December 19, 2013

As challenging as the current environment is, we believe that banking in 2020 will be rich with opportunity. Those who understand how the landscape will likely shift by the end of the decade -- and who position themselves accordingly -- will be better able to protect and grow their business.

Accenture recently analyzed how the industry will be transformed by 2020 and how banks should navigate both the significant pitfalls and opportunities that lie ahead.

The good news is that banks have made their way through the storm. Average return on equity was 11% among the largest institutions last year, up from negative 3.3 percent in 2008. But that's a long way from the pre-crisis 20%-plus rates of pre-tax RoE. Indeed, some banks are still straining to achieve profitability levels above their cost of capital.

Unfortunately, the path to 2020 won't be easy. Several emerging trends -- including digital technology and rapid-fire changes in customer preferences -- threaten to weigh down banks that limit themselves to products and services that get distributed primarily through branches.

[Tracking shifts in customer demand: Banks Don't Have Much Time To Embrace Digital Model]

Given the scale of these disruptions, our analysis shows that full-service banks, as a group, could lose about one-third of their market share by 2020. Digitally oriented disruptors that are far more agile and innovative -- the equivalent of speedboats competing against schooners -- will gain this market share.

Some of these will be new entrants to the market. On the technology front, that might include companies like Google, Paypal or Apple. From retailing, companies such as Wal-Mart, Starbucks or others that place a premium on customer service may pose a threat. Other disrupters will be today's full-service banks that revamp their business models -- or some part of their organizations -- by streamlining operations to better meet consumer needs.

Yet, a potentially significant payoff awaits those institutions that adjust to emerging headwinds. In fact, banks that can match the agility and innovation of leaders in other industries could consistently reap pre-tax RoE levels as high as 18-25 percent by 2020.

To do so, banks must begin to embrace digital banking. Across industries, digital shifts are rapidly redefining information flows and the way that service providers and customers interact, while dramatically cutting distribution costs. Consumers view online banking as the most important area in which banks should invest, according to recent Accenture survey research. Meanwhile, mobile banking activity has increased nearly 50% since 2012.

The digitally driven players that we see taking market share by 2020 will operate from a new playbook. Rather than basing decisions around a large network of physical locations, they will expand their footprint via digital strategies, even across borders. Some, of course, will still have physical locations, but they won't rely as heavily on them as they do today. These banks will organize their businesses around customer needs, not products. And instead of making proprietary investments, they will partner with others -- both in and out of the banking industry -- to leverage innovation.

Specifically, we think that three new business models will emerge to take market share away from traditional, full-service banks that fail to adapt:

  • Niche Digital. These highly agile banks will have few, if any, branches. They will offer a limited array of products and services, including financial advice, to targeted customer segments. For example, a technology provider could collaborate with a large wealth management firm to create a joint venture that offers money management services and advice through digital channels more easily and cost effectively across borders.
  • Digital, Full-Service. These banks will offer a broader product set than niche digital players, similar to that offered by traditional full-service banks today, but only through digital channels. They could be existing banks that redouble their investments in digital platforms while retiring legacy platforms, or new entrants such as established technology firms that enter banking.
  • Big Box. Today's largest banks could choose this model -- offering commodity products such as checking accounts and mortgages at low cost to mass-market customers. A large retailer could also adopt this option. In both cases, they will have the benefit of immediate market share and low pricing across a range of products.
Banks must advance their business models to effectively compete in today's fast changing environment. Those that sit back and try to cling to the status quo risk losing significant market share. The time to start taking action is now.

Wayne Busch is managing director of Accenture's banking practice in North America.