It’s not coming from revenue. Across the world, and particularly in this region, improving economic fundamentals are not translating into significantly higher revenue. (Although that is changing as global – but not Australian – interest rates rise and economic growth picks up.)
"Increasingly underpinning all [bank] efforts is a major shift which is easy to forget because it is so pervasive: simplification.”
In mature, still lower growth, markets the focus is on costs rather than revenue. Who can become more efficient, more quickly? Meanwhile, revenue threats continue to grow, particularly from new competitors from outside traditional banking, and higher regulatory and compliance costs.
These are clear and present challenges for financial institutions. In response they are becoming digital to improve efficiency and deliver innovative products. They’re becoming more customer focussed. They’re addressing reputation and operating risks.
Increasingly underpinning all these efforts is a major shift which is easy to forget because it is so pervasive: simplification.
For decades, particularly in the 90s and early 00s, many large banks tried to become more ‘universal’, adding businesses like insurance, wealth management, broking and a vast array of cottage industries to become the equivalent of financial services supermarkets.
It didn’t work. Customers proved reluctant to shop at such a supermarket meanwhile the added complexity created its own problems. Reputational risk rose without an offsetting improvement in returns.
Moreover, since the financial crisis, regulation has played a clear role. Those banks hit hardest in the crisis and supported by taxpayers (and in some cases accepting state ownership) have been broken up and cut back to more simple structures.
New capital requirements meanwhile, designed to make banking safer, have in the process made some businesses far less profitable – so banks have sold or closed them.
Complexity itself is not just a collateral challenge, it is a corrosive force in its own right. Consulting firm BCG pinned the recent slowdown in productivity across advanced economies as reflecting growing business complexity or “complicatedness” as they describe it.
“We define complicatedness as the increase in organisational structures, processes, procedures, decision rights, metrics, scorecards, and committees that companies impose to manage the escalating complexity of their external business environment,” BCG argue.
The drive to simplification is evident in a new EY report How can divesting fuel your future growth?
“A record number (87 per cent) of companies are planning to divest in the next two years — strikingly higher than the 43 per cent reported in our 2017 study,” the report says.
“Companies are facing intense pressure to evolve their business models using rapidly advancing technology. And they continue to navigate ongoing macroeconomic and geopolitical issues like the recent US tax reform and Brexit.”
“All of these pressures are placing divestments at the core of their growth and transformation strategy.”