of the main conclusions drawn by a new report from Boston
Consulting Group (BCG), Living With New Realities, which seeks to
gauge the state of the retail banking industry in the aftermath of
the current crisis.
The rise of direct banking, fuelled at first by the advances in
technology which enabled the roll out of superior mobile and
internet banking operations, will undoubtedly continue through 2009
as financial institutions look for low-cost methods of boosting
market share. 
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But for BCG, “there is no substitute for a physical presence”
when it comes to the key challenge for retail banks: gathering
deposits.
While the consultancy does acknowledge that a multichannel
strategy can “boost new account growth by 10 to 15 percent, improve
cross-selling by 2 to 5 percent, and reduce attrition by about the
same percentage” as well as lowering a bank’s cost to serve by
between 10 to 20 percent, it asserts that “sticky” deposits, based
on that all-important customer relationship, are best achieved
through branch outlets.
Furthermore, the battle for deposits is likely to continue for
some time, resulting in many direct models being pressured by
competitors.
New retail banking paradigm
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By GlobalDataThose relationships can also facilitate the generation of
higher-quality assets, another crucial aspect of the new retail
banking paradigm.
But the development of a core group of loyal customers via a
branch network should be done on a local level, BCG suggests, a
sentiment at odds with the cross-border strategies that have
characterised bank expansion programmes over the past decade.
Despite this trend, large banks will still dominate the
competitive arena, according to the report, not least because of
the waves of distressed M&A activity seen since the start of
the crisis.
Similarly, while that kind of hurried transaction is less likely
in 2009, existing superbanks will operate according to
“multi-local” strategies.
Such strategies would involve “repeating a simpler, more
standardised business model across fewer countries” as opposed to
heralding the return of “wide-ranging, highly complex global
titans”.
Conversely, the report predicts that another form of financial
supermarket – the universal bank, a structure which has been
similarly criticised over the past 12 months – will regain its
status as the pre-eminent industry model in the post-crisis era,
albeit on a reformulated basis.
Largely funded from their deposit bases and supported by strong
customer relationships, universal banks will “regain their
primacy”, said BCG.
The emphasis placed on relationships and deposit gathering means
retail-oriented businesses will outperform their banking peers;
nevertheless retail banks face serious threats to their
profit-generating abilities given the continued restriction of
credit.
Emerging leading lights
Smaller players are now emerging as leading lights: Hong Kong’s
Hang Seng Bank, a subsidiary of HSBC, produced the second-best
retail banking return on equity (ROE) in 2008 (27.9 percent), with
its very large retail customer base both a source of low-cost
funding and of fee-based product income. The leading retail bank by
ROE is focused on a similar geography: China Merchants Bank.
There have been other winners, relatively speaking: Westpac,
Australia’s largest bank by market capitalisation, is now in the
world top 20 by market cap – by virtue of its acquisition of St
George, its diversified business model and its distance from the US
mortgage market.
