What does Industrialization really mean for Banking

What does Industrialization really mean for Banking October 2013

Capco confidential - © Capco - -2 What does Industrialization really mean for Banking

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

October 2013


Driving force: Lack of trust Reputational challenges have hit the financial industry across the globe

October 2013

Percentage of survey respondents who place trust in given industry, 2012*

Tech Auo Food Telecom Pharma Energy Media Banks0

10

20

30

40

50

60

70

80 79

66 64 62

5653 51

47

* 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


Driving force: Regulation Increasing regulatory challenges for the financial industry

October 2013

Compressed profitability: Reduced margins whilst increased fixed costs

Restrictions on business activitiesVolcker, ICB, compensation

Additional taxesBank levies, transaction taxes

Basel IIICapital, leverage and funding

Consumer protectionDisclosures, distribution

Changes to fundamental structures and business models

Changes in consumer protection:MiFID II, RDR

Changes to compensation levels


Driving force: Cost pressure Between 21% and 33% cost reduction still needed to deliver 15% RoE

October 2013

Sample of 8 global banks. Representing 15% of total global banking cost base.

Equity

Income

Expenses

Profit

0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000

Target 15% RoE, income decline 10% Target 15% RoE, stable income 2011 2006

USD Million

Expenses

2006

2011

Income flat between 2006 and 2011

58% rise in share-holder equity between

2006 and 2011

33% expense reduction needed to deliver 15% RoE if income declines by 10%

21% expense reduction needed to deliver 15% RoE

15% rise in expenses between 2006 and 2011


“Industrialization is a period of profound change whereby social, economic and technological advances coincide to deliver a rapid modernization of society”

October 2013

Driver Enabling trends Propensity to influence financial services

1.Technological Internet Cloud Miniaturisation Componentisation Standardisation

High

Banks have been leading adopters of technology…focus now on gaining strategic advantage as quasi-tech companies

2. Economic Intense cost pressure Surplus capacity New entrants/business models Supply chain disintegration Emerging economies

High

In the face of stiff economic headwinds, vertical disintegration of the value chain appears inevitable

3. Social “Electronification” of society Loosening of networks Trust based on data, not relationships Brand/product switching Mass empowerment

Medium -> High

Trends already seen in the buying of commodity Financial Services (insurance, mortgages) will accelerate as consumer behaviour trends towards mass empowerment

Capco confidential - © Capco - -

Let’s review one of the most revolutionary ‘industrializations’ of all time: 70 years of the electronic computer

October 20137 What does Industrialization really mean for Banking

1944 1960 1970 1980 1990 2000 2010

Un

it p

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com

pu

tin

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ow

er/U

SD

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1000

100

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1

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First 1 GB disk drive

“Worldwide market is for no more than 5 computers” (Thomas Watson, CEO, IBM) Apple, which no

longer manufactures computers, is the most valuable company on earth

Monolithic computing companies (IBM, HP, ICL, Olivetti), rise of the mainframe

Rapid break up of the value chain through changes in technology and supply chain logistics

Rise of the network and the PC, mass customisation trend (Dell)

Rise of the Internet and the ubiquitous computer

Total specialisation of the value chain

6th commercial computer completed by 1953

First electronic computer built -‘Colossus’


Applying these trends to Financial Services, the banks of tomorrow will look radically different to the banks of today…

October 2013

Product

Aggregation

Today

Customerservice

Fulfilment

Technology

Infrastructure

Channelintegration

Bank

Bank

Bank

ThirdParty

ThirdParty

3 years 5 years +

Social and technological drivers further re-shape relation-ships between customers and banks

Threat of dis-intermediation as the way consumers buy banking services fundamentally changes

ThirdParty

Economic and technological drivers to industrialise bottom end of value chain

Thirdparty


Transforming front and back office

October 2013

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


In manufacturing industrialization corresponded to globalization

October 2013

Distributing/selling products to customers across the globe

Production sites and suppliers across the globe

Cost of transport less and less relevant


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.

October 2013

Industrialization without globalization? Impact on business model, legal entity structure, operating model?


Characteristics 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

Value chainLevel

Traditional manufacturing

Manufacturingpartially sourced

Straight ThroughProcessing

Business PartnerSolutions

1

2

3

4

Evolution of value chain in manufacturing

October 2013

Capco confidential - © Capco - -

Y

X 1

2

3

Taking cost and complexity out of the value chain

October 201313 What does Industrialization really mean for Banking

Un

it c

ost

s

Size of firm

Regulatory burden re-duced through sharing

Overall cost reduction of 15%+ is only achievable through industrialisation

Regulatory burden takes most or all of this cost saving back…

Uncompetitive zone

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

Traditional re-engineering and off-shoring within a single bank can only go so far...


Difficulty in benefits realization

Val

ue

of

ben

efit

s re

aliz

ed

Hig

hM

ediu

mL

ow

– m

ediu

m

Standard Medium Complex

Improve cost management

Leverage utilities & suppliers

Commercialization of assets

Location

Premises

Expenses

Headcount

Vendors

Application real estate

Applicationsupport

Settlement & clearing

Collateral management

Asset servicing

Market data

Infrastructure

Referencedata

Risk management

Electronic trading white labelling

Reference data

Paymentsprocessing

Infrastructure pooling

ML Online (wealth mgmt white label)

Externalize research offering

Global markets client portal

Wealth mgmt for masses (non-US)

Wealth mgmtasset sale

Global researchasset sale

Investment bankasset sale

Derivatives industry gateway

Legal entity optimization

>10 competitors >5 competitors >1-2 competitors

Productrationalization

Enhanced cost transparency

IT simplification

Cost/ticket reduction

Activities ripe for industrialization?Strategizing across three categories will help banks realize significant benefits

October 2013

Devices & Hardware

What does Industrialization really mean for Banking