassess this performance, we isolated the domesticretail banking activity of 37 top worldwide banksusing annual report data.

By plotting the results (see Figure 2.3), we soonlearned that most of the banks we chose appearedin the white part of the chart, above the line whereincome growth is equal to cost growth. We bore inmind, however, that retail banking is still stronglyinf luenced by purely national market features, suchas local and national laws, banking regulations,customers habits and behaviours, culture, and so on.

We focused our in-depth analysis on four banks (red-circled in Figure 2.3)Crdit MutuelCIC (France),

ING (Netherlands), La Caixa (Spain), and HBOS(UK). All are top global domestic retail performersand have outperformed their national competitors.

Figure 2.3 Domestic Retail Banking: Growth of Revenue vs. Cost for Selected Banks, 2002200 (%)

-0, 15 -0, 1 -0, 05 0 0, 05 0, 1 0, 15

0, 2

0, 15

0, 1

0, 05

0

-0, 05

RevenueGrowthCAGR

0206a

Operating Cost Growth CAGR 0206a

Deutsche

Bank

Citigroup

Mizuho

Banca

Intesa

La Caixa

Sumitomo

Mitsui

ABN

AMRO

Barclays

UniCredit

Westpac

Sanpaolo

Fortis

Dresdner Bank

Rabobank

Nordea

HVB

BBVA

Resona

ING

Dexia

SocGen

BNPP

Crdit

Agricole Caisse dEpargne

Santander

Wells Fargo

Caja Madrid

RBSANZ

Banques PopulairesCBA

CMCIC

Wachovia

Bank of America

HBOS

KBC

LCL

Source: Capgemini analysis, 2008, and bank annual reports.

Note: CIR before impairment losses. Circle sizes are proportionate to revenue in 2006.a CAGR calculation using 2007 currencies.

1 Retail business is defined as financial products and services (bot core and non-core banking) distributed troug pysical and non-pysical networks to

private customers and SMEs.2 Cost/income ratio before impairment losses.


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31

Four pillars enable profitable growthWhile analysing the best performers we selectedfrom the local market leaders, we identified thefour pillars on which they based their profitableand sustainable growth: (1) combining fast timeto market, innovation, and local client intimacy;(2) ensuring full multi-channel integration andoptimisation; (3) increasing sales productivitythrough dynamic branch management; and (4)leveraging a multi-brand portfolio to createattractive value propositions for each market

segment (see Figure 2.4). Closely examining theapproaches our four top performers took, eachfocusing specifically on one of these pillars togreatest advantage, helped us understand theimportance these strategies hold for banks seekingto improve their performance in domestic markets.

Each of the major banks we selected for study hasstrong business basics, including a reliable capacity todeliver a variety of products and services, combinedwith relationship management know-how. Thisincludes trust development and risk assessment, whichhave always been essential to successful banking.

Pillar 1: Combining fast time to market, innovation,and local client intimacyCrdit MutuelCIC has succeeded in France in beinga first mover and market leader, even when customers

perceived financial services as commodities. Thebank became a market leader by offering innovativeproducts ahead of the competition, combined witha strategy focused on maintaining a close workingrelationship with local cl ients. This strategy requiresstrong centralised systems and a back office that can

Figure 2. The Four Pillars of Sustainable Development

Combining fast

time to market,

innovation, and

local client

intimacy

Ensuring full

multi-channel

integration and

optimisation

Leveraging a

multi-brand

portfolio to

create attractive

value propositions

for each marketsegment

Protable Growth

Crdit Mutuel ING La Caixa HBOS plc

Increasing sales

productivity

through dynamic

branch

management




32/60


accommodate accelerated time to market. It also callsfor a concerted marketing effort that ensures the newproducts meet customer expectations and needs, andrelays that message effectively to the marketplace.

Crdit MutuelCIC has consistently shown itsability to be a prime mover in the French market,moving faster than others to introduce new bankingproducts and services. Using the regional power of itstwo brands, it has maximised the effectiveness of aflexible, common platform, shared back offices, and

aggressive marketing operations, supported by well-managed local branches.

Through its product innovation strategy, CrditMutuelCIC has substantially increased the numberof products its clients buy. While it was achieving4.3% annual growth in net banking income (NBI)per client from 2002 to 2006, it decreased its annualcost per active customer by 5.5%. This outstandingeconomic success was combined with excellent clientrelationship management, highlighted by the topaward in its sector, given by TNS-Sofres, for theBest Client Experience.

Crdit MutuelCIC offers a wide range of productsdesigned to meet customers needs throughout theirlives, including those in savings, automotive, health,real estate, and pensions, among others, many ofwhich feature new technologies (see Figure 2.5).The bank has effectively used the motto, Proximity,listening, and innovation (Proximit, coute etinnovation), to sustain its momentum.

Figure 2.5 New Product Introductions at Crdit MutuelCIC, 2002007

OCT-06JAN-06

JAN-06

FEB-06

MAR-06

APR-06

MAY-06

JUL-06

JUL-06

JUL-06

JUL-06

JUL-06

SEP-06 NOV-06

DEC-06

JAN-07

JAN-07

FEB-07

MAR-07

MAR-07

APR-07

JUN-07

SEP-07

NOV-07

DEC-07

EpargneQuattro(Savin

gs)

EpargneEvolutive(Sav

ings)

LivretFidelitLivretSu

p(Savings)

CarteCadeauCIC(Cre

ditCard)

MandatExcelsius(WealthManagement)

CarteAvance(CreditC

ard)

AssuranceToutProtec

tionAccidents(InsuranceP&C)

CrdOpportunit(Cre

dits)

Extensionfonctionnalitsinternet(Multichannel)

Immosouple10(RealE

stateServices)

PartenariatNRJMobile

(Phone)

PilotageProfessionsLibrales(ServicesforProfessionals)

Domi-Condens(Real

EstateServices)

LancementMarqueVIP

(YoungCustomerServices)

EpargneForce3(Savin

gs)

OffreClic-Clac(Credits)

DuosCartes(CreditCards)

FacilAccS(Multichannel)

Carte3F(CreditCard)

CarteCollectorExclusiveTGV(CreditCard)

Acti-Trsorerie(Wealth

Management)

CarteMastercardPlan

4(CreditCard)

PayezMobile(Mobile

Payment)

CrditVieDeux(Credits)

CraCIC(Financing)



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33

Pillar 2: Ensuring full multi-channel integrationand optimisationING Netherlands has used the Internet and itsseamless integration with other channels to transformits subsidiary Postbank into a multi-channel bank. Ithas taken its place as a major player in the Netherlandsretail banking market without damage to the businessor its profitability.

Since 2000, ING Netherlands has used amulti-channel strategy with a strong Internet

emphasis. It improved results, increasing its NBI by25% from 2002 to 2006. The bank managed to cutcosts over the same period, reducing its cost/incomeratio, excluding risk costs, from 83% to 68%. INGsInternet banking grew at an annual rate of 62% from2004 to 2006, much faster than the Dutch bankingmarket as a whole, which posted a 22% CAGR (seeFigure 2.6). In three years, ING raised its Internetaccount rate from 8% to 42%.

As it boosted Internet use, ING also had to createthe infrastructure required to deal with the explosionof its utilisation. It made all products and servicesavailable through the Internet via informationplatforms and a portfolio of capabilities, using f inesegmentation and central processes.

ING cut the number of branches severely, reducingcustomer usage in the last f ifteen years. Theremaining branches are used for recruiting, sellingcomplex products, and promoting the brand. INGhas developed an integrated sales force with trainedspecialists, who move freely between the remainingbranches to meet specific customer needs whenface-to-face advice is necessary.

As a last step in its multi-channel strategy, ING hasannounced in 2007 the merger of Postbank with itsbranch operations in the Netherlands, in order tocombine their data bases and branch networks.

Figure 2. INGs Internet Banking Strategy

0

50

100

150

200

250

300

200620052004

IndexednumberofInternetpayment

accounts(base

=2004)

ING

CAGR = 62%

Dutch Market

CAGR = 22%

Source: CBS (Dutc market) and company data (Postbank).



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Pillar 3: Increasing sales productivity through dynamicbranch managementLa Caixa has successfully answered the productivitychallenge in Spain. Its high-quality commercialmanagement in the branches is a key differentiator,

driving up sales productivity and enabling the bankto develop its branch network effectiveness withoutincreasing headcount.

La Caixa has offered customers a wide rangeof fine-tuned, customised products and serviceofferings for the past five years, making the productsreadily available to its customers by transforming itsbranches into a denser network of small points ofsale, without increasing headcount. In addition, itdeveloped a rich on-line banking service.

Between 2004 and 2006, La Caixa increased itsbranch productivity ratio (NBI per branch) by32.7%, and raised its employee productivity ratio(NBI per employee) by 39.9% (see Figure 2.7),reaching this goal while holding the employee/branch ratio at 4.5. During this period, the bankadded 477,000 new clients, reaching a total of 10.1mill ion by the end of 2006. Its NBI growth rateof 12.3% greatly exceeded its operating costs, whichrose by only 3.3% over the previous five years.

By increasing its number of branches by 212 in 2006,to 5,186 at the beginning of 2007, La Caixa hasimplemented a physical network hyper-segmentationstrategy. It has launched very innovative productsaimed directly at new residents, customers abroad,

students, and others. Along with its branches, ithas initiated an aggressive multi-channel strategy,offering a wide range of products and servicesnotonly financial onesthrough its branches, theInternet, ATMs, land lines, and mobile phone accesspoints. In a startling example for the banking world,La Caixa sells half of the entertainment tickets soldin Barcelona (theatre, film, music, etc.) through itsdistribution network.


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35

Figure 2.7 La Caixa Productivity Increases, 200200 (000)

0

20,000

40,000

60,000

80,000

0

200

400

600

200620052004

0

5,000

10,000

15,000

0

50

100

200620052004

48,997

56,071

65,033

286

352

429

Productivity Ratios per Branch

10,620

12,393

14,804

61.9

77.8

97.7

Productivity Ratios per Employee

Recurring net nancial

operating income per branch

Business volume per branch

Recurring net nancial operating

income per employee

Business volume per employee




36/60


Pillar 4: Leveraging a multi-brand portfolio to createattractive value propositions for each market segmentHBOS is a prime example of how a bank can usea well-targeted, multi-brand portfolio to meet thechallenge of developing and diversifying a customerbase without alienating current cl ients. HBOShas succeeded in bringing to market a portfolio ofdifferentiated value propositions that attract newcustomers in several market segments.

The HBOS brand portfolio strategy has captured allkinds of consumers while limiting the side-effects onthe customers it has already attracted into its fold. Itoffers low-cost products/services under the Halifaxbrand, without putting at risk the goodwill of theexisting Bank of Scotland or BM clients, who areaccustomed to a higher standard of products. This

strategy, in the five years 2002-2006, helped HBOSincrease its customer base by 20%; raise NBI percustomer by 24.5%; add 180% to its on-line customerbase (increasing it to a fifth of its overall customers);and achieve a C/I ratio (after loan gains and losses) of55%, the best among retail banking market leaders.

A shared IT architecture has helped HBOS developand manage its portfolio of retail banking brands,reflecting different client value propositions, to

grow balances and support margins (see Figure2.8). Halifax, as noted earlier, is the low-cost brand,offering modestly priced products on the highstreet; Bank of Scotland guarantees good rates froma reliable direct provider; BM is a best-buy, directprice fighter; and Intelligent Finance appeals to morefinancial ly sophisticated clients.

Figure 2.8 HBOS Brand Portfolio Strategy

Strategy Channel Marketing

PositioningMargin Balances Relationship Branch Internet Phone/Post Af finit y

HalifaConsistentlywell-pricedonthehighstreet

BankofScotland

Hx

Guaranteedgoodratesfromareliabledirectprovider

BMBest-buydirectpricefighter

IntelligentFinance

Offsettingforthefinanciallysophisticated

Source: Presentation at hBOS Retail Investors' Seminar, 2003.


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37

Figure 2. Interviewed Retail Banking Executives Past and Future Growth Levers

0%

5%

10%

15%

20%

25%

30%

PricingResources

(IT & HR)

Customer

Segmentation

Shared

Production

Management

System

Offering

Innovation

Distribution

Optimisation

Past

Future

Source: Capgemini World Retail Banking Report 2008 survey on growt levers.

Note: Te four igligted levers correspond to te four pillars.

From cases to consensusThe four pillars of profitable growth highlightedin the cases also ref lect our core findings from ourinterviews with the 52 world retail banking marketleaders. Their answers to our question, What werethe past levers you used to grow? were: offeringdevelopment, distribution optimisation, quality ofmanagement, and shared systems/back offices (seeFigure 2.9), matching our four pillars. They alsomentioned technology and staff resources, but they

made clear in the interviews that these are reallyenablers of our four pillars.

We also asked, What are the levers you intend touse to grow in the future? The unanimous responseasserted their trust in continuing to rely mostly on thesame four pillars to grow in the future.

Traditional levers will certainly remain essential,especially for banks that have not yet generated themost benefit available from using them. The questionremains, however: Will they be eff icient enough inthe future to secure sustainable growth?



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Figure 2.10 Relative Evolution of Bank Index/Market Index, 20022007 (Points base 100)

EuroStoxx 50/bank

Nasdaq 100/bank

Nikkei 225/bank

ASX 200/bank

60

80

100

120

140

160

180

Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07

Source: Capgemini analysis, 2008.Note: Base point, June 2002 ratings.

CHANGING MARKETS

The 2007 crisisThe banking market changes fast. Over the lastten years, many banks, such as KBC, Unicredit,RBS, and Socit Gnrale, have focused oninternationalisation, and some new entrants, suchas PayPal, exploded on the financial market sceneand quickly became intermediation giants. PayPalis revolutionising the payments systems industry,attracting significant, fast-growing financial f lows.

Other IT providers have become payments leaders inEurope. Non-banks, including retailers and insurancecompanies, meanwhile, are also distributing moreand more banking products, and they constitute realcompetitive threats as they win market share.

The sub-prime turmoil of 2007, which led to a cashshortage in Europe and the US and froze inter-bankcredit, has ushered in a new era in which banks willno longer be able to rely on real estate or capitalmarket bubbles to fuel their growth. The low interestrate period seems to be finished, and with it the easylending market. Banks will need to develop a growingand sustainable retail business to avoid being anacquisition target open to attack from larger banksor even non-banks.

Middle East funds entering Citigroups or UBSsequities, or Chinese banks entering the top 100assets ranking, have taught banks a hard lesson.From now on, banks will be l iving by the mottoes,There is no easy money and Get back to basics.


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3

Successful banks will rely on stable and loyal privatecustomers and do a better job of managing credit risk,while finding and adopting renewed ways to supportcontinued growth in their domestic markets.

Bankings golden past, therefore, may be over. TheUS led the way, with the Nasdaq 100/bank indexfalling off precipitously in June 2006 (see Figure2.10). The three other major indexesEuroStoxx50/bank (Europe), Nikkei 225/bank (Japan), andASX 200/bank (Australia)soon began to follow

suit. The continuing US tailspin over the past sixmonths clearly indicates the need for retail banksto sit up and take notice.

The rise of risk and a shrinkage in liquidity are nowlimiting growth opportunities for banks in high-income markets. Some forward-looking banks willfocus on retail banking as a stabiliser. To succeed,however, they will need to understand and respondeffectively to structural changes resulting fromlegal and regulatory constraints, radical advances intechnology, changing customer behaviour, and newcompetitive threats.

Structural Changes

More costs, more constraints from regulatorsRegulators will encourage competition by trying tolevel the playing f ield across geographies and openingthe market to new entrants. Current examples includethe Payment Services Directive (SEPA), consumercredit regulation, and the McGreevy Green Book.Others, such as MIFID, Basel II, Solvency II, andSarbanes-Oxley, wil l aim directly at preventing risk.The sub-prime crisis, which has wreaked havoc in the

marketplace, is very likely to spark new regulations inthe near future. All these regulations will have directimpacts on retail banks that want to succeed in high-income domestic markets.

Fewer advantages from legacy investments in technologyTechnology today enables customers to manage theirown banking operations from a distance, whichdecreases the frequency of contact. It also makesit possible for new entrants to build new systemsfrom scratch very quickly, often leap-frogging thetechnologies of existing players.

New technologies derived from Internet standards,solutions, and practices have dramatically transformedbanking information systems from necessary andclumsy infrastructures to enablers of new servicesand processes. For instance, new technologiesthat make it possible to separate distribution andproduction systems have fathered new businessmodels that unbundle retail bankings value chainand facilitate shared back offices and factories. Newsoftware packages built in an open architecture aregetting easier to roll out, with a powerful effect on

standardisation and industrialised processing.

A changing customer: Less loyal, more demanding,in an increasingly disintermediated contextIn a rapidly changing and risky market, consumers havebecome more risk-averse. Due to the Internets readilyavailable information, better-informed clients expectmore clear information fast, and they want resultsquickly, even when seeking credit. And the increasingdemand for sophisticated investment products requiresmore senior and skilled financial advisors.

Consumers also expect to have several potentialpoints of contact with their banks, available whereand when they choose. Todays retail bank must beready to provide several non-branch access points,deal with fewer contacts with clients, and usecustomer relationship management and other toolsto help them meet their customers varying needsacross several channels.

As they become better informed, some consumersare developing new buying behaviour patterns. In thepast, bank clients could be expected to be delegators,eager to get advice before buying banking products

they perceived as complex and risky. Many customersnow bring a self-directed attitude to the bank, takingadvantage of the Internet (plenty of information,easy comparisons, click-and-buy) to make theirown purchase decisions, often with a strong focuson finding the best price. Many clients are bifocal:delegators in certain situations, self-directed in others.Such dual-focused customers create new problems forbanks, because their needs from one case to anothercan be diametrically opposed.



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A new generation of competitors on the retail bankingplaying fieldIn high-income markets, retail banking has developeda diversified offering portfolio that combines both assetand liability products, along with advisory and logisticsservices (see Figure 2.11). Each of these offerings willhave to face challenges from specific competitors.

Product specialists in assets, l iabilities, and logisticsservices are poised to strike. This latest generation ofspecialists leverages new technology to deliver fully

automated services at low cost compared to existingbanking systems and processes. They enjoy lessexpensive distribution channels than traditional bankbranches, and can price aggressively. Retail banksare vulnerable to this kind of competition becausetheir pricing policy often conceals cross-subsidising

between products. Competitors like these can pricein a way that undercuts a banks most profitableproducts, depriving banks of needed earnings.

Distribution specialists (e.g. retailers, post offices)also pose a competitive danger. These competitorsalready have access to consumers through theirexisting point-of-sale networks, a website (e-merchants or on-line brokers), or even a brand.The main differentiator they are likely to claim isindependent advisor, as they will not be producing

the products they sell or recommend. They wil l alsochallenge traditional bank branches with alternativechannels, such as visiting advisors or fully automatedcomparison websites. The major threat retail banksmust cope with is losing client relationships andopportunities to cross-sell additional products.

Figure 2.11 New Generation of Competitors in Retail Banking

RetailBanks

Core to non-core banking

products and services

Logistics Services

Asset

Pr

od

ucts

Liab

i

l

i

ty

Products

Advisory Services

Portfolio

Management

Credit

Consolidation

Mortgage

LoansP&C

Insurance

Consumer

Credit

MutualPension Funds

Life

Insurance

Saving

Accounts

CurrentAccounts

Payments

Investment

Services

AAA Financial

Services

Zopa

Zopa

Carrefour

AXA

Virgin

Money

Fidelity

MLP

Bankrate.com

PayPal

VISA

Private

BankersComparison

WebsitesIndependent

Financial Advisors

Real Estate

Specialists

Asset

Managers

Insurance

Companies

Insurance

Companies

P2P

(borrower)

P2P

(investor)

RetailersLow Cost &

Direct Banks

Payment

Specialists

On-line

Brokers Cards

Operators



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1

Consequences of structural changesAll of these structural changes add up to a real seachange in the market, full of new competitors, moredemanding customers, and regulators protectingconsumers while lowering barriers to competition. Tohelp understand the implications of these structuralchanges, we developed an economic simulation. Itmeasures what could happen to retail bankings netbanking income over the next ten years if prices andinterest margins fell due to competitive pressure.

The simulation focuses on the European market,whichdue to SEPA and other EuropeanCommunity regulationsis the most likely to facesuch an eventuality. Using eight of the main European

retail marketsBelgium, France, Germany, Italy, theNetherlands, the Nordics, Spain, and the UKwebased the simulation scenarios on a key assumption:prices and interest rate margins will equal the averageof their two lowest prices in the eight studied markets.

The results are startling. As shown in Figure 2.12,the simulation indicates that the aggregated netbanking income across the eight countries would falldrastically, by 12% (due to the alignment of fees withthe low average noted above) plus another 24% (due

to interest margin alignment with the low average).The impacts would, of course, be different in eachcountry due to discrepancies between their startingsituations, but the overall picture is not bright.

Figure 2.12 Impacts of Severe Competition in Europe, 2002017F (Million)Price Harmonisation

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

UKSpainNordicNetherlandsItalyGermanyFranceBelgium

2006

Forecast 2017

Impacted forecast

-15%

-22%

-12%

-8%

-9%-16%

+11%

-8%


Note: All volumes of transactions producing fees and of stocks of loans, and deposits producing interest, are forecast to evolve proportionally to GDP growt.



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Countries in the most risky position are Belgium,Germany, Italy, and Spain, where net banking incomecould drop more than 50%. In this simulation, theUK appears to be the sole winner, although thesimulation assumes that banking services are equalacross the eight markets.

Major banks have the most to lose in these scenarios.They depend heavily on their high-income domesticmarkets, which generate the bulk of their retailbanking revenues. Add in the shrinking number of

new clients a new branch can acquire using the oldvalue propositions, and the rising cost of selling anadditional product to an existing client, and there isno doubt that banks wanting to prosper in the futurewill be seeking better approaches to growth.

FINDING A GROWTH PATH BEYOND THE

UNIVERSAL RETAIL BANK

An effective future growth strategy for a bankdepends on the characteristics of that banksmarket. The retail banking development paths invarious markets have been determined to a greatdegree by the level of regulatory restrictions placedon universal banking.

When unregulated, retail banks were free to grow bydeveloping a trust relationship with the clients theyacquired in their branches, selling them more andmore products on top of their current account(path a in Figure 2.14).

Figure 2.13 Impacts of Severe Competition in Europe, 2002017F (Million)Interest Rates Harmonisation

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

UKSpainNordicNetherlandsItalyGermanyFranceBelgium

2006

Forecast 2017

Impacted forecast

-46%

-16%

-35%

-43%

+47%-42%

-45%

-28%


Note: Interest margins are estimated as average credit interest minus average deposit interest, wit no provision for gaps between loan and depositbalances. All volumes of transactions producing fees and of stocks of loans, and deposits producing interest, are forecast to evolve proportionallyto GDP growt.


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3

At the other extreme, in more regulated markets,retail banks became f inancial product specialistswho had to share the market with outside brokers,insurance companies, or investment specialists.Their growth path was consequently more drivenby product innovation and economies of scale(path b in Figure 2.14).

Path a is structural ly more rewarding in the longrun for retail banks. Although banks taking path bhave achieved high profit levels, gains have only been

temporary, and have occurred in less-competitivesituations. There is, however, no barrier betweenpaths a and b. If banks are not able to meet anddefeat broker competition, a market with universalbanks typical of path a might evolve towards adisintermediated market typical of path b. Conversely,a market previously held on path b by regulatoryconstraints might evolve towards a universal bankingmarket as legal constraints are loosened, provided thebanks in such markets succeed in regaining a strongrelationship with their clients.

As a result of their history along one of these paths,most retail banks are today running in their domesticmarket one of the two opposite business models listedbelow (some large groups are even consolidatingentities of the two kinds):

Branch-supported, relationship-orienteddistribution of diversified financial services.

Specialised supplier of one category of financialservices combining direct and indirect sales.

Although some banks might still take the obvious

and appealing growth path based on cross-selling thefull scope of traditional financial products to theirclientsprovided regulators would allow itwe haveno doubt that the future ultimately will require theinvention and adoption of new distribution models.

Figure 2.1 Retail Banking Markets Development Paths

a

bPa

thof S

pecialised

BankingPa

thofU

nive

rsal

Banki

ng

Retail banking

market maturity

Customer acquisition,

current accounts &

basic nancial

transaction services

Credit and savings

products

Non-core banking

products

Scopeof actualmarkets

Revenue per client

Economies of scale




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Distribution Models to Grow beyond theTraditional Retail Banking Business ModelBy examining the newest and most original initiativeslaunched worldwide today, and by identifying theirinherent features that have the potential for a largeroll-out, we identified three distribution strategies toenable a bank to grow beyond the traditional retailbanking business model in high-income markets(see Figure 2.15):

Better sell: Better fit diverse clients needs(hyper-segmentation)

Larger offer: Expanding the offering to includenon-financial products and services

Indirect business: Sell through other distributors(B to B to C through e-merchants or retailers)

Each of these is discussed in more detail below.

Better sell to better fit diverse clients needsThree distribution models, all of which aim atincreasing a banks share of wallet by adapting to clientdiversity, have come to light as a result of our research.

Figure 2.15 New Distribution Strategies

Retail

Banks

Core to non-core banking

products and services

Logistics Services

As

set

Pr

od

ucts

Liab

i

l

it

y

Products

Advisory Services

COMPETITORS

COMPETI

TORS

CO

MP

ETITO

RS

COMP

ETIT

OR

S

C

OMPE

TI

TORS

COM

PETI

TORS

PortfolioManagement

Credit

Consolidation

Mortgage

Loans

P&C

Insurance

ConsumerCredit

Mutual

Pension Funds

Life

Insurance

SavingAccounts

Current

AccountsPayments

InvestmentServices

BE

TTERSELL

IND

IRECTBUSINESS

INDIR

ECT

BUSINESS

LARGEROFFER

BETTER SELL

Financial Advisor

for Mass Afuent

Trust Operator

Discount Bank

GeneralBroker

Open Source Bank

Community Bank



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5

Financial Advisor for Mass Affluent CustomersA common sore point for retail banks is having agroup of high-potential clients who have bought onlya limited share of the banks product portfolio. Themodel shown in Figure 2.16 provides a direct answerto this issue, using for the mass affluent segmentsome of the techniques private bankers use with theirhigh-net-worth customers.

We focused on this topic in the World Retail BankingReport2005 edition, and identified best practices

for growing share of wallet in what we called theuntapped gold segment. We concluded that acustomer-needs-driven approach should avoid theexisting hard-sell practices. This remains true today.

HSBC Premier is a good illustration of this model. Itoffers tailored advisory services to its most profitableclients, thanks to the creation of an offeringaimed specifical ly at high-value customers in itsmass aff luent segment. These clients benefit fromdedicated specialist advisors and financial specialistsproviding preferential offers.

Community BankCommunities are increasingly recognised by marketingspecialists as essential in assessing buying behaviour.Concept stores and websites (such as Second Life onthe Internet) all try to leverage community affiliations,and this model aims to achieve this objective in retailbanking (see Figure 2.17).

La Caixa for migrants and HSBC for travellers aregood illustrations of this model. Another is USAAfor the US military. USAA is a community-centredbusiness model launched in Texas in 1922 by military

officers to mutually insure their automobiles. It grewwithin the US, eventually extended its services tobanking and investment products, and built its clientbase among military families. By the end of 2006,the association had 5.9 million members and 21,800employees. Members held an average of five banking,investment, or insurance products.

USAA is the only fully integrated financial servicescompany at the national level in the United States.It has grown revenues by 12% a year since 2000, andits CAGR figures for 2000-2006 are impressive:

membership up 45%, products up 63%, productivityup 69%, assets up 93%, and net worth up 90%. Thisis clearly a success story.

Figure 2.1 Financial Advisor for Mass Affluent

Customer Model

Valuepropositiontocustomers

Takingcareofthecustomersfinanciallifeasafinancialadvisor

Bringingtomassaffluentclientssomeservicesusuallyrestrictedtoprivatebanking,e.g.:pensionadvice,fiscaloptimisation,riskmanagement,assetreview

Valuecreationtobanks

Intensifyingclientsrelationshipbyupgradingthevalueofservice

Eventuallycollectingagreatervolumeoffinancialflowsandassets

Issuestocover

Differentiationwithprivatebankingcustomersaswellaswithnon-goldmassaffluentclients

Hiringorreskillingadvisors,keepingcostsinlinewithepectedaddedrevenue



Figure 2.17 Community Bank Model


Specialisedserviceprovidertoaspecificcommunity(travellers,military,migrants)

Closesttoyourpersonalaffinity,recognisedbybuzznetwork


Nichepositioningleveragedbydelegatedmarketingpromotion

Mainstrengthistheconfidencerelationshipwiththebrand,andwithastrongbelongingfeeling

Issuestocover

Compatibilitywiththebrand,e.g.:image,ethics,politics

Controlofthecustomer-acquisitionprocessversustheinabilitytorejectacommunitymember



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Discount BankMany customers today are self-directed and viewbanking services as ordinary commodities, many ofwhich they purchase on their own. If they do not buythe product themselves on the Internet, they at leastcompare prices there before buying the product. Thediscount bank model shown in Figure 2.18 aims atcapturing these self-directed buyers with a profitablelow-price offering.

The HBOS multi-brand strategy, with its low-end

brand Halifax, is a good example. So is BoursoramaBanque, a subsidiary of Socit Gnrale. Boursoramahas developed a leading on-line broker positionin Europe, comprising 232,000 accounts undermanagement and nearly 4.2 million orders executedin 2006.

Having bought a small network of branches in largeFrench cities from La Caixas French subsidiary,Boursorama launched a single full-banking packagefor Internet users with the lowest price on the market.Boursoramas Service Plus package includes a currentaccount with accruals (1.5%, versus 0% for traditionalbanks), as well as free standard services for whichtraditional banks charge. These include, amongothers, payments means, insurance, Internet access,entry fee to mutual funds, credit cards, and premiumcards. The only customer requirement is to spend aminimum amount each month. In 2006, Boursoramaboasted an operating efficiency four times higher thantraditional banks: 260 employees for 188,500 clients.

Larger offer: Expanding the offering to includenon-financial products and services

The Trust OperatorThe larger offer model depends on a bank having avery high degree of client trust and satisfaction, whichmany typical universal banks enjoy today. The modelshown in Figure 2.19 assumes the earned trust canbe leveraged to extend the banks offering into other,non-financial services products offered to its clients.

Many banks have run experimental trials of thismodel, including the sale of entertainment ticketson La Caixas ATMs. But Deutsche Banks Q110concept is probably the most ambitious. It relies on

trendy shops with all the sophistication of a concept

Figure 2.18 Discount Bank Model


Themosteconomicwithoutminimisingsecurityorquality

Thelowestpricesonthemarket


Marginalrevenueswithoutadditionalfiedcosts(providedeistingsystemsandbackofficesmaybeshared)

Acquisitionorretentionofself-

directednewcustomerswhohavelittleinterestinadvisoryorproimityservices

Issuestocover

Differentiatethemarketpositioningunderanewbrand(nottodeterioratetherelationshipwithcurrentcustomers)

Sharingproductionmeanstohaveasustainablecoststructure


Figure 2.1 Trust Operator Model


One-stopshoppingforcustomers,includingallkindsofpersonalorfamilyservices:domesticchores,billsmanagement,employmentresearch,realestate,mobilephones,journeys,sportsandothertickets...


Capturingadditionalbusinessflow

Increasingcross-sellingopportunities

Optimisingthereturnonassets(physicalnetwork)

Issuestocover

Securingmulti-servicecompetences,avoidingblurringtheimageofthebank

Choosingqualitypartnersoracquisitiontargets,fine-tuningthepricingpolicy



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7

store, offering financial services alongside premiumfood products. It gives very detailed care to the clientexperience, even including fancy boxes for financialservices packages. Deutsche Bank Q110 brancheshave generated 50% more account openings than thebanks other branches.

Indirect business (B to B to C)This model did not evolve from any traditional retailbanking distribution model, but a growing numberof retailers and websites have started extending

their offering to include financial services productsprovided to them by retail banks. Retail banks coulduse this business line as a way to build economies ofscale in their systems and back offices. Banks wouldhave to agree up front to position themselves as pureproducers who would not participate in the end-clientrelationships commanded by the distributors.

Open Source BankBusiness on the Internet has given rise to pure playerswho have developed unique know-how in makingmoney in the virtual world. By providing themwith products, retail banks could form a mutuallybeneficial partnership (see Figure 2.20). Zopa (UK),an Internet marketplace linking private lenders andborrowers, is an example. Another is PayPal (US), thefamous payments services leader on the Internet.

PayPal was created in 1998 and bought by eBay in2002. It is the leader of on-line payment solutions,and offers services in seven currencies in 55countries. To on-line buyers, it offers security andconfidentiality inexpensively, plus free person-to-person money transfer. To on-line sellers (e-merchants), it offers a simple solution with a good

service level, no debt-collection risks, and a positiveeffect on website image, which has been successfullycompeting with banks distant sel ling contract, atleast for small or starting sites.

PayPals efficient cost model features an automatedsystem that guarantees a very low cost/income ratio(30%) compared to banks. Thanks to eBay and thebuzz effect, it has limited cl ient acquisition costs.A special team works full-time to minimise the fraudrate, which in 2006 stood at 0.29% (vs. 1.5% for cardson the Internet).

With 164 million users and 450,000 e-sellers in 2007,PayPal has not only achieved substantial success todate, but also has substantial development potential inbanking license authorisation and diversification.

Figure 2.20 Open Source Bank Model


Easyaccessandtimesaving

ofhighlyautomatedoperationsthroughtheInternet,complementingotheron-lineservices

Valuepropositiontodistributor

Bestpriceandturn-keyaccesstofullyoperational,professionallysupported,legallyandprudentiallysecurefinancialproducts


Additionalbusinessvolume

bringingeconomiesofscaleandpotentialopportunitiesforcross-sellinginpartnershipwiththedistributor

Issuestocover

Riskmanagement

Avoidingthetransferofknow-howtothedistributor

Choicebetweenbrandedandwhite-labelledoffering

Lowcustomerintimacythreateningloyaltyandretention




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General BrokerRetailers have always been dangerous challengersto specialised product or service distributors toindividuals, and they have developed unique retailmarketing expertise (see Figure 2.21). Many ofthem have already extended their operations tosome financial services, such as cards or consumercredit. They can, moreover, claim the advantage ofindependence, whether in the selected best-of-breedproducts