After growing their balance sheets and profits off decades of strong system credit growth, Australian banks now face a low-growth environment in which previously disguised weaknesses in traditional operating models will be cruelly exposed.
The days of easy growth are gone, at least for the time being. By the mid 2000s, credit growth in Australia was running at about 20 percent a year. Today it seems stuck at around a meagre 3.5 percent p.a. Income is being squeezed while cost cutting is more a necessity than an option.
The regulatory environment has also become more testing. On KPMG’s estimate, Australian banks are being expected to comply with about six times more regulation, domestically and globally, than they faced in the early 2000s. Regulatory changes include tougher anti-money laundering rules, consumer credit reforms and more onerous liquidity and capital requirements.
In responding to these changes, banks are looking to further consolidate functions that are currently duplicated across groups while developing ‘centres of excellence’ for key functions leveraging lean and other customer-centric interventions. These centres also offer opportunities to baseline performance targets against good practice that is currently achievable within the organisation rather than being diverted by lengthy debates about what might be theoretically possible based on the use of peer benchmarks.
At the same time banks are working harder to attract and retain customers.
By the end of the current decade, the so-called Generation Y will comprise about a third of the Australian workforce. These people exhibit very different transaction behaviours compared with earlier generations — they are much more intensive users of online and mobile banking technologies, visit branches infrequently and avoid traditional, across-the-counter transactions.
Some retail banks are trying to embrace practices they have observed in more customer-centric sectors such as fast moving consumer goods. For example, they are trying to move away from the traditional fragmented structure common in banking in which separate departments look after different parts of the value stream (e.g. product development, operations, technology, risk management) in favour of a more holistic approach under which a single owner takes end-to-end responsibility for a particular value stream such as deposits or small business banking. It is similar to the ‘brand manager’ approach found in many consumer markets.
The role of bank employees is also being rethought. New delivery models and channel usage demand correspondingly new skills, behaviours and training capabilities. Increasingly branch staff will find their transaction-based functions being superseded by selling and after-sales service activities, which will become core functions, not just add-ons.
Put bluntly, banks that fail to adapt to the changing marketplace (or that make the wrong adaptation decisions) risk becoming commercial dinosaurs.