For banks, simplification involves reducing the number of products offered to customers, and streamlining the processes around their delivery.
The objective is to differentiate the offerings provided to various customer groups by wrapping different brands, prices and fee structures around the products and services, while keeping the core product elements and processes essentially the same. By driving down the cost to service customers in this way, banks will be in better shape to make a return on equity that exceeds their cost of capital.
In retail, much of the attention is on achieving higher levels of straight-through processing. To this end, banks are channelling investment into the reengineering of systems and business processes in a bid to increase operational automation. Lloyds’ plans to invest up to £500 million a year in order to deliver £1.5 billion of annual savings are a good example.1
Banks are focusing on encouraging customers to undertake far more of the initial front-end sales activity themselves. To do this, they need to revamp how they interact with customers through technology, whether via mobile devices, tablets or computers. Banks are only just beginning to explore the potential for social media to change the customer interaction experience. It is clear that customers will increasingly use their mobile phone to transfer money between accounts, and make payments to suppliers and friends.
Bank internet sites are also being reformulated. Going forward, user interfaces and applications need to be more automated, interesting and intuitive – the emphasis must be on providing high quality information to customers and enabling them to quickly see the value they can extract from using the technology, in the same way that sites such as Autotrader and Sky News do. Done well, a bank’s internet platform will become an effective self-service sales channel that encourages customers to review and buy products and investments.
In conjunction with automating more of the front-end sales, retail banks are also striving to implement more structured downstream transaction and service workflows. The goal is to help make their entire operational platforms more automated and efficient.
Likewise, for investment banks simplification rests on a concerted drive towards straight-through processing. Rather than rely on offshore centres with lower labour costs, wherever possible investment banks are focusing on leveraging the processing power of systems to bear more of a heavy load, for example by building out global transaction processing hubs that can generate enhanced operating efficiencies.
Prudential regulators’ understanding of ‘simplification’ is diametrically opposed to the view of banks. Rather than targeting cost reductions and customer experience improvements, the emphasis for prudential regulators is on vertical simplification – creating operating structures capable of standing alone.
Ways to achieve this type of simplification take various forms, and include:
- Splitting up banks into subsidiaries by country
- Creating a division between retail and investment banking by using a ring-fence, as the Independent Commission on Banking has outlined for the UK
- Stipulating implementation of recovery and resolution plans (RRPs) to create legal entity structures across banks that contain separate standalone operations able to be resolved over the course of a crisis weekend.
The focus for conduct regulators, by contrast, is to ensure that, going forwards, banks design products that demonstrably treat customers fairly, that are simple to understand and which do not rely on small print and complexity. Increasingly regulators will expect banks to focus on delivering outcomes that really meet customers’ needs.
Banks have generated considerable revenues in the recent past from bundled products – for example, personal loans wrapped up with PPI, or current accounts that impose charges for customers who go overdrawn.
We are now witnessing a backlash. Some of the greatest burdens being felt by banks at present involve the resolution of conduct issues, whether it be working through PPI claims in the UK or the consequences of mortgage foreclosure in the US.
This raises a big issue. Will this drive towards simplification create an environment in which, in effect, banks cannot sell a product where there is a possibility of a negative outcome for the customer? For example, an investment product may have a good performance track record over the last year or five years, but there is always the potential for it to lose money. Or where the sale of such investment products would necessitate more personalised customer advice and service? If so, it would have significant ramifications for banks’ product ranges and their means of delivery.
There is conflict between the three approaches to simplification which will require prioritisation – and unfortunately for banks, the regulators’ view is bound to take precedence. In framing cost cutting strategies, therefore, firms need to pay close attention to the regulatory roadmap and its likely future development.
Furthermore, this is a global trend. Although the financial crisis was mainly an American and European problem, the regulatory consequences are being felt around the world. That is evidenced by, for instance, the focus on recovery and resolution planning now taking place in Australia, and the growing focus on conduct-related issues in Singapore.
We are only seeing the start of these simplification journeys, but when they reach their destination banks around the world will look very different. Their costs to serve customers will be lower, they will sell fewer products and those products will be less complex. Meanwhile, global banks will become networks of viable independent entities, united by a common brand but with separate funding.
1. Lloyds Banking Group plc, Outcome of Strategic Review dated 30 June 2011.