After the financial crisis, banks have to pursue holistic strategies and respond better to customers' requirements

• Banks have to offer customer-oriented solutions to stay competitive in a tough market environment
• In the aftermath of the severe financial crisis, holistic risk management is necessary: Banks should strive for closer interaction of risk, return, capital and liquidity
• Banks can cut costs by outsourcing areas with lower profit margins
• Customers are willing to pay more for personalized services
• International banks can leverage arbitrage advantages

Since the financial crisis hit, banks have been confronted with low growth rates and falling margins. The keys for a successful future are solid balance sheets, stable funding and new distribution models. These are the results of a study conducted by Roland Berger Strategy Consultants entitled "After the crisis…? How to rebuild retail and commercial banking in tumultuous times". The analysis of 35 banks showed that most banks have no holistic approach to risk management. This poses a considerable hurdle to surmount in implementing new strategy models across the entire organization.

"The credit crisis profoundly reshaped the competitive environment, regulation and client behavior in the banking sector", says Udo Bröskamp, Partner and Financial Service expert at Roland Berger Strategy Consultants. "The banks are battling low growth rates and sinking margins, and have to consider new strategies for driving their business."

Roland Berger estimates that the Basel III agreement of September 2010 will reduce banks' returns on equity (ROEs) by around two percentage points. Margins are being squeezed by the increased price sensitivity of key accounts, stricter consumer protection measures and tougher competition. Banks therefore need to make structural changes to adapt to the new market conditions.

A holistic approach

"The financial crisis has shown that banks need to better understand interactions between risk, return, capital and liquidity," says Bröskamp. "When a bank's business units work independently of one another, it's impossible to successfully implement a new business model. Banks should therefore focus on developing a holistic approach.

This means not only involving all business units and areas, but also taking into account certain external factors, such as macroeconomic scenarios.

Cost effectiveness by outsourcing processes

Falling profit margins, increased price sensitivity of customers plus the rising number of financial providers such as direct banks and retail brokers are challenging banks to cut their costs to remain competitive. "Banks should find profitable niches and expand there. Areas with low profit margins should have their structures streamlined and their processes standardized," recommends Bröskamp.

For example, banks could provide online platforms for certain services. This enables them to administrate simple products and shape processes in a cost-efficient way. In doing so, banks can outsource many standardized processes and in turn cut costs. Increased use of IT solutions can also help set up a more efficient branch network employing mini-branches or franchising models. This ultimately results in better customer service.

Personalized financial solutions more important than price

Although customers are more price-conscious, they are still willing to pay more for good personal advice and high-quality products. "More and more, customers are demanding hassle-free, all-in-one banking options. They want very flexible and sophisticated remote platforms with a high degree of customization. This allows them to conduct their banking business at their convenience," explains Bröskamp.

To develop high-quality online platforms for financial services, banks need more than just cutting-edge technologies. They also need to increase their use of customer data. This makes it possible to quickly adapt financial products to changes in customer preferences and market conditions. For customers who still prefer direct, personal support and value high-quality service, banks can develop niche models as private banks have done. Another business niche consists of customers who have immigrated to their current countries from abroad. They often prefer culture-specific banking services and also require special sales channels.

Expansion strategies

Multinational banks can exploit arbitrage opportunities arising from differences in macroeconomic prospects, regulatory regimes and customer behavior. "International banks have excellent opportunities for expansion, both in the industrialized and the emerging countries," says Bröskamp. "Compared to banks active in only one country, global banks can benefit from raising capital in various countries and hedging their risks better. This protects especially those banks in countries with stricter austerity programs and a higher risk of recession."

Four bank types – Four strategies

In the current market environment, Roland Berger has identified four bank types with varying strategic priorities:

1. "Restructurers" are in the worst position and need to take urgent action to stay competitive. This includes expanding a modern IT infrastructure and outsourcing services with low profit margins to cut costs. These banks can establish themselves over the next two to three years as small, but solid market players.
2. "Rebalancers" are those banks that suffered during the crisis but have already taken several steps to clean up their balance sheets. However, they still need improved risk management, stable sources of financing and exciting product innovations.
3. "Streamliners" are conservative institutions that weathered the downturn but are in danger of being marginalized by more nimble players. These banks require an innovative customer service model that includes modernizing their branch networks and improving their services, both in person and online.
4. "Acquirers" are the clear winners. They used their superior models and balance sheets to widen the gap in performance versus competitors. These banks should use the advantages of their service models and strong risk management to drive their growth forward.