Contact: Gerry Schipper
Deloitte
Partner Assurance & Advisory
+61 3 9208 7085
Contact: Louise Denver
Deloitte
Director of Financial Services Communication
+61 2 9322 7615
“The greatest shift in economic power in 200 years will take place over the next few decades. Australia, and the developed world, need to position themselves to meet this,” says Deloitte Australia partner and banking and securities leader Gerry Schipper.
“Efficiency, self-service and economies of scale are key to financial organisations remaining globally successful beyond 2010,” he says referring, to the latest research from Deloitte Touche Tohmatsu’s global financial services industry group (GFSI).
The research – The Hallmarks of Success – pinpoints opportunities to reinvest some of those back-office cost savings into premium services for high value market segments – including ‘mass affluent’ segments that may be underserved today.
“In the back office, this is likely to further drive the move to offshore non-customer facing activities. And beyond 2010, the emergence of industry utilities should become dominant from investment banking to insurance,” Schipper points out.
In addition the report highlights merger and acquisitions
In Europe Deloitte expects 700 European banks to disappear through mergers over the next three years and is expecting a number of east - west, and west - east deals, to capitalize on increasing globalisation.
The Asia Pacific market is also likely to see a rise in both transaction volumes and values between now and the end of the decade – with major capital flows into both China and India.
Says Schipper, “Financial institutions of every shape and size are likely to face continuing challenges to grow their top line, even after large acquisitions.
“Our research reinforces that the market rewards financial institutions achieving the best revenue growth and superior risk adjusted returns on invested capital, and our analysis shows that the five banks with the fastest revenue growth on a worldwide basis saw their stock price soar by an average 91 percent over a four year period, which is more than four times better than the industry average.”
Growth strategies
The report also says financial institutions should rethink their growth strategies, eschewing product innovation in favour of process and service improvements. Process and service innovations are much harder for competitors to replicate, and so provide a more enduring advantage, both in terms of better customer relationships and revenue growth.
Process and service innovations also tend to reduce complexity and cost, creating a ‘virtuous circle’ of top-line growth and bottom-line profitability.
Successful financial institutions are likely to embed innovation into the very fabric of the organization – from strategy and processes, to people, systems and business partners – actively developing good ideas into enduring commercial success.
Cracking the IT value code
By 2010 leading financial institutions are likely to be some of the most sophisticated users of technology on the planet. Today the top 25 financial institutions in the world spend in excess of US$50 billion on technology in a single year. Says Schipper, “Financial institutions should get improved productivity, enhanced revenue growth, and better profitability from this level of expenditure in the future. The challenge for financial institutions should be digitisation of business and effective IT governance.
“The differentiator between success and failure will not be the absolute amount spent, but the governance of technology within the business”, he said. “This means ensuring the CIO has a seat at the top table and is savvy in both technology and business.
Secondly, financial institutions are incredibly complex businesses
Over the next five years technology should be applied to reducing this degree of complexity by the eradication of paper-based processes. Says Schipper, “For instance, trading of many asset classes is now done on electronic exchanges. By contract, back-office clearing and settlement is often stuck in a paper-based world driving up complexity and risk, and reducing the efficiency of markets.”
By 2010, technology is likely to be almost invisible yet pervasive throughout leading financial institutions. This simplicity should drive new business models and be integral to forging the hallmarks of success needed to take organisation to 2010 and beyond.
Only the best will profit
Says Schipper, “The trends and challenges identified in this report are likely to affect the vast majority of financial services firms. But only the best are likely to profit from them. Big is likely to become beautiful, but in itself will be no guarantee of success. Financial institutions that start building these qualities into their corporate DNA today are the ones most likely to come out on top in 2010.
“The need to scale up will be driven by three factors. First, the need to have a significant balance sheet will be critical in supporting the major corporate clients and in funding future activities.
Second, many financial products are likely to become commoditised, meaning margins will become thinner and economies of scale more important. Third, the ability to have a multinational market portfolio could only be sustained by major organisations.”
Further global shifts which will have an impact on financial services are:
Demography
The developed world is getting older, and this will bring changes to lifestyle, and more conservatism. Immigration is not the only answer to address skills shortages. There will be a power shift to older generations. Increasingly, Australian companies will have to find ways to use ‘older workers’ and to bring more women into the workforce.
The environment
The end of the oil era is coming; timing is uncertain but it will arrive. This looming shortage has to be balanced with huge pressure from US, India and China for economic growth, and therefore for fossil or other fuels. The Australian economy is a big beneficiary of coal exports. Investment in alternative fuel technologies is required.
Companies have to become green. Some oil companies still find it hard to attract staff. Banks need to lead the charge in this regard. In many parts of the world banks face liability for financing entities which may cause pollution. This trend will accelerate. Lending criteria will have to include “environmental issues”.
Globalisation
China and India are the cheapest manufacturing and services providers respectively. The west needs to exploit its intellect, culture and education. China, US and India will be the largest economies in 2050, in that order. Top universities are in the US (and some in Australia). Increased corporate and state support of Australian universities are required to maintain and increase this edge in academic excellence.
Technology
Global level playing field, technology is democratic. Investors have to be nimble. There are already more tele-workers than factory workers.
Government
Governments will have to start competing for resources. This has to be seen in the light of certain countries becoming more nationalistic and protectionist.
