An Internet explosion rocked the banking and securities industry in 1999, transforming the competitive landscape.
The speed at which competitors can penetrate markets and grab market share is now measured in Internet time. Banks and securities firms need the ability to respond quickly.
The Internet has also intensified the competition for talent, as more MBA’s from top schools are spurning offers from major firms to follow their dreams of changing the world – and becoming fabulously wealthy in the process – at dot-com start-ups.
The Internet has not just changed how banks and securities firms do business: It is changing what business they are in. On-line distribution has exposed the commodity nature of most financial products, and shifted power to customers. Where banks and securities firms once served as intermediaries with special access to information and markets, customers now enjoy the same access from their computer screens.
Another major change to watch is the impact of the recent dismantling of the regulatory barriers that have separated the banking, securities and insurance industries. Look for a new wave of cross-industry consolidation as US banks, securities firms and insurance companies merge across industry lines to create one-stop financial services conglomerates.
What must banks and securities firms do to respond successfully to these fundamental changes? Here are the top 10 challenges that firms must address to stay ahead:
1. Attackers Rewrite the Rules
Watching Internet start-ups threaten to steal their customers, some banks and securities firms have moved from defense to offence – creating new brands unencumbered by the culture and legacy systems of the parent. The new brands are not only competing for customers with other firms, they are competing with the parents themselves.
2. Electronic Bill Presentment – Will Banks Lose Their Role?
The central role of commercial banks in the payment system is under fierce attack from new players offering bill presentment and payment over the Internet. The major banks are struggling to respond, but progress has been hobbled by turf battles, egos and cumbersome decision making. If the banks don’t get this right soon, someone else will.
3. ERP – 20/20 Vision for Management
With banks and securities firms expanding rapidly into new lines of business and geographies, senior management faces the daunting task of getting a clear view of costs, revenues and resulting profitability across the organization. In the coming year, look for bank and securities firms to embrace enterprise resource planning (ERP) tools in order to integrate data across products, markets, geography and delivery channels to turn it into useable information for decision making.
4. Square Pegs into Round Holes – Shifting Staff from Y2K to the Internet
With Y2K work nearing an end, banks and securities firms are burdened with armies of IT staff ill-suited to fight the next war – delivering services over the Internet. Firms can either undertake massive retraining or face the prospect of competing for IT talent with Internet start-ups dangling stock options. Either way, the transition will be an uphill battle.
5. Intermediaries in the Cross Hairs
Electronic capabilities have disassembled the process for trading securities, allowing buyers and sellers to connect directly on-line and trade around the clock. Offering low costs and speed, electronic exchanges have stolen market share from traditional exchanges. The role of the investment banker in placing IPOs is also coming under attack, as competitors and issuers are now auctioning IPO (Initial Public Offering) shares over the Internet. The challenge to intermediaries is clear – demonstrate your value or be cut out of the process.
6. The Drive Towards T + 1
Prodded by regulators, US securities firms are working to achieve next day, or T + 1 settlement of trades as a key step before achieving the ultimate goal of straight through processing. The reduction in settlement time promises to reduce risk and increase efficiency.
7. Mergers – Answering the Value Question
Although the pace of mergers slowed in the US during 1999, the struggle to achieve critical mass and economies of scale through mergers will continue. But why have so few mergers created value for shareholders? There are lessons to be learned from firms who got it right.
8. Spinning Straw into Gold – Extracting Latent Value
Leading banks and securities firms are finding ways to extract value from their intellectual capital and certain aspects of their operations, like procurement and branch networks that had previously been seen simply as necessary infrastructure. Firms that are able to create this new business model will be generating new revenue by selling their services and ideas to third parties.
9. Building the Global Bank
For all the talk of globalization, precious few banks have expanded successfully around the world. To be successful, global banks will need to examine every part of their operation – from technology architecture, to human resources and customer service standards.
10. Community Banking Goes Virtual
Community banking is coming back in a new guise. Aided by the Internet, both major banks and start-ups are offering “affinity banking” to specific communities, such as women, senior citizens or doctors.
Bill Currie is a senior Deloitte Consulting practitioner and the author of the company’s Millenium Top 10 Global Banking and Securities Industry Outlook report. This excerpt was printed by arrangement with Deloitte Consulting.