December 12, 2011
As we look ahead to 2012, the road is full of challenges and opportunities.
Regulation has been an intense agent of change. The new competitive landscape is creating immense pressures for banks, and squeezing traditional avenues for profits. Some growth drivers of the past are no longer profit engines due to regulation.
Not surprisingly, business model efficiency has never been more important. To "do more with less," many banks are moving toward a shared services model of computing, pursuing strategic outsourcing opportunities and collapsing applications to be used on fewer large-scale computers in order to reduce their IT spend. Banks are also re-investing resources for middle-and-back office functions for the first time, after decades of fueling support for front office trading systems.
The industry is entering a critical period for self-reflection and change. If banks can embrace change, then they will successfully navigate the challenges ahead and sit in an enviable position. Below are the strategies for growth that financial leaders can use in 2012 to become more competitive in the new economy.
Renew Customer Relationships IBM's 2010 Global CEO study found that the highest ranking priority for financial services CEOs was "getting closer to customers." A strategic investment in analytics can yield better insight into customer preferences and patterns. Banks can use this intelligence to deliver personalized offerings, as well as increase loyalty and trust.
Restructure Business Models IBM estimates that the cost of complexity represents an opportunity of $200 billion in extra profit per annum based on a sample of 50 mature market banks in the U.S. and Western Europe. Banks must reduce complexity derived from multiple layers of governance, too many customized systems platforms and poor integration after multiple acquisitions. Cloud computing is emerging as a powerful platform for the cost-effective delivery of business services.
Reinvent Growth Banks should focus on the creation of innovative revenue streams. For example, financial institutions could consider playing an active role in health care processing in the U.S. through a combination of improved analytics and indirect support techniques like patient-centered collaborative care models. They could also pursue diversification into related information processing services - such as risk management and payments processing.
Reduce Risk "De-risk" the portfolio by eliminating businesses that are sensitive to further credit waves (such as subprime and Alt A), building and extending fee-based businesses and considering the operational nature of derivative businesses and their sensitivity to additional credit or interest rate stresses, particularly Black Swan events.
Expand Global Reach International markets are growing robustly. US financial institutions should look to global markets to diversify their holdings and find new revenue. Chose long-term growth markets with strong balance sheets and develop an international strategy, leveraging partnerships where needed.
Likhit Wagle is the Global Banking and Financial Markets Leader, Global Business Services, at IBM.