I served as developmental and line editor on this white paper from Booz & Company's financial services team.

1. Perspective Vanessa Wallace
Andrew Herrick
The Future of Banking
Reappraising Core
Capabilities after
the Crisis

2. Contact Information
Amsterdam Milan Sydney
David Wyatt Vincenzo Bafunno Vanessa Wallace
Principal Senior Executive Advisor Partner
+31-20-504-1940 +39-02-72509-278 +61-2-9321-1906
david.wyatt@booz.com vincenzo.bafunno@booz.com vanessa.wallace@booz.com
Bangkok Mumbai Andrew Herrick
Arthur Calipo Jai Sinha Senior Associate
Principal Partner +61-2-9321-1947
+61-2-9321-2804 +91-22-2287-2001 andrew.herrick@booz.com
arthur.calipo@booz.com jai.sinha@booz.com
Tokyo
Beirut Munich Takeshi Fukushima
Peter Vayanos Johannes Bussmann Principal
Partner Partner +81-3-3436-8642
+961-1-336433 +49-89-54525-535 takeshi.fukushima@booz.com
peter.vayanos@booz.com johannes.bussmann@booz.com
Zurich
Cleveland New York Carlos Ammann
Steffen Lauster Paul Hyde Partner
Partner Partner +41-43-268-2144
+1-216-902-4222 +1-212-551-6069 carlos.ammann@booz.com
steffen.lauster@booz.com paul.hyde@booz.com
Copenhagen São Paulo
Torsten Moe Ivan De Souza
Partner Senior Partner
+45-3318-70-02 +55-11-5501-6368
torsten.moe@booz.com ivan.desouza@booz.com
London Shanghai
Alan Gemes Andrew Cainey
Partner Partner
+44-20-7393-3290 +86-21-2327-9800
alan.gemes@booz.com andrew.cainey@booz.com
Booz & Company

3. EXECUTIVE For all the chaos in the global banking sector since mid-2007,
some things have not changed. The purpose of banking, the
SUMMARY
needs of customers, and the core capabilities that drive the
strategies of the most successful banks have endured.
What has changed is the environment in which banks operate
and compete. The level of government regulation and owner-
ship in the sector has risen dramatically. The banking value
chain has been fractured, particularly the links between banks
and their customers, in pursuit of returns that proved unsus-
tainable and must now be reforged. Finally, the outlook has
shifted to what will almost certainly be a prolonged period of
low growth in the broader economy and the banking sector
itself, with important implications for how banks compete
and capture value.
If banks hope to survive and prosper, their leaders can neither
conduct business as usual nor adopt temporary fixes and
half-measures. They must respond at a more fundamental
level, bolstering—and, to the extent that they are not already
in place, creating—the essential organizational capabilities for
the post-crisis era. This Perspective is designed to guide bank
leaders as they ready their institutions for the challenges and
opportunities ahead.
Booz & Company 1

4. The global financial crisis has triggered by increased regulation and even
THE FUTURE dramatic alterations to the global econ- outright ownership of the sector.
OF BANKING omy and the financial services land-
scape. The banking industry has been • There is now an urgent need for
accused of bringing the world to its banks to reintegrate the value chain
knees by taking breathtaking risks, and regain their traditional close-
spurred by astronomical compensation, ness to the customer in order to
with little regard for the consequences. better manage risk and create value.
Much energy has been expended in de-
bating the responsibility for this uphea- • The outlook has shifted to what
val; however, banking leaders cannot will almost certainly be a pro-
afford to engage in the blame game. longed period of low growth, with
They must realize that despite the chaos important implications for how
and restructuring experienced by the banks compete and capture value.
banking sector, the fundamentals of
banking are unchanged. They must Although the fundamentals of
continue to fulfill the societal purpose banking are unchanged, banking
of their institutions while steering leaders cannot respond to these
them to safe harbor and future success. challenges with the kinds of short-
term solutions and temporary fixes
To achieve this, senior leaders must re- that are used to weather minor
cognize three developments that have cyclical dips. Instead, they must
been set in motion by the financial crisis: analyze and adjust their companies’
core capabilities in their continuing
• The role of government is grow- quest to outperform the market and
ing around the world, as witnessed their competitors.
2 Booz & Company

5. MAPPING THE Morgan’s takeover of Washington
Mutual in the U.S., the merger of
the entire sector—rating agencies,
credit bureaus, and regulators—have
NEW BANKING Lloyds TSB and HBOS PLC in the been compromised. Sovereign risk
LANDSCAPE U.K., and Westpac’s purchase of
St. George Bank in Australia. The
has become a component of bank risk
registers, since many counterparties
ranks of the truly global retail banks are now functioning only with the
are thinning, as yesterday’s titans support of their home governments.
retreat to the security of their home And perhaps most critical, the public
markets and capital bases, while trust on which banks and bankers
The changes to the global banking domestic banks are merging, disap- depend has eroded—a trend that has
sector are well documented. The pearing, and narrowing the focus of been exacerbated recently as some of
world’s largest retail bank is now the their businesses. the banks that received U.S. and U.K.
China Construction Bank, a Chinese public bailout money have gone on to
state-owned enterprise. Six of the It is not just the footprint of the indus- reap record profits, and in some cases
largest 20 banks are new to the top try that has changed; its business have even returned to the practice
order, and four of them are from the models and supporting structure are of paying massive bonuses to staff.
much smaller nations of Canada and being altered too. The value proposi- Besides the visible populist reaction in
Australia (see Exhibit 1). The stand- tions of seemingly timeless models in many countries, there is also a quieter,
alone investment bank, which formerly securitization, mortgage brokerage and but perhaps more serious erosion in
dominated much of the sector, has insurance, private banking, and even the credibility of the banking profes-
all but disappeared. Consolidation is financial advice are being questioned. sion, particularly among long-term
creating high levels of concentration The independence and relevance of the investors, pension fund and endow-
in the banking industry; witness J.P. institutions that support confidence in ment managers, and large depositors.
Exhibit 1
A Reordering of the World’s Leading Banks, 2007–2009
Top 20 (February 2007) Top 20 (July 2009)
Market Cap Market Cap
Rank Company Rank Company
(US$B) (US$B)
1 Citigroup U.S. 247 1 China Construction Bank China 181
2 Bank of America U.S. 227 2 HSBC U.K. 172
3 HSBC U.K. 203 3 JPMorgan Chase U.S. 145
4 JPMorgan Chase U.S. 172 4 Bank of America U.S. 128
5 Mitsubishi UFJ Japan 134 5 Banco Santander Spain 117
6 China Construction Bank China 127 6 Wells Fargo U.S. 114
7 UBS Switzerland 125 7 Goldman Sachs U.S. 83
8 Royal Bank of Scotland U.K. 124 8 BNP Paribas France 78
9 Wells Fargo U.S. 117 9 Mitsubishi UFJ Japan 69
10 Banco Santander Spain 116 10 Royal Bank of Canada Canada 67
11 BNP Paribas France 97 11 BBV Argentaria Spain 61
12 Unicredit Italy 96 12 Industrial & Commercial Bank of China China 60
13 Barclays U.K. 95 13 Credit Suisse Switzerland 56
14 BBV Argentaria Spain 86 14 Barclays U.K. 55
15 Intesa Sanpaolo Italy 86 15 CBA Australia 54
16 Credit Suisse Switzerland 84 16 Westpac Australia 53
17 Mizuho Japan 83 17 Toronto Dominion Bank Canada 50
18 Goldman Sachs U.S. 83 18 Unicredit Italy 49
19 Morgan Stanley U.S. 80 19 UBS Switzerland 47
20 Société Générale France 78 20 Standard Chartered U.K. 46
Fallen from Top 20 since 2007
New to Top 20 since 2007
Source: Datastream
Booz & Company 3

6. THE Despite all of this chaos and restruc- money. And they assess their custom-
ers’ financial needs and advise them as
turing, the primary purpose of
FUNDAMENTALS banking remains unchanged. Banks to the products and services that best
OF BANKING ARE have always performed a critical set match their financial objectives.
of functions in support of society and
UNCHANGED human endeavor. They provide a safe Finally, the core organizational capa-
haven for the savings of individuals bilities that banks need to pursue
and businesses; they allocate capital their purpose and meet customers’
across the economy efficiently and needs have not changed. These are
effectively; and they bridge the diver- customer management, product and
gent maturity needs of short-term offer development, risk management
depositors and long-term borrowers. and pricing, distribution management,
If the global financial crisis has dem- operations and IT, asset and liability
onstrated anything, it is the continu- management, capital management
ing and essential nature of these and portfolio strategy, talent manage-
banking functions to society. ment, investor relations and stake-
holder management, and performance
The functions of a bank reflect the management.
needs of its customers, and these, too,
remain unchanged. Banks provide So, if the fundamental nature of
accounts and services that enable banking—its purpose, the needs of its
individuals and organizations to safely customers, and the core capabilities
hold cash and make transactions. They it requires—remains unchanged, how
provide loans that enable customers to will the future of banking be affected
bring forward expenditures or invest- by the current financial crisis?
ments that would otherwise require
years or decades of saving. They help As noted above, some overarching
protect customers by absorbing risks developments have been set in motion
that otherwise could not be borne at by recent events. They represent three
either an individual or organizational broad areas where financial services
level. They provide savings vehicles institutions will need to change their
that enable customers to invest their practices and ways of thinking.
4 Booz & Company

7. THE UTILITY- The magnitude of the government
response to the financial crisis will
In many countries, the regulatory pen-
dulum in banking had swung toward
LIKE have fundamental and long-lasting free markets during the previous 30
REGULATION OF effects on banks everywhere. In the
short term, governments have been
years. Many banks were partially or
completely privatized in the quest for
BANKING (and continue to be) forced to bail greater efficiency, enhanced ability to
out insolvent institutions, supplying attract and retain management talent,
liquidity and guaranteeing obligations and greater access to global capital
so these banks can survive—and, in to fund innovation and growth. But
some cases, taking ownership stakes now, five driving forces are causing
in exchange. In the medium to long the pendulum to swing back:
term, Western governments will
seek to exit these investments in an • The growing perception that bank-
orderly manner. However, a much ing is a public good: Recent events
broader debate with more enduring have reinforced the fundamental
consequences is occurring around the truth that a steady flow of credit
long-term regulatory framework for and a stable banking sector are as
the banking sector. important to a productive economy
as abundant resources, physical
It is highly likely that in the aftermath infrastructure, and human capital.
of the financial crisis, the regulatory
landscape in banking will more • The understanding that markets
closely resemble that of utilities, such are not always efficient: For
as electric, gas, telephone, and water decades the prevailing logic has
companies, that provide society with been that market forces can best
a “public good”: a product or service connect the sources and users of
that is considered so essential that capital—with the resulting price
its delivery cannot be left to market accurately reflecting all available
forces alone. Utilities tend to face a information and therefore being,
high regulatory burden, which dic- by definition, “right.” While the
tates many elements of their pricing, free market philosophy is clearly
customer bases, and competitive envi- here to stay, there is a growing
ronment, and which therefore often realization that people, and
inhibits their levels of innovation and markets, can and do behave irra-
experimentation. tionally, and that these “animal
Booz & Company 5

8. spirits,” as John Maynard Keynes • The realization that “too big to The extent and speed with which these
famously called them, can dramati- fail” is simply too big: The con- drivers will affect banking regulation
cally skew market behavior. sequences of failure among key depend on a range of factors, including
banking players are causing policy- the strength of each nation’s banking
• The rising levels of systemic risk: makers to reappraise the need for system, the broader economic outlook,
The increasing interconnected- governmental control over the size and the market philosophy that holds
ness of the global financial econ- and scope of the largest banks. sway with the government. But the
omy has introduced multiple, overall rise in state ownership and
and often hidden, points of failure. • The broader consequences of regulation has implications for banks’
Strategies that make sense at the misaligned compensation and risk portfolio choices, product offering
level of a business unit or a single management structures: Existing and pricing, investment and capital
institution (for example, regard- compensation models, in both the management, and reporting and talent
ing portfolio choices, product size and the design of their incen- management (see Exhibit 2). Further,
offerings, or capital allocation) tives, encouraged outsized risks by if banks do not or cannot fulfill their
may not optimize outcomes at bank employees. They enjoyed the larger societal purpose, governments
the level of a large bank, a na- upside reward, but left sharehold- will stay involved longer and enact
tional economy, or a global ers, and ultimately governments, stricter regulations, which could
financial system. responsible for the downside. result in a less global, less innovative,
and less talented financial sector.
Exhibit 2
Implications of Government Ownership and Utility-Like Regulation
Short-Term Government Ownership Longer-Term Utility Regulation
Portfolio Choices - Restricted global aspirations, as governments draw in capital - Likely return of Glass-Steagall–style separation of retail banking,
and restrict activities to national boundaries investment banking, insurance, and wealth businesses
- In countries where multiple players have been acquired, - Closer monitoring of mergers—potentially similar to Australia’s
potential breakup with merger of similar lines of business to “Four Pillars” policy—to maintain competition and avoid “too
create single-purpose utilities big to fail” scenario
Product Offering & Pricing - Potential for government to provide basic services—simple, - Supply-side regulation around pricing and customer choice for
low-cost banking, savings and pension accumulation, “critical” products—low-cost transaction banking, access to
basic protection basic credit, retirement savings and pensions, life insurance,
- Increased requirements on loan portfolio, including pricing of health savings accounts
risks and flow of credit to specific sectors
Investment & Capital - Free cash flows siphoned off in the form of dividends to the - Much greater intervention across the board to ensure
Management government, constraining investment options and potentially “protection” of community—e.g., funding and liquidity
stifling innovation regulations
- More sophisticated calculation of minimum capital
requirements—e.g., linked to economic cycle, bank risk
processes and appetite, compensation models
Reporting - Greater focus on forensic reporting into areas of interest to - More comprehensive and onerous reporting requirements
governments—e.g., economic stability and political agenda - Need for reporting to satisfy broader set of stakeholders,
provide greater transparency, and cover longer-term
perspectives
Talent Management - War for talent between private and public sectors, similar to - Shift to long-term compensation models to limit short-term risk
the competition between healthcare and education sectors in taking
most developed economies
Source: Booz & Company
6 Booz & Company

9. BANKS REASSERT Many of the excesses that contributed that allowed “shadow” assets to be
to the financial crisis are related to hidden off balance sheet.
OWNERSHIP OF the unbundling of the banking value
THEIR ASSETS chain and the resulting decoupling of Starting in the early 1990s, the bank-
assets from risks. Banks shifted from ing value chain was impacted by
a long-term, balance sheet manage- discontinuous changes at both ends.
ment approach focused on maximizing Banks relinquished the customer
return on assets to a short-term, earn- interface (and resulting information
ings-driven approach that maximized flow) to a host of intermediaries
return on capital. The latter model was including brokers, aggregators, and
further facilitated by accounting rules referrers (see Exhibit 3). At the same
Exhibit 3
The Unbundling of the Banking Value Chain
Banks packaged and
TRADITIONAL sold loans to investors RECENT
(until 1990s) (1990s–2007)
(on balance
(off balance
Govern-
Hedge
Mutual
Final Asset
Banks
Banks
sheet)
sheet)
ments
GSEs
funds
funds
Holder
Securitization – 2nd and higher orders
Vertically integrated lenders
Vertically integrated lenders
Securitization – 1st order
Banking value chain
Originators
Originators
disintermediated at Investment
Retail banks Credit unions
both ends banks
Brokers Aggregators Referrers
Customer/Borrower Customer/Borrower
Banks relinquished
customer interface to
intermediaries
Source: Booz & Company
Booz & Company 7

10. time, they packaged the resulting • Originate-to-distribute model: The At the same time, many financial
loans into securities and sold them to new business model compensated services products became more
investors, who saw them as a new— banks and their third-party origina- complex and difficult to analyze.
and apparently high-yield—asset class. tors for the volume of loans origi- As a result, the effective credit
nated. It should come as no surprise analysis of institutions and, in
This trend was driven by three inter- that banks came to focus on distri- particular, investment products
locking and reinforcing factors: bution reach and became less con- became compromised, as evidenced
cerned about underlying asset quality. by the elevated number of defaults
• Product innovation: The “tranch- in highly rated securitized products.
ing” of securities according to • Reliance on external rating agen-
risk and return, and the variety of cies: The unbundled value chain The crisis forced bankers to recog-
product innovations it stimulated, might have been sustainable if nize that by shifting ownership of
allowed investors to choose among investors were able to accurately loans—and the customer relationships
levels of risk and be compensated gauge the quality of assets they that they represent—to others they
accordingly, at least in theory. were buying. Unfortunately, rating reduced transparency and increased
Unfortunately, these new asset agencies were paid by the same risk. To reverse the situation, they
classes also facilitated the expansion institutions that were issuing these must reassert that ownership, and
of leverage to unrealistic levels and securitized assets and, in some leverage the resulting information
separated assets from the capital cases, actually worked with them flow for more effective risk manage-
supporting their associated risks. to reach desired rating outcomes. ment and value capture.
8 Booz & Company

11. NEW LENS ON A rising tide lifts all boats—and there
were few exceptions to this rule in
slump has already cut deeper and
lasted longer than any recession to
VALUE IN A global banking between 2001 and hit the U.S. economy since the Great
LOW-GROWTH 2007. During this time, many banks
took advantage of favorable mar-
Depression (see Exhibit 4), and its
impact around the world on con-
ENVIRONMENT gins and thin capital buffers to set sumer buying patterns continues.
hurdle rates for return on equity of Beyond the standard boom and bust
20 to 30 percent. They relied on a cycle, this crisis is underpinned by
simple formula for success: Increase fundamental structural imbalances
cash earnings by 10 to 12 percent that will take years, even decades, to
annually by growing revenues in the work through, such as the U.S.–China
high single digits and keeping cost trade deficit, the mismatches in
increases in the low single digits; use Euro-zone growth rates, the size and
high dividend payouts to add another likely duration of the U.S. budget
few percentage points to shareholder deficit, and the disparity between
returns; and exploit their own high personal saving rates in Western and
(and continually rising) price/earnings Asian economies. As a result, asset
ratios to offset the low beta and cost growth will be significantly subdued
of capital in the banking sector. and it is likely that the banking sec-
tor’s margin expansion of mid-2009,
Clearly, this equation will no longer which occurred in response to a
work. First, a quick economic restricted supply of credit, will not be
rebound is unlikely. The current sustainable.
Exhibit 4
Quarterly GDP Change in Major U.S. Recessions
% Change 1990
from Start of
2001 S&L Crisis
Recession
Tech Wreck
4 1981 U.S. Fed
Starts Inflation
2 Targeting
0
-2
1973
OPEC Shock
-4
2008
-6
Global Financial
Crisis
-8
-10
-12
1929
-14
Great Depression
-16 Quarters from
0 1 2 3 4 5 6 7 8 Start of Recession
Note: For the 1929 recession, only two data points are marked, as data is available only by year, not by quarter.
Source: Federal Reserve Bank of Minneapolis; Bureau of Economic Analysis; Booz & Company analysis
Booz & Company 9

12. Second, keeping cost growth low will investors and bolster their P/E ratings. ating growth shifted back to cost
not be sufficient, and reducing abso- In addition, their P/E ratings are like- reduction.
lute cost levels will not be easy. Low ly to reflect an expectation of lower
growth in assets and a weak pricing risk and return signatures over the The early signs from the current
environment in the medium term will medium to long term. recession suggest that a similar pat-
require banks to keep a tight lid on tern is developing. Already margins
costs just to maintain their margins. To see how conditions like these have are widening as nonbank and foreign
However, the need to comply with played out in the past, it is worth competitors exit markets and the
increasing regulatory demands and revisiting the last major recession, remaining banks use this opportunity
to invest in a significant refocusing in the early 1990s, and the asset to reprice lending, especially in their
of capabilities—both prerequisites clearing period that followed. In that loans to businesses. However, this
for operating in the post-crisis recession, margins initially widened is likely to provide only temporary
environment—will create upward as banks were able to pick and relief. Competition will increase as
cost pressures. choose customers and dictate loan stronger players use this opportu-
terms. Profit growth was generated nity to reposition and enhance their
Third, the price/equity ratings of mainly by working out bad debts. market share, and in the medium
banks will languish. Banks can But margins soon shrank: Increased term, securitization and nonbank
no longer afford to pay out large competition created rising costs at lenders will reemerge, driving
amounts of their free cash flow in the same time that bad debts were renewed competition and with it,
the form of high dividends to attract resolved and the burden for gener- continued margin compression.
Low growth in assets and a weak
pricing environment in the medium
term will require banks to keep a tight
lid on costs just to maintain their
margins.
10 Booz & Company

13. A CAPABILITIES- While the developments described The three sections that follow, and
above do not change the core capa- the key questions and recommen-
DRIVEN bilities required for banking success, dations within them, are designed
APPROACH they do require that those capabilities to assist executives as they evaluate
be retooled to better respond to the the current capabilities of their
TO BANKING demands of the post-crisis environ- banks and gauge their capacity
SUCCESS ment. Each of the three developments to cope with and profit from the
has specific implications for the core post-crisis banking landscape.
capabilities of banks (see Exhibit 5).
Exhibit 5
The Capability Impacts of the Three Major Developments
THE FUNDAMENTALS ARE UNCHANGED … … BUT HOW BANKS DELIVER CRITICAL CAPABILITIES IS BEING
IMPACTED BY MAJOR DEVELOPMENTS
Societal Purpose of Customer Core Macro Capabilities
Banking Needs Capabilities Developments Impacted
Customer Investor relations &
Savings & management stakeholder management
investments – Utility-like regulation of banking
Provide safe haven for the Performance
Product & offer
savings of individuals and management
development
businesses
Risk management & Customer
Transaction & cash pricing management
flow management
Distribution Risk management
management – Banks reassert ownership
& pricing
of their assets
Distribution
Ops & IT management
Allocate capital
across the economy Borrowing
efficiently and effectively Asset & liability
Product & offer
management
development
Capital management &
portfolio strategy Ops & IT
Protection
Talent management Asset & liability
– New lens on value in
management
a low-growth environment
Bridge divergent maturity
needs of short-term Investor relations & Capital management &
depositors and long-term stakeholder management portfolio strategy
borrowers Advice
Performance
Talent management
management
Source: Booz & Company
Booz & Company 11

14. MANAGING As banks face the need to be more
proactive in dealing with govern-
toward restoring confidence and
stability, particularly around com-
THE RISING ments, and are required to provide pensation and risk management.
REGULATORY more transparent and relevant infor-
mation to investors and other stake-
The recent and very public efforts
of some Australian banks to reduce
BURDEN holders, they will need to address executive salaries and exception
two sets of questions: fees are a good example of this
approach.
1. Do you have the investor relations
and stakeholder management capabil- 2. Does your performance manage-
ity necessary to influence the policy ment capability include metrics that
decisions and regulations being con- reflect your organization’s broader
sidered within your bank’s geographic role in society? Are those metrics
footprint? properly balanced, as well as trans-
parent to stakeholders?
Banks need to enhance their stake-
holder management capability to Regardless of the degree of regulation
earn a seat at the table and influence and government ownership that arises
outcomes before, not after, the new from the crisis, banks must be pre-
regulatory landscape is mapped out. pared to respond to demands for much
This is especially critical given the greater transparency from all of their
wave of negative publicity that is con- stakeholders—including shareholders,
fronting both the banking sector and governments, and communities.
the policymakers who are perceived
to be propping it up. To counter this, • No longer can metrics be focused
banks must be able to proactively solely on short-term financials,
engage government officials in the such as profit growth, cost to
following ways: income performance, and dividend
payout ratio; they must expand to
• Articulating the fundamental social include longer-term measures that
roles of the banking sector and offer insight into funding dura-
fully explaining the implications— tions, loan to deposit ratios, and
positive and negative—of increased capital management through the
regulation and intervention. economic cycle.
• Showing that they understand • Banks must prepare to report
the needs and objectives of public in greater detail on a variety of
officials, particularly the need for factors—such as capital base, asset
systemic stability, and helping quality, compensation, and risk and
to achieve those objectives in a derivative exposures (by industry
manner that supports rather than and country)—that concern the
undermines the goals and priorities full spectrum of stakeholders, both
of banking institutions. public and private.
• Demonstrating on an ongoing basis • Banks must begin to augment
the steps that banks are taking reporting with metrics that demon-
and the progress they have made strate their contribution to systemic
12 Booz & Company

15. REDESIGNING In the post-crisis era, as global finan- that still have product-defined orga-
nizations will have to rapidly rethink
cial markets deleverage, banks will
VALUE CHAINS have to reevaluate and redesign their how they can create a targeted
FOR RENEWED value chains. They will return to customer-centric orientation.
more vertically integrated manage-
CUSTOMER ment systems, bringing their underly- Customer insight is the key to success
OWNERSHIP ing assets closer so they can better in this shift. Like most other busi-
nesses, banks need to sharpen their
assess risk, safely deploy their balance
sheets in an environment of scarcity, capability for capturing customer
and maximize value capture. This information in a timely manner—for
raises three sets of questions about banks, this means analyzing their cus-
a bank’s capabilities: tomers’ product holdings, cash flows,
behaviors, and personal circumstances.
1. Does your customer management Depth of relationship will be more
capability enable you to get close important than breadth. For example,
enough to the customer? Are you it will be more valuable for a bank to
collecting the right customer informa- have an 80 percent wallet share of 1
tion? Are you leveraging this informa- million customers than a 10 percent
tion to greatest effect? share of 8 million customers. Greater
wallet share permits greater insight
Bankers now realize that their core into buying patterns, credit risk, and
asset is their customer base, compris- churn potential, enabling a stronger,
ing both individuals and businesses. more profitable lifelong customer
A well-honed customer management relationship. Customer and decision
capability—one that enables them to analytics, which are too often relega-
engage, win, and retain customers— ted to credit card departments if they
will enhance both revenue generation are present at all, will now become a
and risk management. Those banks critical capability.
Booz & Company 13

16. 2. Are your risk management processes prospects. To enhance effectiveness, customers. At a minimum, banks
optimized for efficiency and effective- banks will need to assess the qual- must augment their statistical risk
ness? Are you confident in your risk ity of information being used to feed assessment of consumer loans with
pricing approaches? Does your asset their risk models, as well as review more sophisticated use of customer
workout group have the right skill set? risk management approaches within behavior information.
the different parts of their portfolios.
As they forge closer connections with For risk-assessed loans, banks will Banks with large portfolios of bad
customers, banks need to revitalize need to augment external ratings debt will also need to retool their
their risk management and pricing with a more robust internal analysis asset workout capability. The “bad
capabilities. They must ensure that of risk and pricing. This will have bank” model used in Australia and
they are pricing accurately for risk an added benefit in terms of reduc- the U.S. during the early 1990s may
and fully leveraging the improved ing systemic risk by broadening the provide a useful model for isolating
information flow that will result from base of information available to bad loans in separate business units
“natural ownership” of their assets. banks, minimizing their reliance on instead of offloading them at deep
the narrow and potentially skewed discounts. This grants some measure
Both the efficiency and effectiveness analysis that resides at centralized of protection to the larger organiza-
of risk processes must be improved. credit bureaus. Because of the impact tion and enables the “bad bank” to
To enhance efficiency, banks can of unemployment and poor stock focus on helping borrowers get off
revisit their credit processes and market performance, banks will need life support, restructure their busi-
ensure that they are properly aligned to account for altered risk profiles nesses, and repay loans. Like private
with the organization’s risk objectives. in their statistically managed loans; equity investors, bankers will need
A “triage” approach provides abbre- broad-brush approaches such as relevant operational expertise in
viated or short-form processes for community-rated pricing will prove addition to the classic financial reen-
existing customers or for refinancing, less competitive as more sophisticated gineering skills, especially in
leaving full analysis for higher-risk competitors cherry-pick low-risk geographies where nonperforming
14 Booz & Company

17. loans will force banks to operate design differentiated customer experi- remains sound: For lenders, it provides
significant numbers of companies ences that align with their brands, and an alternative means of funding and
for years to come. deliver supporting value propositions. managing the balance sheet; for in-
In particular, banks will need to vestors, it represents an asset class
3. Does your distribution manage- be able to plan and deliver a tar- with tailored risk and return profiles.
ment capability allow you to optimize geted customer experience across It is highly unlikely, however, that
control of the customer interface? an integrated suite of touch points. second- and third-order securitiza-
How will your investor distribu- For example, HSBC has created a tions will reemerge, given the lack
tion capability respond to the likely high-touch customer experience for of transparency and unsustainable
reemergence of securitization? its “premier” clients in Hong Kong. leverage they engendered. Instead,
In addition to a branch upgrade investors will conduct their own
Banks need to place less emphasis that allows tellers to spend more due diligence, demanding clear
on third-party distribution channels. time on service and less on routine transparency into asset quality and
Instead, they need to focus again on transactions, these high-net-worth first-order relationships with lenders.
establishing and developing customer customers receive preferential Banks that deploy their brands and
channels over which they have greater counter service and pricing, sup- provide superior reporting about
control, either by direct ownership ported by a 24-hour call center and the quality of their assets will com-
or through operational and platform a website providing an integrated mand strong relationships with
linkages. These in-house channels view of both local and foreign cur- investors and maintain an edge
will permit more targeted customer rency accounts. over resurgent nonbank lenders.
acquisition, service, cross-selling, and They may even be able to develop
retention. They will require a distribu- Banks will also need to re-evaluate and market “branded” securitiza-
tion capability that enables banks to how they distribute loans off their tions, in which the integrity of the
become increasingly sophisticated in balance sheet via securitization. The originating institution becomes a
how they define customer segments, essential premise of securitization key selling point to investors.
Booz & Company 15

18. PROFITING IN A Growing shareholder value in the post-
crisis banking environment will require
In the post-crisis era, customers
will increasingly concentrate their
LOW-GROWTH a comprehensive and balanced business in banks they perceive as
ENVIRONMENT approach to both financial and non-
financial capabilities. Banking leaders
stable, secure, and able to provide
the products and services they
must augment their past focus on re- require. Winning these customers
venue and cost with a more sophisti- and the greater wallet share they
cated approach to capital. At the same represent will require banks to pro-
time, successfully responding to the vide the proof points of security
scope and scale of change will demand and longevity needed to secure their
that banks revisit their people pro- trust. As the industry consolidates
cesses and underlying cultures. Five through mergers and acquisitions,
sets of questions need to be consid- and global universal banks face
ered, by the CEO and executive team the challenge of retaining and
and in more detail by functional leaders: strengthening their connections to
larger numbers of customers, the
1. Do your product and offer devel- ability to create and demonstrate
opment capabilities enable you to brand value will be key to build-
leverage your brand in developing ing this trust, as will the ability to
long-term customer relationships? manage and align multiple brands.
How will you use your brand to earn Meeting a full range of customer needs
the chance to satisfy a broader set of will provide a level of return beyond
customer needs? what can be derived solely from depo-
16 Booz & Company

19. sits and loans. Banks will increasingly architecture around customer-centric the increased taxpayer funding of
offer services such as cash flow man- imperatives? banks and associated public scrutiny.
agement (especially as customers re- In fact, some CEOs have already pub-
spond to changing personal situations Over the past decade, many banks licly ruled out offshoring in an effort
and budgets) and new forms of finan- have focused their efforts on cost to improve battered corporate reputa-
cial advice, with a likely greater focus reduction, but for the most part, tions and brands.
on transactional support over the tradi- they have not been able to achieve
tional holistic approach. Bancassurance reductions sufficient to compensate Many banks will thus need to develop
represents another critical opportunity; for shrinking margins—so that overall better operational and IT management
with the destruction of wealth in stock returns on assets have been flat or capabilities to attack the structural
markets and other investment channels declining. Further cost savings are drivers of cost and achieve customer-
over the last year, banks can expect to hampered by two obstacles. First, cost centricity. This is a major, near-term
see a strong and growing demand for efficiencies have typically been driven opportunity for many banks to rein-
simple wealth creation and protection by process improvements that have vent their systems architectures at the
products such as mortgage protection, leveraged an end-to-end product view. same time that they replace core main-
income protection, life insurance, and Now, however, banks find the result- frames that date back to the 1970s or
health savings accounts. ing product-aligned architecture to earlier. In parallel, banks can overhaul
be at odds with the need for greater the associated business models and
2. Do your operations and informa- customer-centricity. Second, a large structures that are inhibiting customer-
tion technology capabilities enable portion of operational savings has centric innovation.
cost reduction and productivity pro- come from outsourcing and offshor-
grams that attack structural cost driv- ing, but these options will likely The cost drivers in most banks are
ers? Are you aligning your business become more difficult to exploit, given deeply embedded in their legacy
Many banks will need better
operational and IT management
capabilities to attack the structural
drivers of cost and become more
customer-centric.
Booz & Company 17

20. process, technology, and product of the role of deposits as a critical analytics to understand the drivers of
architectures. They are best addressed source of funding. Too often, deposits customer value and retention and to
by fundamentally realigning the were treated as a consumer banking analyze elasticity and demand in their
structure of the business around product, and were managed in a frag- efforts to optimize pricing.
customer needs, rather than overlay- mented manner across multiple lines
ing new operating models and IT of business. Now, however, banks 4. Do you have an integrated capital
systems on legacy product-based pro- must manage their cash holistically management and portfolio strategy
cesses and organizational structures. and on a group-wide basis. In fact, capability? Are you managing capital
Greater customer-centricity will the banks that already do this have a as a strategic asset? What alterna-
permit a more sophisticated under- distinct advantage in the post-crisis tives do you have if current funding
standing of the drivers of customer era and in some cases have emerged sources dry up?
value and their cost. In turn, this as aggressors in M&A deals as mar-
will permit banks to deliver “smart kets consolidate. Capital is now acknowledged as a
customization”—streamlining and critical strategic asset and needs to be
consolidating delivery of customer The recent dramatic rise in saving managed as such. A restricted flow of
“nonnegotiables,” while charging rates in developed economies repre- capital destroyed institutions such as
appropriately for extra features that sents another major opportunity for Bear Stearns and Lehman Brothers,
customers actually value. banks to shore up a critical gap in while more savvy stewards of capi-
their customer offerings while more tal such as JPMorgan Chase and
3. Do your asset and liability man- proactively managing a core element Goldman Sachs are emerging from
agement capabilities enable you to of their funding mix. Capturing these the crisis as clear winners.
manage your funding mix holistically? new deposits will require banks to
How well positioned are you for the apply a level of sophistication to But it won’t be enough to manage
coming scramble to attract deposits? product innovation and pricing that capital strategically. Banks must
Easy access to low-cost wholesale was previously applied only to the also effectively communicate their
funding during the pre-crisis era asset side. Banks will need to use strategy to investors, particularly as
caused many banks to lose sight increasingly sophisticated customer they seek to expand. Big is no longer
Capital is now acknowledged as a
critical strategic asset and needs to be
managed as such. Low growth in assets
and a weak pricing environment in
the medium term will require banks
to keep a tight lid on costs just to
maintain their margins.
18 Booz & Company

21. beautiful unless it leads to a firm that Banks will also need to reset the expertise; a single executive might
is better aligned with its core value ex-pectations of equity markets. The need to be fluent in customer analyt-
proposition and delivers an attrac- low-risk, high-return proposition ics, asset and liability management,
tive, sustainable return on capital. that the banking sector implicitly distribution, products, and opera-
Shareholders will no longer tolerate promised investors has proven illu- tions. This highlights the value of
empire building for its own sake sory. Banks can no longer afford a more traditional rotation model,
but will expect to see a compelling high dividend payout ratios or use in which well-rounded, high-potential
business case for each M&A deal, leverage to generate oversized returns bankers are groomed for senior lead-
as well as subsequent reporting on equity. Shareholders are now ership by serving in multiple func-
around deal performance. Share- presented with a less attractive, tions during their careers. And
holders will also expect to see how although arguably more sustainable, it further reinforces an already exist-
specific deals fit into a broader opportunity that can best be sum- ing shift from talent recruitment to
M&A and capital management marized as “low risk, low return, talent retention and development.
agenda that includes divestments as but low volatility too.” Banks need
well as acquisitions. to set and manage this expectation Important cultural changes will also
proactively. be required in the aftermath of the
To securely fund business growth in current crisis. The need for a holistic
the coming era, banks will have to 5. Does your talent management view requires effective teaming at
diversify their funding base. For debt, capability support the human capital senior levels and the elimination of
this will mean diversifying duration; requirements of the post-crisis era? the “cult of the leader” phenomenon
in fact, regulators in some countries that creates barriers to collaborative
are already moving to mandate The last decade has seen an increased management. Banking cultures will
longer-term requirements. For equity, trend in banks hiring from outside also become more outwardly focused:
it will mean thinking ahead about the financial services sector, focusing They will center naturally on the cus-
alternative sources of capital before on functional skills like marketing tomer, and will work with regulators,
they are needed, including strategic that were thought to be transferable. investors, and communities in a more
investors and sovereign wealth funds. Today, banks need more holistic inclusive way.
Booz & Company 19

22. IMPROVED Banks—whether government con-
trolled or privately held, whether
financial crisis—their core purpose,
customer needs, and capabilities—
CAPABILITIES: specialist, regional, or universal while recognizing that profound
THE KEYS TO players—are still the heart of the
global economy. They pump the funds
market changes have occurred
and will impact how these capa-
SUCCESS IN on which productive human enter- bilities need to be delivered. Those
BANKING’S prise depends. Banks must perform
this role effectively with all the due
leaders whose banks can respond
to the times and enhance their
NEW ERA diligence we would expect of any capabilities will be tomorrow’s
custodian of such an essential role. winners.
Banking must refocus on those fun- How ready are you to compete in
damentals that are unchanged by the this new era of banking?
20 Booz & Company

23. About the Authors
Vanessa Wallace is a
Booz & Company partner and
leads the financial services
practice in Asia, Australia, and
New Zealand. She specializes in
strategy, postmerger integra-
tion, and restructuring in retail
banking, wealth management,
insurance, and the public sector.
Andrew Herrick is a
senior associate with
Booz & Company’s financial
services practice and is based
in the Sydney office. His exper-
tise is retail and business bank-
ing, with a focus on strategy,
organizational transformation,
and operational excellence.
Booz & Company 21

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Booz & Company is a leading global management
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