Dr. Peter Leukert, Strategy Global Financial Institutions, FIS Industrialization strategies that enable banks to reduce cost and complexity while improving customer service. - Driving forces for industrialization in banking - Transforming front and back office - Regulatory trend towards localization (industrialization without globalization?) - Taking cost and complexity out of the value chain

1. What does Industrialization
really mean for Banking
October 2013

2. Agenda

Driving forces for industrialization in banking

Transforming front and back office

Regulatory trend towards localization
(industrialization without globalization?)

Taking cost and complexity out of the value chain
2 - What does Industrialization really mean for Banking
Capco confidential - © Capco - October 2013

3. Driving force: Lack of trust
Reputational challenges have hit the financial industry across the globe
Percentage of survey respondents who place trust in given industry, 2012*
80
79
70
66
64
62
60
56
53
51
47
50
40
30
20
10
0
Tech
Auo
Food
Telecom
Pharma
Energy
Media
Banks
* Participants assessed trust of every industry on a 9-point scale from “trust them a great deal” to “don‟t trust them at all”, Source: Edelman trustbarometer
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4. Driving force: Regulation
Increasing regulatory challenges for the financial industry
Basel III
Capital, leverage and funding
Compressed profitability: Reduced
margins whilst increased fixed costs
Restrictions on business activities
Volcker, ICB, compensation
Changes to fundamental structures
and business models
Additional taxes
Bank levies, transaction taxes
Changes in consumer protection:
MiFID II, RDR
Consumer protection
Disclosures, distribution
Changes to compensation levels
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5. Driving force: Cost pressure
Between 21% and 33% cost reduction still needed to deliver 15% RoE
Sample of 8 global banks. Representing 15% of total global banking cost base.
33% expense reduction needed to deliver
15% RoE if income declines by 10%
USD Million
21% expense reduction
needed to deliver 15% RoE
Profit
Expense
s
2011
2006
15% rise in expenses
between 2006 and 2011
Expenses
Income flat between
2006 and 2011
Income
58% rise in shareholder equity between
2006 and 2011
Equity
0
100,000
200,000
300,000
400,000
Target 15% RoE, income decline 10%
5 - What does Industrialization really mean for Banking
500,000
600,000
700,000
Target 15% RoE, stable income
Capco confidential - © Capco - October 2013
800,000
2011
900,000
2006

6. “Industrialization is a period of profound change whereby
social, economic and technological advances coincide to
deliver a rapid modernization of society”
Driver
Enabling trends
1. Technological





2. Economic





3. Social





Propensity to influence financial services
Internet
Cloud
Miniaturisation
Componentisation
Standardisation
High
Intense cost pressure
Surplus capacity
New entrants/business models
Supply chain disintegration
Emerging economies
High
“Electronification” of society
Loosening of networks
Trust based on data, not relationships
Brand/product switching
Mass empowerment
Medium -> High
6 - What does Industrialization really mean for Banking
Banks have been leading adopters of
technology…focus now on gaining strategic
advantage as quasi-tech companies
In the face of stiff economic headwinds, vertical
disintegration of the value chain appears inevitable
Trends already seen in the buying of commodity
Financial Services (insurance, mortgages) will
accelerate as consumer behaviour trends towards
mass empowerment
Capco confidential - © Capco - October 2013

7. Let‟s review one of the most revolutionary
„industrializations‟ of all time: 70 years of the
electronic computer
1000
100
Unit price of computing power/USD/byte
10
1
.1
.01
.001
“Worldwide market is
for no more than 5
computers” (Thomas
Watson, CEO, IBM)
Monolithic computing
companies
(IBM, HP, ICL, Olivetti
), rise of the
mainframe
First electronic
computer built
-„Colossus‟
.0001
.00001
.000001
6th commercial
computer
completed
by 1953
Apple, which no
longer manufactures
computers, is the
most valuable
company on earth
Rise of the network and the
PC, mass customisation trend
(Dell)
Rapid break up of the
value chain through
changes in technology
and supply chain logistics
Rise of the Internet and
the ubiquitous computer
Total specialisation
of the value chain
First 1 GB
disk drive
.0000001
.00000001
1944
1960
7 - What does Industrialization really mean for Banking
1970
1980
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1990
2000
2010

8. Applying these trends to Financial Services, the
banks of tomorrow will look radically different to
the banks of today…
Today
3 years
5 years +
Aggregation
Third
Party
Channel
integration
Customer
service
Fulfilment
Bank
Bank
Product
Economic and
technological
drivers to
industrialise
bottom end of
value chain
Social and
technological
drivers further
re-shape relationships between
customers and
banks
Third
Party
Third
party
Technology
Threat of disintermediation
as the way
consumers buy
banking services
fundamentally
changes
Bank
Third
Party
Infrastructure
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9. Transforming front and back office
Front office



Back office
Improve customer experience
Offer more convenience, choice
and control
Improve connectivity to customers
and employees





Improve quality
Reduce waste
Reduce complexity
Virtualize services
Integrate channels
Virtuous cycle
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10. In manufacturing industrialization corresponded
to globalization

Distributing/selling products to customers
across the globe

Production sites and suppliers across the
globe

Cost of transport less and less relevant
10 - What does Industrialization really mean for Banking
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11. However in Banking regulation drives towards
localization

Home market regulators pressuring banks to curtail and / or ring-fence their external activities
either through explicit rules (e.g. ICB in the UK) or through the lens of resolution planning
(e.g. in Italy).

Home market regulators seeking to limit proprietary trading activity, or ring-fence this from
retail deposit-taking activity.

Host regulators in the key hubs limiting, and seeking greater transparency and control, over
risk-taking conducted overseas but booked into the hub (e.g. UK PRA).

Host regulators in the hubs and other markets pushing for increased capital and liquidity to
be held locally, as well as onerous (and at times unpredictable) governance requirements
(e.g. local risk appetite frameworks, local limit frameworks etc.).

Host regulators pushing for foreign bank branches to become subsidiaries, or treating them
as if they are subsidiaries, heightening the level of scrutiny and supervision.
Industrialization without globalization?
Impact on business model, legal entity structure, operating model?
11 - What does Industrialization really mean for Banking
Capco confidential - © Capco - October 2013

12. Evolution of value chain in manufacturing
Level
Value chain
Characteristics
1
Traditional
manufacturing

2
Manufacturing
partially sourced

3
Straight Through
Processing

4
Business Partner
Solutions

12 - What does Industrialization really mean for Banking




Many expensive process breaks in value chain
All process steps executed in-house
Many expensive process breaks in value chain
Non-core process steps outsourced to third parties
Inefficient process breaks are eliminated
Non core process steps outsourced to third parties
Smart Sourcing Solutions
Manufacturer offers business partner solutions
Capco confidential - © Capco - October 2013

13. Unit costs
Taking cost and complexity out of the
value chain
Regulatory burden
takes most or all of
this cost saving back…
Regulatory burden reduced through sharing
Overall cost reduction
of 15%+ is only
achievable through
industrialisation
1
Uncompetitive zone
2
X
Traditional re-engineering and off-shoring
within a single bank can only go so far...
Y
3
Industrializing to reach new cost position:
 Sharing across banks to realize economies of scale
(e.g. sharing investments for regulatory changes)
 Reducing complexity, by e.g.
 Standardization
 Eliminating redundancy
 Removing non value-adding variety
Size of firm
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14. Activities ripe for industrialization?
High
Strategizing across three categories will help banks realize
significant benefits
Global research
asset sale
Wealth mgmt
asset sale
Investment bank
asset sale
Commercialization of assets
Reference
data
Payments
processing
Externalize research
offering
Medium
Infrastructure
Electronic trading white
labelling
Leverage utilities & suppliers
Wealth mgmt for masses
(non-US)
Product
rationalization
Market
data
Vendors
Low – medium
Value of benefits realized
ML Online
(wealth mgmt white label)
Application
support
Enhanced cost
transparency
Asset servicing
Premises
Headcount
Cost/
ticket reduction
Infrastructure pooling
Risk management
Global markets
client portal
Settlement
& clearing
Improve cost management
Location
Collateral management
Derivatives industry gateway
Reference data
Application real estate
Legal entity optimization
Expenses
>10 competitors
Standard
IT simplification
>5 competitors
Medium
Difficulty in benefits realization
14 - What does Industrialization really mean for Banking
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>1-2 competitors
Complex