What should the banks do to take the path of innovation?
KYIV, 29 MAY 2018. EY Global banking outlook 2018 finds all market participants seek to keep pace with advancing modern technology, focusing on innovation. The survey based on comments from representatives of 221 financial institutions across 29 global markets  (hereinafter – the survey) revealed the following priorities for the banks for 2018:
- Enhancement of cybersecurity systems
- Implementation of digital transformation programs
- Acquisition, development and retention of talents
- Increasing efficiencies through innovations
- Investing in technology to improve the overall client experience.
Ten years after the global financial crisis the banking industry has successfully recovered. EY’s survey reveals that most bankers are positive about their ability to improve their financial performance in 2018 and beyond. However, conditions favorable for growth are unlikely to remain permanent. The banks need to consider the challenges of the digital age and direct their efforts to achieve more sustainable growth in a rapidly changing economic and technological environment. Investment in technologies to drive greater efficiency while managing evolving risks and benefit from the growth opportunities that will be critical for sustainable success over the long-term business cycle.
To be prepared for any unexpected cyclical downturns the banks must find answers to some important questions:
- How aligned is our strategy for the rapidly changing revenues and profit pools?
- How can we implement strategic change in a rapidly evolving digital environment?
The survey found that the vast majority of respondents expect revenues and profitability to improve over the next 1 to 3 years, in spite of the rising costs.
Bankers’ expectations for growth are clearly supported in EY’s annual review of the strategies of the top 30 major banks in the world. Managing risks and protecting against internal and external threats was the most highlighted priority, however a greater emphasis is on improving the financial performance through growth and optimization.
How do the banks plan to increase their revenues and achieve growth?
The banks are striving to improve operational efficiency while maintaining or improving the quality of customer services. To reduce the impact of a possible downturn on financial performance and business continuity, the banks must complete the transition from a regulatory-driven transformation to an innovation-led change. Banks will need to make meaningful investments in processes and infrastructure aimed at driving real efficiencies across the entire organization.
The banks that participated in the survey note the following priorities for development and investments in new technologies:
- Strengthening their competitive position and building market share (70% of the banks surveyed)
- Expand the ability to acquire, engage and retain customers (67%)
- Generate cost savings with operational efficiencies (62%)
- Mitigate growing cybersecurity threats (58%)
- Gain access to new business models and monetisation techniques (46%).
Banks’ investments in customer technology have largely been focused on the front-end interfaces. Also, banks continue to invest in data analysis projects to improve efficiency and find new ways to increase revenues. Almost 80% of the banks surveyed invested in data analytics and plan to increase the volume of such investments over the next three years.
Are these investments sufficiently effective?
We acknowledge that banks appear to appreciate how advanced technologies can lead to more efficient operations. At the same time only a few of the surveyed banks are consistently delivering cost-income ratios below 50%. Particularly because of the increased competition it is expected that banks would need their cost bases to drop 30% lower than they are currently.
As the survey shows, banks need to focus more on expanding their market share by meeting the customer needs through innovative products and services offering, as well as through optimization of banks fees policy.
Innovative solutions for the Ukrainian banking sector
National Bank of Ukraine reported on 10% increase in the sector’s operating income for the year in its banking sector review in February 2018 . At the same time, administrative expenses grew faster, so operating profit before provisioning increased by 8% – to UAH 40.7 billion. The dynamics of net interest income were determined primarily by transactions with retail clients: lowering of deposits interest rates and a renewed demand for consumer lending.
“The Banks that already used this innovative approach and digital business models today can ensure a sustainable return even in times of economic downturn, – Viktoriya Shmuratko, senior manager, EY Ukraine, commented. – EY has gained a successful experience of delivering projects in Ukraine and in other countries , with the aim of creating a sustainable business-model for the banks with considerable share of retail clients. We optimize fee and interest income management by recommending changes in parameters and processes, pricing models and format of retail banking products.”
EY Revenue Improvement Solutions (RIS) is an innovative methodology, which encompasses four types of solutions into a single RIS project:
- Fixing revenue leakages (Revenue assurance)
- Optimizing parameters and processes
- Adjusting the pricing model
- Creating value-added services.
While delivering the project, EY specialists maintain under control such important aspects affecting the retail business as credit risk, customer impact, IT costs and regulatory framework.
Our recommendations mainly took the form of tactical changes that allow generating recurring income in the short to medium term. The EY team is able to generate considerable financial impact in the form of additional recurring revenue: 30-50 revenue improvement opportunities; >€10 per card and >€10 per account; 8-15% increase in interest and fee income in retail banking. This approach is so effective that it allows EY to work completely on a success fee basis, which depends on actual incremental revenue received by the bank as a result of implementation of our recommendations.
About the survey
In preparation of the Global banking outlook survey EY asked senior executives at 221 banks across 29 markets about their views regarding “their bank’s financial performance, strategic business priorities and technology adoption plans over the next 12 to 36 months”. The survey was conducted between November and December of 2017. The survey data cited throughout this report is focused on a regional asset basis with all “don’t know” responses removed from the calculations.
Markets covered by the survey: North America: Canada, the United States; Europe: Austria, Belgium, France, Germany, Ireland, Italy, the Netherlands, Nordics (Norway and Sweden), Poland, Spain, Switzerland, the United Kingdom; emerging markets: United Arab Emirates (UAE), South Africa, Nigeria, Russia, Turkey, Brazil, Mexico, China, India, Indonesia, Malaysia; developed Asia-Pacific (APAC): Australia, Hong Kong, Japan, Singapore. Respondents account for at least 50% of the assets in each market.
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 North America: Canada, the United States; Europe: Austria, Belgium, France, Germany, Ireland, Italy, the Netherlands, Nordics (Norway and Sweden), Poland, Spain, Switzerland, the United Kingdom; emerging markets: United Arab Emirates (UAE), South Africa, Nigeria, Russia, Turkey, Brazil, Mexico, China, India, Indonesia, Malaysia; developed Asia-Pacific (APAC): Australia, Hong Kong, Japan, Singapore. Respondents account for at least 50% of the assets in each market.
 NBU, Banking sector review, issue 8, February 2018: https://bank.gov.ua/doccatalog/document?id=64628171
 EY team has experience in delivering successful projects for the financial sector clients in such countries as: Ukraine, Spain, France, Belgium, Netherlands, Portugal, Brazil, Mexico, Colombia, South Africa, Russia