To be able to rationalize product portfolios and optimize revenue, banks need to have a clear idea of each target segment, how these might evolve and the contribution each might make to growth. But for customer preference to shape portfolio composition in this way will require banks to have rich data and dynamic analytical capabilities. Equally, banks will have to become skilled both at developing compelling customer value propositions for these well-defined customer segments and convincing customers of the value of the new packages.
None of this can be achieved without people willing to deliver and work within the new model. Meanwhile, these people, namely bank management and staff, are having to change their behaviors in the face of capital, liquidity and resolution measures that increase the cost of risk-taking; structural separation measures that highlight the need for banks to take different approaches to their retail and investment banking activities; governance measures to encourage boards and senior management to focus on risk; remuneration measures to reduce the incentives for inappropriate and excessive risk-taking; and conduct measures that focus on both the design and distribution of financial products and on the incentives for retail customer-facing sales and advice staff.
Far from being separate and isolated, regulatory compliance, capital efficiency, revenue growth, cost reduction, business model transformation and culture change are all mutually interdependent. To deal effectively and efficiently with this deluge of interconnected change, it is vital for banks to adopt an integrated, holistic approach at both the process and the strategic level.
For example, many of the new regulations, such as the Foreign Account Tax Compliance Act (FATCA) and emerging regulations around treating customers fairly, affect core business processes, particularly customer processes. Rather than trying to manage this process change in an ad hoc fashion, there is an opportunity to use the need for sustainable compliance with new and emerging regulation as a catalyst for improvements in efficiency, creativity, culture change and customer experience.
This can be best achieved by viewing regulatory change as a portfolio and grouping together these change impacts by process, function and business, thereby eliminating duplication of effort and avoiding unintended consequences. Banks can then change their mind-sets from a focus on doing compliance projects to applying Lean principles to redesign those end-to-end processes most affected by regulation with the aim of not only achieving sustainable compliance, but also maximizing customer value and eliminating waste. By adopting such a portfolio approach, banks can reduce process and systems duplication and complexity over time, align business processes with desired customer experiences and staff behaviors and eliminate activity that does not add customer value.
"This can be best achieved by viewing regulatory change as a portfolio and grouping together these change impacts by process, function and business, thereby eliminating duplication of effort and avoiding unintended consequences. "
Strategically, many of the prudential regulatory changes that are happening, such as Basel III, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Vickers report, the Liikanen report and Recovery and Resolution Planning, affect levels of required capital and liquidity and with it, customer and product profitability and return on equity. They also have profound implications for the organizational structure, operating model and likely competitor actions.
Rather than seeking still more regulatory overlays to meet these various requirements, the optimal response will require reviewing and, if necessary, redefining the bank’s structure, strategy and operating models. Project and change management will be a core competency as banks assess their current state, decide on their desired future state, plan their future portfolio and execute the change program (see diagram below).Going through this process will force banks to answer fundamental questions about the shape of the business going forward: How flexible will product pricing structure and profitability become? What geographic markets do we want to operate in? Which products and services will be viable? Are unidentified opportunities being created? Does our strategy provide the flexibility to deal with the direct and indirect risks and opportunities provided by regulatory change? Is our structure sufficiently simple and agile to optimize financial efficiencies? Most importantly, do we understand the interconnectedness of all the above issues and the impact on our core business processes?
In the new environment of continuous change, the banks that win will not be the ones that are best at doing compliance projects. The winners will be those banks that are best at optimizing their business strategies, operating models and corporate cultures within the context of these new regulatory constraints.