BCG Report: Tighter Competition and Shrinking Margins Leading to Shakeout in Retail Banking Industry

Development of Winning Business Models and Requisite Skills Is Critical to Improving Revenue Share, Profitability, and Overall Competitiveness, Says The Boston Consulting Group


FRANKFURT, GERMANY--(Marketwire - November 15, 2007) - Retail banks, facing intensifying competition and continuously declining margins around the globe, must take forceful steps both to protect and expand their customer bases at home and to explore high-growth markets abroad. Otherwise, they will face serious threats to their revenue shares and profitability, according to a report released today by The Boston Consulting Group (BCG), a leading management consulting firm.

The report, "Retail Banking: Facing the Future," states that deregulation and the opening of international markets, ongoing regionalization and globalization in the industry, the expansion of direct and online banking, and rising customer expectations are putting banks under intense competitive pressure -- which may lead to increasing merger-and-acquisition activity, particularly in mature markets with low growth rates.

According to the report, retail banking will remain the dominant source of revenue for banks worldwide through 2015. In 2006, the retail banking business accounted for EUR 1.22 trillion in revenues, or about 57 percent of the global banking revenue pool of EUR 2.15 trillion. Still, margin pressure is here to stay. From 2001 to 2006, banks included in a recent BCG benchmarking survey showed average margin declines in their retail segments of about 21 percent. In some markets, attacking players have already taken sizable share from incumbents that have been reluctant to fight proactively on the price front -- a trend that will likely continue.

The report underlines that the trend towards more direct and online banking is highly significant. The penetration of both general Internet usage and of online banking channels has increased sharply in many markets and will continue to do so -- a dynamic that will lead to a further decline in the importance of bank branches for some sales activities, although branches will remain critical for customer acquisition and advice-intensive products. Overall, delivering a truly superior customer experience will be a crucial source of competitive advantage, the report says.

Given intensifying competition in many markets and the evolution of new business models, "it is clear that the industry is moving towards a new structural equilibrium characterized by lower margins and lower cost levels," says Reinhold Leichtfuss, a BCG senior partner based in Frankfurt and lead author of the report. "Many banks will face a tall challenge to resize and restructure their platforms over the next decade in order to cope with these developments."

A key result of heavy price competition and its expansion into a wide range of products is that revenue pools will grow at a lower rate in many major markets over the next few years, the report says. By 2015, the share of global retail-banking revenues generated collectively in the top five European countries and in the United States will have shrunk by an estimated 5 percent, with a corresponding collective share increase in Asia-Pacific and the Middle East. Vast numbers of "unbanked" consumers in emerging markets -- what BCG calls the next billion -- will develop banking relationships over the next generation, providing opportunities for retail players.

According to the report, the winning business models of the future are exemplified by six categories of retail banks: global titans and regional expansionists, domestic champions, retail-oriented attackers, direct banks, specialists, and trading-up players. The first five categories have clearly outperformed the competition in recent years. They have an average advantage in their cost-to-income ratio of 10 percentage points, an average ROE advantage of 10 percentage points, and a revenue growth rate more than twice that of most other banks. They also dare to invest in organic growth and in acquisitions -- their top-line growth allowing cost growth three times as high as that of most other players. Leading players in the sixth category, trading-up banks, are well positioned to catch up if they maintain focus and expand more aggressively.

Over the next five to ten years, the report says, traditional incumbents will face tough battles on several major fronts. Winners will be those that succeed in

--  adopting a winning business model to defend and differentiate
    themselves from an increasing number of attackers in their home markets
    
--  increasing their direct and online banking profiles and becoming
    successful acquirers and integrators
    
--  achieving better cost efficiency by fully exploiting the power of
    process; on average, cost savings of 15 to 30 percent can be achieved
    through improving process efficiency, sharing services internally, and
    outsourcing and offshoring
    
--  building meaningful presences in markets that offer the steepest
    growth potential; just planting flags in numerous markets to attain meagre
    market shares will not be a value-creating strategy
    

To receive a copy of "Retail Banking: Facing the Future," or to schedule an interview with one of the authors, please contact Eric Gregoire at + 1 617-854-4570 or gregoire.eric@bcg.com.

About The Boston Consulting Group

The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 66 offices in 38 countries. For more information, please visit www.bcg.com.

Contact Information: Contact: Eric Gregoire + 1 617-854-4570