A shopper uses Royal Bank’s Mobile Wallet payment application.Tim Fraser/The Globe and Mail
Canadian banks have an enviable record for stability and performance over the past 20 years. Even into 2013, we are continuing to see remarkably good performance.
However, the next few quarters are likely to be very challenging as key forces start to impact top- and bottom-line results. These include the global headwinds we are seeing as the European economy continues to stall, slow growth in the Canadian economy and the high degree of debt among Canadian consumers, who can no longer be the growth engine for the domestic retail businesses.
While these cyclical factors present near-term challenges , more fundamental ones exist for the banking industry globally and in Canada, and it is vital that the industry start to address them.
Canadian banks have a business model in retail banking, which will not be sustainable in the future. While most industry executives would acknowledge that the world is changing, there is not a universal recognition with respect to how fast this is likely to occur. The answer is quickly , meaning that now is the time for our banks to take a leadership position in rethinking the retail bank of the future.
In doing so, they can drive innovation that will position them well both for profitability in the domestic market and success abroad, as they increasingly look to growth beyond the Canadian border.
The Challenge
In Canada today there are almost 10,000 bank branches, including credit unions. This branch structure costs well over $10-billion to operate annually, or more than $300 per person in the country. There are other costs associated with the current banking model. For example, moving paper cheques each day from these branches for processing costs the industry almost $100-million a year just in transport costs, let alone the associated processing costs.
This infrastructure, as well as the hundreds of millions of dollars in costs for call centres, paper statements, and so on is increasingly irrelevant to today's millennial customers. The idea of having to go to a branch is foreign to them – they expect to transact and purchase using their smart phones, iPads and laptops. With changes to e-signature rules, it is easy to envision a world where virtually every transaction can be done online or perhaps in the home, as roving, mobile-enabled sales forces increasingly penetrate the market for more complex products and advice based services.
Now accounting for 35 per cent of the Canadian banking consumer population, by 2023, today's millennials and those following them will represent more than 50 per cent of banking consumers. As mobile functionality evolves and is adopted by this segment, and even older consumers, the branch infrastructure will be rendered increasingly obsolete. While all banks are engaged in developing mobile solutions, the pace has been relatively slow and they risk being left behind by more aggressive non-bank players such as Pay Pal, Google, Apple and global payments players such as American Express.
The speed with which this sea change is likely to occur should not be underestimated and with this, the overall impact on bank operating models and infrastructure. One has only to look the cautionary tale of Blockbuster, which, from a peak valuation of $5-billion in 2004, fell to $24-million by 2010, as online competitors such as Netflix disrupted their business model, seemingly overnight.
The Path Forward
So what are the steps forward-looking banks can take to address these issues?
· Redesign the customer experience. Customers expect to interact with their bank when they want and where they want. They also expect institutional memory – that is, when they interact with the bank, no matter what channel, they expect that any interaction with other channels will be knowledgeable about what has gone before. And they expect their bank to know them, their preferences, their needs and how they wish to deal with their bank. The data is there in spades; the challenge now is to invest in the analytic capabilities to turn data into actionable insights. These investments will allow leading banks to develop very targeted offers to their clients and potential clients, based on revealed preferences and even real-time locations.
· Work with other financial institutions and the regulatory authorities to upgrade Canada's payments infrastructure. We are behind many countries in our payments and mobile infrastructure. While some progress has been made, more must be done and the industry must adopt a more co-operative mindset to speed progress. For example, our electronic payment system known as the Automated Clearing Settlement System (ACSS), managed by the Canadian Payments Association, is ill-equipped to move Canada to electronic bill payment and presentment, one of the key innovations we are seeing elsewhere.
· Upgrade internal infrastructure to provide more flexibility. For many banks with deposit and lending systems dating from the 1970s, this is a daunting task, but one that must be tackled. The vast majority of the technology personnel that worked on and understand these systems either have already retired or will do so in the next few years. The ability to efficiently modify and update these systems to accommodate new products is eroding quickly.
· Focus on activities and capabilities critical to competitive advantage, and seek new models to source the rest. Around the world, banks are increasingly focusing on those activities where they can truly differentiate themselves competitively. This could be in the area of customer interaction, new product development, risk models or marketing strategy. For many other non-differentiating functions, leading banks are outsourcing them to specialist providers, be they offshore or on shore. In Canada, where outsourcing has recently attracted some controversy, we must move past that and understand that work must ultimately flow to wherever the greatest value can be created. While the transition can be difficult, we need to focus on creating sustainable, innovation-based jobs in Canada, not resisting the inexorable tide of globalization.
· Develop relationships with innovative players in the areas of mobile, new products, payments, etc. For example, Toronto is a hotbed of innovation in mobile and payments. Unfortunately, though with some exceptions, these startups are often forced to look to the United States for funding and for charter customers. This is something that must change if Toronto is to build an ecosystem of innovation around banking.
The next few years are likely to see massive change in how consumers interact with their banks. Canadian banks have a unique chance to lead the way. But it will require an aggressive innovation-driven mindset and a willingness to reduce reliance on an increasingly obsolete banking model.
John Armstrong is Managing Partner of Capco in Canada, a financial services business and technology consultancy, and member of the Ontario Task Force on Competitiveness, Productivity and Economic Growth.
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Editor's note: The year when millennials and those following them will represent more than 50 per cent of banking consumers is 2023, rather than 2022, as appeared in a previous version of this story. This version has been corrected.