26. April 2019

Swiss retail banks and the need for reinvention


Swiss retail banks are enjoying record results – the pressure to digitalise is not yet being felt. Yet below the calm surface, sea changes are already underway.

«Digitalise or die!» A couple of years ago, ti&m was amongst those preaching a message to the market – anyone who didn’t digitalise immediately would go under, and quickly. But what has been happening in Swiss banking since then? Swiss retail banks are recording record profits. How is digitalisation affecting company performance? At first glance, it would appear not at all. But a few things have actually happened: We have witnessed the emergence of a wide range of new services targeted at submarkets or micromarkets within the banking sector. Their focus is on investment property finance or municipal finance, services for international travellers, new apps for pensions, platforms for mortgage brokers, innovative solutions for investors, and so on.

The list is almost endless. All these solutions have one thing in common, however: They all want a slice of the sumptuous banking cake. And they are succeeding: At the moment, they may only be scratching the surface. But in the future, there will no longer be any reason why, for example, a municipality should have to be funded by a bank rather than via a platform such as Cosmofunding, which operates without brokers and offers access to a broader range of finance.

Business models are being sliced up
The mechanism by which this takes place is familiar, and many «disrupted» sectors have experienced it in recent years. A business model is sliced up, and the profitable parts are redistributed. Take a newspaper’s individual revenue streams for instance: the classified section with jobs, cars, property, small ads, death notices and a substantial amount of the advertising have all been taken over by specialised platforms. Today, the printed newspaper is as good as dead commercially, even though its contents are still widely circulated. The future of banking looks similar: A bank might still have as many customers as it does today, but firstly, the number of inactive customers is increasing, and secondly, revenues are continuing to fall, because customers are generating lower volumes with smaller margins. Quite simply, business will be done elsewhere. At the likes of Revolut, HypoPlus, MoneyPark, VIAC, Cosmofunding, True Wealth, and ImmoScout – anywhere with a better and more suitable offering. It is absolutely plausible that a customer might seek advice from their bank on a house purchase, but then agree their mortgage elsewhere – as the retail electronics sector has experienced with «showrooming» for instance. In this scenario, banks would be intermediaries at best. This would significantly affect earnings.

Five key points
So how should banks react? What are the strategic areas for action? There are five key points to take away:

1. Technology: This is something that most banks underestimate entirely. The fact is this: You need excellent technological expertise. Successful future business models for banks will be based on intelligent use of technology, networked with expert banking knowledge – banking is becoming an IT business. At present, this skill set is largely lacking; it must be built up urgently, and at all levels – including management. Only then will banks be able to make the right technological decisions and drive innovation. 

2. Cultural transformation: These days, it is almost a truism: Businesses need to change if they want to survive in digital markets. But banks are by very nature inert. Their core business is administration, by contrast with pension providers and insurance companies, whose core business is competition. Change therefore means moving away from an admin-focused culture towards increased customer orientation, greater speed and even more agility, courage, and risk. But it also means shifting away from a hierarchical culture towards networks and new management models. Innovative IT companies in particular, such as ti&m, might serve as models for this shift.

3. Customer interfaces and data science: Banks remain exceptionally fortunate in that their customers are simply there. If you want to grow, you build branches, or to be more precise, you strengthen your local presence. As a rule, having local roots is enough. However, there’s no guarantee that it will still be sufficient in the future. Understanding customer needs and customer behaviour is therefore of paramount importance precisely because even customers themselves don’t know what they want. Customers must be surveyed and above all their behaviour measured. Data science is becoming a central banking function; in future, it will direct all customer-related activity.

4. Business model innovations: How will the bank of the future still earn money? As a mortgage intermediary (Valiant)? As an IT provider (GLKB)? As an intermediary for municipal finance (Vontobel)? All these banks are doing one thing right: They are on the lookout for new business models. The margins in traditional banking have been in free fall for 20 years now. This has only been offset by the buoyancy of the property market. The decline in margins is set to accelerate. Anyone who has not developed an alternative to, or an extension of, their traditional business model within five to ten years will have a big problem. Consolidation is likely.

5. Save, save, save: Increasing pressure on margins means that costs need to be cut. Here, we need to consider the entire process landscape, including sales. In order to reduce costs sustainably and significantly, bold steps must be taken. Standardisation is needed, as is process automation.


Too much success, too little pressure
At the moment, the average retail bank is to some extent still living a charmed life. Customer behaviour is lazy and locally oriented, the balance sheet is invested long-term, and no one can quite believe that the property boom could end. Moreover, regulation is significantly raising the entry bar for new providers. However, all these factors, which in the past have laid the foundations for success, now pose the greatest danger. There is no pressure. The result is laziness. The longer this lasts, the more urgent the mantra becomes: «Digitalise or die!»

Stefan Rüesch
Stefan Rüesch

Stefan Rüesch has been digitalising various
business areas as a manager and strategy
consultant for banks and Internet companies for
over 17 years. He heads up digital banking at ti&m.