Research & Thoughts

The Industrialization Realization

ROE squeezed. Cost/income ratio not squeezed enough. Surplus capacity. Compliance complexity. Think industrialized!

Banks are experiencing a near perfect storm of overcapacity, regulation and plummeting demand. Industrialization is unavoidable if banks want to re-attain acceptable Return on Equity (ROE) levels of 15% or higher.

Banks can no longer afford to ignore the possibilities of industrialization. Even though profits are approaching pre-crisis levels thanks to central banks pumping liquidity into the marketplace, this disguises more profound difficulties, not least disappointing Return on Equity (ROE) figures. Banks need to embrace industrialization to deliver genuinely innovative processes, products and services. Ultimately this means undertaking approaches that have transformed other industries from auto-manufacturers to IT. In the next few years, we believe that a wave of ‘first movers’ will adopt the industrialization model, commercializing assets and seeking out partnerships that support the creation of products and services from ‘best in class’ components.

Although recent quarters have seen many banks’ profits return to near pre-crisis levels, the picture is less rosy once you dig deeper. Capacity remains too high, ROE has yet to return to pre-crisis levels, and regulation continues to drive up costs—with little end in sight. As for the competition, a shakeup is imminent with the entry of agile new market-entrants free from the regulatory cost burden of legacy banking.

We believe that industrialization is unavoidable, but this means more than operational cost cutting and outsourcing. 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.

Race for the prize
The real prize of industrialization is innovation that creates a strong financial and emotional bond with clients. Banks need put front-office activities at the heart of their industrialization strategies creating ‘innovation factories’ that deliver products and services that belong in the digital as well as the financial marketplace.

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 more industrialization thought leadership papers and news of more Executive Events later this year.