banks can do, and too much consumer path dependency, to place all the ... Oliver
Wyman retail and business banking Digest takes a closer look at some key ...
Financial Services
Volume III – Summer 2013
RETAIL BANKING Americas DIGEST
IN THIS ISSUE 1. s mall business baNking Challenging Conventional Wisdom to Achieve Outsize Growth and Profitability 2. F inancing Small Businesses How “New-Form Lending” Will Reshape Banks’ Small Business Strategies 3. Enhanced Performance Management Driving Breakthrough Productivity in Retail Banking Operations 4. Innovation in Mortgage Operations Building a Scalable Model 5. Chas e Merchant Services How Will it Disrupt the Card Payments Balance of Power? 6. The Future “Ar Nu” What We Can Learn from Sweden About the Future of Retail Distribution
foreword Banking is highly regulated, intensely competitive and provides products that, while omnipresent in consumers’ lives, are neither top-of-mind nor enticing to change. These factors drive the role and form of innovation the industry can capitalize on. In traditional business history – the realm of auto manufacturers, microchip makers, logistics companies and retailers – the literature rightly hails disruptive, game-changing innovation as the engine behind outsized profits for the first movers. In banking, such innovation is very rare. Disruptive innovations of the magnitude of the smartphone or social networking grab headlines, but are hard to leverage in the banking industry. There are simply too many restrictions on what banks can do, and too much consumer path dependency, to place all the shareholders’ chips on disruptive innovation plays. Instead, successful banks develop and execute strategies around less “flashy”, dare we say, small-scale innovation that can still reap outsize returns for their shareholders. This issue of the Oliver Wyman Retail and Business Banking Digest takes a closer look at some key innovation opportunities available to banks today, including: •• Paths to success in small business banking through new form lending and other challenges to conventional wisdoms •• Process redesign opportunities triggered by advances in mobile technology, as in mortgage, or through performance management techniques •• Learning from innovation abroad This eclectic list illustrates one of the greatest benefits to small-scale innovation – there is always room for incremental upside. Each effort, executed effectively, will drive additional gains, while affording the flexibility to react to new opportunities. Additionally, such innovation can be a key move in the game of “strategic chess”, such as the recent Chase/Visa partnership announcement (explored in this digest), which their competitors must now respond to. I hope you find these articles thought provoking.
Michael Zeltkevic On behalf of the Retail and Business Banking Practice
Table of contents 1.
Small Business Banking
4
Challenging Conventional Wisdom to Achieve Outsize Growth and Profitability The SB segment has long presented a significant opportunity for US banks. However, strategies that meet small business needs, create differentiation and maximize potential economic returns have proven elusive. While many banks have settled back into conventional strategies, challengers to these standards can define a break-out strategy that gains material share from competitors and delivers higher growth and higher profits.
2.
Financing Small Businesses
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How “New-Form Lending” Will Reshape Banks’ Small Business Strategies “New-form lending” is a new approach to small business financing that will satisfy an unmet need for short-term cashflow financing for SBs. New-form lending relies on the analysis and ongoing monitoring of daily cashflows to assess and control risk. This is a major profit opportunity that can also help improve traditional loan underwriting processes by lowering unit costs and improving risk differentiation.
3. Enhanced Performance Management
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Driving Breakthrough Productivity in Retail Banking Operations Years of relentless focus by retail banks on improving the efficiency of the operations function have left few residual opportunities to drive transformational savings without diluting service quality. By developing a new way of measuring employee productivity and compensation, Enhanced Performance Management (EPM) fills this gap by dramatically increasing employee throughput, while simultaneously improving risk, quality and the client experience.
4. Innovation in Mortgage Operations
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Building a Scalable Model The last 20 years have seen a number of innovations in the design of mortgage origination processes. Looking ahead, however, we see three factors converging that will now provide both the opportunity and the forcing mechanism for institutions once more to rethink their approach to mortgage originations, driving fundamental progress in the core operations of the business.
5. Chase Merchant Services
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How Will it Disrupt the Card Payments Balance of Power? In the current power play between issuers, networks, and acquirers, JPMorgan Chase has taken a first step towards creating a new 3-party network with Chase Merchant Services. This paper explores how this will impact Chase’s competitors and its customers (merchants and cardholders), as well as the networks themselves.
6.
The Future “Ar Nu” What We Can Learn from Sweden About the Future of Retail Distribution With high mobile and internet banking adoption, low branch traffic and heavy use of electronic payments, Sweden and its banks provide invaluable insight into the future of retail banking. This article explores the factors that enabled Swedish banks to accelerate evolution and evaluates what one can learn about the future of US retail distribution and how to enable a smooth transformation.
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1. Small Business Banking Challenging Conventional Wisdom to Achieve Outsize Growth and Profitability By Anna Epshteyn Whitney and Tim Spence
Boasting a base of more than 20 MM potential customers1 with a broad range of financial services needs, the Small Business segment has long presented a significant opportunity for US banks. Recent Oliver Wyman research and analysis2 suggest that the SB sector produces $14 BN of after-tax profit and $10 BN of after-tax economic profit3, annually – nearly 15% of the total US financial services economic profit pool.
The sector is also resilient: in the face of recent economic turmoil and uncertainty, 73% of business owners told us that their firms were either “very” or “reasonably” profitable, while 75% described them as being in “established” or “growth” mode. However, strategies that meet small business needs, create differentiation and maximize potential economic
Exhibit 1: Small Businesses are heavy users of financial services PRODUCT USAGE RATE (EMPLOYER SMALL BUSINESSES) 100% 80% 60% 40% 20%
Deposits
Cards*
Loans
Wire
ACH
Payroll
Merchant svcs Remote deposit
Any payments
Other loan
Mortgage
Equipment loan Operational loan Auto loan/ lease
Any loan
Store card
Charge card
Credit card
Any card
Money market HY Sav/ CD
Savings
Checking
Any deposit
0%
Payments & Treasury Services
* Card consists of cards used solely for the business; 44% of SBs are also merchants (accept cards) Source: 2011 Oliver Wyman Small Business banking survey
1 ~20% of small businesses in the US have at least one employee in addition to the owner. Source: 2007 Census. 2 A 2011 survey of 5,000 small business owners, from which we estimated the profit to banks from these businesses’ product and service usage.
3
“Economic profit” is the profit after tax earned by the bank over-and-above the required rate of return on capital held against the risks of the business; it is worth noting that today, most of this profit comes from high-balance checking accounts and high-volume merchant services accounts – and not from small business loans.
Copyright © 2013 Oliver Wyman 4
Exhibit 2: Profit contribution of small business customers ranked by relationship profit CONTRIBUTION TO TOTAL SB PROFIT 73%
21% 11%
What are the conventional wisdoms restricting banks’ strategic thinking? We see five:
3%
1%
Bottom 10%
10th percentile
20th percentile
30th percentile
40th percentile
50th percentile
60th percentile
-13% 80th percentile
2. RELATIONSHIP COVERAGE: “Assigning relationship managers is an effective means to attract new businesses, deepen relationships and decrease attrition”
6%
-2% Top 10%
1. SEGMENTATION: “The size of the business is the best indicator of needs, profit potential, and sales and service approach”
70th percentile
returns have proven elusive. Following the financial crisis disruption, the market has largely settled back into competitive equilibrium, with many banks – and their advisors – allowing a set of conventional wisdoms to constrain their thinking as they craft their strategies. A bank willing to challenge these conventional wisdoms, Oliver Wyman believes, can define a break-out strategy that gains material share from competitors and delivers higher growth and higher profits.
Source: 2011 Oliver Wyman Small Business banking survey
3. CHECKING: “Offering ‘free checking’ is a tablestakes competitive requirement” 4. SMALL BUSINESS LENDING: “Credit process streamlining is the key to improving profitability and expanding SB lending” 5. NEW REVENUES: “Expanding into new service areas is the best path to increasing fee revenue” Oliver Wyman research and analysis suggest that some of these conventional wisdoms are wrong, and others only half-right. Worse, they disguise powerful new insights that banks can leverage to upgrade performance substantially. Let us examine them one-by-one.
Oliver Wyman research validates the notion that larger businesses are more likely to be profitable. However, it also reveals two interesting findings that averages disguise. Firstly, 20% of businesses (the high value group) generate 95% of total segment profit. More surprisingly, more than half of the high value group have annual revenues less than $1 MM.
Exhibit 3: Annual revenues of the most profitable small business relationships TOP 20% OF ALL SMALL BUSINESSES BY PROFIT CONTRIBUTION $5-10 MM 14%
1. Segmentation: is revenue size all we need? Conventional wisdom places a great deal of weight on business size. For example, most banks use it to dictate how they organize, what prospects they target, and what products and delivery models they employ. Businesses that are larger, the rationale follows, will carry higher deposit balances, have greater credit appetites, and need more complex payments solutions, thus making them more profitable relationships.
