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 / Winter 2009 / Issue 57(originally published by Booz & Company)


What Banking Needs to Become

Unemployment and poor stock market perfor­mance will continue to increase the inherent riskiness of many consumer loans. Banks will need to augment their current statistically based methods for assessing risk for consumer loans with the more sophisticated use of customer behavior information. As some banks learn to cherry-pick low-risk loan customers, broader ap­proaches, such as community-rated pricing (in which all customers are charged the same premiums), will prove less competitive.

To enhance efficiency, many banks will revisit the way they process credit applications, adopting abbreviated or short-form processes only for existing customers or for refinancing, and applying a more complete analysis to higher-risk or more uncertain prospects.

Distribution management. Banks need to place less emphasis on third-party intermediaries such as brokers, aggregators, and referrers. Instead, they should refocus on establishing and developing their own channels to customers. With these in-house channels, banks will become more sophisticated in defining and targeting customer segments, designing differentiated customer experiences that align with their brands, and delivering value across an integrated suite of programs and products. For example, HSBC has created a high-touch customer experience for its “premier” clients in Hong Kong. These high-net-worth customers receive preferential counter service and pricing, supported by a branch upgrade that allows tellers to spend more time on ser­vice and less on routine transactions, plus a 24-hour call center and website that provide an integrated view of both local and foreign currency accounts.

Among universal banks, in-house channels for investors will replace intermediaries, especially for complex financial instruments. Banks will also need to reevaluate how they move loans off their balance sheet through securitization. The basic practice will continue, because its essential premise remains sound. It provides an effective means of funding and managing lenders’ balance sheets, and it provides investors with risk and return profiles tailored to their needs. It is highly unlikely, however, that second- and third-order securitizations (in which tranches are recombined and repackaged several times) will return, given the lack of transparency and unsustainable leverage they engendered. Instead, investors will conduct their own due diligence, demanding clear transparency into asset quality and first-order relationships with lenders. Banks that brand themselves as providing superior reporting on the quality of their assets will command strong relationships with investors and maintain an edge over resurgent nonbank lenders. They may even be able to develop and market branded securitizations, in which the integrity of the originating institution becomes a key selling point to investors.

Product and offer development. In the post-crisis era, customers will concentrate their business, favoring banks they perceive as stable, secure, and able to provide the products and services they require. To win these customers, and the greater wallet share they represent, banks will increase their efforts to meet a full range of customer needs. They will offer services such as cash-flow management (especially as customers face changing personal situations and budgets) and new forms of financial advice, likely with a greater focus on transactional support. Bancassurance (the selling of insurance through a bank’s existing channels) represents another critical opportunity; with the destruction of wealth in stock markets and other investment channels over the last year, banks can expect to see a strong and growing demand for mortgage protection, income protection, life insurance, and health savings accounts.

Operations and information technology. Many banks have had difficulty reducing costs enough to compensate for shrinking margins. In the past, expense reductions have tended to come from two sources. The first is process improvements aligned with individual products; this approach is now at odds with the need for greater customer-centricity. The second source is offshoring and outsourcing, which will become less acceptable in a climate of greater government oversight. In fact, some bank chief executives, such as Gail Kelly of Westpac in Australia, have publicly ruled out offshoring in an effort to improve their battered corporate reputations and brands.

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  1. Shumeet Banerji, Paul Leinwand, and Cesare R. Mainardi, Cut Costs, Grow Stronger (Harvard Business Press, electronic book, 2009): Step-by-step insights for reducing expenses dramatically by focusing on a coherent system of capabilities.
  2. Alan Gemes, Peter Golder, and Thorsten Liebert, “Global Financial Governance: Improving Stability and Mitigating Future Threats,” Booz & Company white paper, September 2009: Basic principles for the next generation of financial-services regulation.
  3. Henry Kaufman, The Road to Financial Reformation: Warnings, Consequences, Reforms (Wiley, 2009): A banker’s perspective on thehistorical precedents for the current crisis, its likely aftermath, and the impact on regulation and the industry.
  4. Yoshiyuki Kishimoto, Hiroyuki Sawada, and Chieko Matsuda, “Follow the Customer, Follow the Car,” s+b Leading Ideas Online, 12/17/08: Lessons from Japan’s “lost decade” reinforce the imperative of being close to the customer and the dangers of excess capital.
  5. Andrew Turnbull, “Is State Control Making a Comeback?s+b Leading Ideas Online, 04/28/09: Why permanent government control of banks is unlikely — but a new regulatory environment is assured.
  6. For more thought leadership on this topic, see the s+b website at:
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