Five keys to banks success in the new era

By Xiao Gang

The global financial crisis has apparently brought dramatic changes that will impact the banking industry. Three characteristics define the new era that bankers have entered.

First, banks have to maintain their profitability in the coming low-growth economic environment. Recent developments in developed and emerging economies both have shown that there are many uncertainties in the road to recovery from recession, and that different countries face different problems.

Some countries have to control their budget deficits and government debts but cannot for fear of delaying the recovery. Others are considering withdrawing their loose monetary policies in order to prevent asset bubbles and to control inflation. But at the same time, they are worried that too early a withdrawal may deal a heavy blow to the ongoing economic growth or even lead to a dreaded double-dip recession.

Despite mixed forecasts for the world economy and controversies in policymaking, common sense suggests that the world economy is almost certainly facing a prolonged period of low-growth, implying that the period of high profitability for the banking industry may be nearing its end.

Second, banks must develop their business further amid structural rebalancing and economic reforms. There is little doubt that the world economy can no longer revert to the expansionary model of the pre-crisis period. Neither over-consumption nor over-saving would be enough to stimulate the economy and keep it on a healthy, sustainable path.

Taxpayers are getting increasingly dissatisfied with public utilities, and policymakers are focusing more on resolving social problems rather than on economic growth. And more and more policymakers agenda are according priority to education, employment, housing, pension and healthcare. All these will give rise to many new requirements for customers and provide the banking industry with huge potential for profitable business transformation.

Third, banks now have to establish a framework for managing the rising regulator burden while conducting their business. The magnitude of the government response to the global financial crisis will leave fundamental and long-lasting effects on banks everywhere. More stringent capital and liquid assets standards could place greater burden on banks returns to their investors. Tougher rules on banks in the post-crisis period, which were sometimes decided on the basis of compromises between the regulators and bankers, could turn the banking industry into a less innovative sector.

Banks whether government controlled or privately held, whether specialized, regional or universal players are still at the heart of the global economy, without any fundamental change in their main mission, customer needs, and core capabilities. To better cope with the above-mentioned challenges, banks are required to have five crucial capabilities to be ready to compete in this new era of banking and become tomorrow s winners.

Customer management capability: Customer base is an invaluable asset for banks. Banking sector leaders should seriously rethink how best to rapidly transform their service model from a traditional product-defined structure to a targeted customer-centric system, thus allowing them to engage, win over and retain customers.

To do so, banks need to improve their ability to capture customer information timely and analyze the customers product holdings, preferences, behaviors and financial conditions. The breadth as well as depth of customer relations are equally important. Banks have to not only increase their customer numbers, but also focus on redesigning value chains to gain a greater wallet share.

Innovation management capability: It has been widely argued that over-innovation, particularly in the area of widespread securitization, was one of the root causes of the global financial crisis, but the fundamental ways and means to emerge from the crisis still lies in innovation. Cultivation of innovation capability was (and still is) the driving force for the banking industry s development.

What banks need to do is to seek the right direction and make innovation closer to the real economy and social development by satisfying a broad set of customers needs. Carbon-related financial products may be one of the areas of innovation in the coming years.

Distribution management capability: Across-the-counter and Internet banking are banks most important channels to serve customers. Banks need to establish more channels, as well as expand the existing ones, to provide their customers with the best services and increase cross-selling.

Furthermore, they should establish clearer customer segments and design differentiated customer processes. The upgrade of banks branches should focus on the shift from routine to market-centric transactions, spending more time on service rather than on across-the-counter operations. Internet banking should be enhanced further to ensure the security and efficiency of the banks products and services.

Risk management capability: This is vital for any bank s survival. Banks need to revitalize their risk management and pricing capability, ensuring that they are fully analyzing the high-risk prospects and incorporating this analysis into their pricing. Both the efficiency and effectiveness of risk management must be improved.

Banks should revisit their credit processes and review risk management approaches within different portfolios. These must be properly aligned with a bank s risk appetite and objective. What s more, the definition of risk management should be broadened, to include capital management, liquidity management, and even brand management and information technology management.

Human resource management capability: Human resources are a top priority for banks and crucial to their success. Banks should increase returns on human capital further by improving performance measurement and appropriate remuneration. It is very important for banks to develop a variety of training programs on individual basis, reinforcing an already-existing shift from talent recruitment to talent retention and career development.

Human resources management departments play a vital role for banks; they train employees to build a strategic, professional and service-centric human resources team to meet the requirement of the new era of banking.

The basic function of banks to support the real economy and social development remains unchanged. What is most important for bankers to do is to focus on enhancing the core capabilities, regardless of changes in the new era.

The author is chairman of the Board of Directors of Bank of China.