Capco Institute Blog

Are banks ready to industrialize? Can they even afford not to? These were just two of the questions that we sought to answer at the Capco Executive Event Roundtable, Industrialization in Financial Services, held in Zurich last week. Attended by 40 senior banking executives, the event laid the foundation for a series of Executive Events, workshops and papers on industrialization organized by Capco this year.

A perfect storm
What’s put industrialization back in the cross-hairs in 2013? The figures speak for themselves. Although recent quarters have seen many banks’ profits return to near pre-crisis levels, the picture is less rosy once you dig deeper. Capacity? Way too high. Return on Equity? Too low. Costs? Still rising, with little end in sight. As for the competition, we believe a shakeup is imminent with the entry of agile new market-entrants free from the regulatory cost burden of legacy banking.

It’s not as if banking is the first industry to experience a near perfect storm of competition, regulation and plummeting demand. As Stephen O’Sullivan, Partner, Capco, described, car manufacturing, telcos, retailing and IT are just some of the sectors that have embraced, or been dragged through a defining period of industrialization in recent decades.

So where do banks begin? Operations, naturally fall under the spotlight, especially in the pursuit of savings. But industrialization means more than operational cost cutting and outsourcing. We believe banks need to take a balanced approach, which also includes the delivery of innovative services that not only drive growth, but also help repair brands tarnished by events of the past six years.

An emotional journey
And there’s the rub. The real prize of industrialization is innovation in process and services that creates a strong financial and emotional bond with clients. If that sounds too ‘soft’ look to computing device and auto manufacturers where brands steeped in innovation enjoy exceptional market capitalization.

The result? Banks need to bite the bullet and put front-office activities at the heart of their industrialization strategies. There’s enormous potential for front offices to play a central role in these ‘innovation factories’ challenging the status quo with products and services that belong in the digital as well as the financial marketplace.

Attention to detail matters too. Banks must become excellent in measurement with a focus on cost of processes and multi-dimensional profitability. As with other industries that have undergone industrialization, the greater the detail the better the result.

First in, first win
What happens next? Pressure will continue to mount until industrialization becomes unavoidable. New market-entrants, without the regulatory cost burden of legacy banking, are poised to shake up the market. As a result, Expect a wave of ‘first movers’ to break cover and adopt the industrialization model in the next two-three years. Their advantages will increase the pressure on non-industrialized competitors. This will also start a process of ‘climate change’ among wider industry stakeholders. Examples of early success will galvanize shareholders to insist on concerted efforts to regain desirable levels of 15% RoE or more.

Over the coming months, we’ll look in more detail at banking activities that are ripe for industrialization and call out examples from the first wave of innovators. In the meantime look out for news of more Executive Events later this year.