may 19th 2012 retail renaissance - the economist...2012/05/19 · with its siblings along...

May 19th 2012

S P E C I A L R E P O R T

I N T E R N AT I O N A L B A N K I N G

Retail renaissance

SRInternationalBanking.indd 1 08/05/2012 16:43

1

�IF YOUR BANK could start over, this is what it would be,� trumpeted themarketing campaign for the launch in 1999 of Wingspan, an internetbank. The following year the bank was gone. In September 2000, a fewmonths after the dotcom bubble burst, it was absorbed by its boringAmerican bricks-and-mortar parent, Bank One (now part of JPMorgan).

For all the high hopes that the internet would transform banking,most other internet banks launched around that time met with a similarfate. Citi f/i, an online bank started by Citigroup, was folded back into itsparent in 2000. NetBank, an American pioneer of internet banking, sol-diered on for longer than most but was shut down by banking regulatorsin 2007. On the other side of the Atlantic, Egg, Britain’s �rst stand-aloneinternet bank, shook the market in 1999-2000 when it gained more than2m customers within months of starting up. But within a few years it, too,had in e�ect disappeared, its customers having been sold �rst to Citi-group and then to Barclays and the Yorkshire Building Society. It was anignominious end to a bold experiment in online banking that had causedpalms to sweat in banking centres around the world.

The promise of internet banking had seemed obvious. More thanmost other industries, banking was already largely digitised. In most richcountries the cash that people carry in their wallets represents only a tinyfraction of their assets and is used for only a small portion of their spend-ing. The rest exists only in the pattern of magnetic charges and �ickeringelectronic impulses of banks’ data centres.

Moreover, banking is something few people enjoy. If o�ered an al-ternative to queuing up in a branch to get served, surely customerswould take it up avidly? After all, large numbers of bookshops and musicstores have already closed as people have taken to buying online, eventhough browsing in such places was rather fun. Going to the bank is notmuch fun. All the more reason to do your banking from your armchair.

Yet, except in a very few rich countries, there are 10-20% more bankstoday on main streets the world over than there were a decade ago. In-

Retail renaissance

The internet and mobile phones are at long last turning boring old

retail banking into an exciting industry, says Jonathan Rosenthal

A C K N O W L E D G M E N T S

CONTENT S

This special report bene�ted from

the time and insight of many people

in addition to those mentioned in

the text. The author would like to

thank in particular: Sebastian

Arcuri, Jan Bellens, Roelof Botha,

Louisa Cheang, Sylvia Coutinho,

Douglas Flint, Noel Gordon, Greg

Hinston, Ed McLaughlin, Tim

Murphy, Gloria Ortiz Portero, Narciso

Perales, Emmanuel Pitsilis, Simon

Samuels, Michael Shepherd, Antonio

Simoes, Tim Sloan, Paul Thurston,

Huw van Steenis, Mark Weil and

others who wished to remain

anonymous.

3 Branches

Withering away

6 Spain

Dispatches from the hothouse

7 Big data

Crunching thenumbers

10 Mobile payments

A wealth of wallets

13 Remittances

Over the sea andfar away

14 Wealth

management

Private pursuits

17 Winners and losers

World, here we come

SPECIAL REPORT

INTERNATIONAL BANKING

The Economist May 19th 2012 1

A list of sources is at

Economist.com/specialreports

An audio interview with

the author is at

Economist.com/audiovideo/

specialreports

2 The Economist May 19th 2012


SPECIAL REPORT

2 stead of superseding banks, the internet has simply made them alittle more convenient. Conventional banks have added internetbanking, mobile banking and even video banking to their o�er-ing. Yet all the while they have expanded their branch networks.

In retrospect, the years in the run-up to the �nancial crisiswere a golden age for banks. Even the dullest of them could earnhigh returns by taking big risks. And few really bothered to try tocut costs when their revenues were being massively boosted bya debt-fuelled bubble. Since the mid-1990s Europe’s big retailbanks have managed to cut their costs relative to income by anaverage of just 0.3% a year, reckons Simon Samuels, an invest-ment analyst at Barclays. Yet even that modest �gure �atters thebanks. He calculates that costs over the period increased by anaverage of 8% a year. The only thing that saved them was that rev-enues increased a little faster.

The e�ect of the debt bubble was more insidious than it ap-peared at �rst glance. In encouraging universal banks to build uptheir investment side, and some retail banks to dabble in exoticinstruments that they did not always understand (demonstrat-ing that even boring retail banks can blow up), it made them taketheir eyes o� their bread-and-butter business. Yet basic retailbanking was, and remains, their main engine of pro�tability.McKinsey, a consulting �rm, reckons that it accounts for morethan half banks’ worldwide annual revenue, which in 2010amounted to $3.4 trillion (see chart). It has also proved, in the lon-ger run, to be the most reliable generator of consistent pro�ts andhigh returns on equity. A ranking of the world’s biggest banks byreturn on equity correlates closely with the proportion of rev-enue they make from retail banking, rather than from racier in-vestment banking.

During the bubble years retail banking was a dead end forambitious managers. Pay was higher at investment banks, andthe corner o�ces at universal banks would go to executives whohad climbed up the ranks of the investment banks. But recently

retail banking has been getting a lot more attention, for severalreasons. The �rst is that it needs it. In the rich world the burstingof the debt bubble, slowing economies and low interest rateshave changed the economics of the business. Banks are nowhaving to put their best talent to work at the retail end to reducecosts and restore pro�tability.

Second, technology is changing fast. Smart mobile phonesare encouraging customers to interact with their banks in newways. Technology also promises fundamentally to alter the eco-nomics of low-margin banking staples such as processing pay-ments. With new tools to store and crunch massive amounts ofdata, banks and technology �rms such as Google and PayPalhope to transform the business of swiping a credit card. Ratherthan merely generating an instruction to move money thatmight be worth a few small coins, the information that comeswith such a payment might open up new sales and advertisingopportunities that could we worth hundreds of times as much.

Money is special

This report will argue that retail banking is going to be themost exciting part of the banking business over the comingyears. Yet unlike the bricks-and-mortar bookshops, travel agentsand record stores that have been swept away by the internet,banks have two enormous advantages in adapting to changeand adopting new technologies. The �rst is that in the minds ofconsumers, money is still special. Few customers like to switchbanks, even if they are unhappy with their own, and even fewerseem ready to trust one without a physical presence. That ischanging with time, but slowly enough to allow banks to adjust.

The second is that, in a sense, banks are technology compa-nies. Many have hundreds, if not thousands, of people workingin huge information-technology departments. Most are ready toadopt new ways of serving their customers. The most obvioussign of this is the changing nature of bank branches. 7

Sources: World Bank; Oliver Wyman

51

55

43

37

447054

63

No data

0.0-9.9

10.0-19.9

20.0-29.9

30.0-39.9

>40.0

WORLDTOTAL

($3.4 trn)

ASIA

MIDDLEEAST

EASTERN EUROPE

WESTERNEUROPE

AFRICALATIN

AMERICA

NORTHAMERICA

Number of retailbank branchesPer 100,000 peopleLatest available

Retail banking revenueBy region, % of total

Wholesale bankingGlobal return on equity, %

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

310 17 17 20 25 -25 18 13 8


SPECIAL REPORT


1

A HUGE GLOWING wall blinks blue and red at the torrentof commuters as they �ow up the escalators and into the

halls of Orchard Road station, one of the busiest on Singapore’stransit system. As they pass the wall it spews out useful informa-tion: the weather, the latest news headlines, movements in themarkets. Behind all this are the changing advertisements for Ci-tigroup’s latest deals, on o�er right by the concourse. This is abold attempt to entice customers into a branch that looks noth-ing like a bank: there are no doors to keep robbers out, no coun-ters to shelter cashiers. Instead there are massive touch-screentelevisions on the outside walls and gleaming white bencheswith tidy rows of Apple computers. Neatly dressed assistantsbrandish iPads with smart black leather covers.

With a few taps on the iPad, Han Kwee Juan, Citibank’sboss in Singapore, shows how a customer spending a few thou-sand Singaporean dollars a month on a Citibank credit cardcould earn thousands a year back in rebates, discounts and otherrewards. How about consolidating credit-card debts into a perso-nal loan? The saving could be more than S$600 a year, he says.

This branch is worth close examination because, togetherwith its siblings along Singapore’s transit lines, it re�ects a radicalchange in the way that Citi (and a growing number of other bigbanks) thinks about its large network of branches. For decadesthose branches were seen mainly as places where customerscame to deposit or withdraw money. More recently some peopleassumed that they would be swept away by the internet and oth-er waves of innovation. �Ten years ago the consultants said to usthat we had to scrap our branches and go straight to the internet,�

says Alfredo Sáenz, the chief executive of Santander, a big Span-ish bank. �But I had heard those kinds of statements before withthe credit cards and ATMs�I’m old enough to remember.�

Branches were seen to be under threat because they are ex-pensive. They usually occupy a prominent corner in a pricey partof town, and they cost a lot to man. Because they get robbed ev-ery now and then, even the smallest will usually have at leastfour people on site at all times, even though three of them mayhave nothing much to do. For most big retail banks, renting,equipping and sta�ng branches can easily account for 40-60%of their total operating costs, with computer systems making upmost of the rest.

Despite the predictions of the death of branch banking, inmost countries the number of branches has increased over thepast decade. In America, which is still the world’s richest bank-ing market, the number of branches and o�ces has risen by 22%since 2000, to almost 90,000. In Europe, too, the number of bankbranches has increased steadily over the decade, rather toomuch so in Spain and Italy. Spain, for instance, has some 43,000

branches, about half as many as the whole of America, a coun-try with almost seven times as many people and a land mass 20times larger than Spain’s.

Branches continue to thrive because people still think thatmoney is special and want reassurance that their cash is safe.�Location is still the �rst and most important decision-makerwhen you choose your branch,� says John Stumpf, chairmanand chief executive of Wells Fargo, an American bank. �Afterthat you might bank online, you might not go back to visit thatbank again�but that location is where you think your moneyis.� Baudouin Prot, the chairman of BNP Paribas, a French bank,reckons that �most of the customers still want a branch some-where nearby�you still need a shop around the corner.� AndRob Markey of Bain, a consultancy, thinks that people �cravephysical interactions with human beings in the branch� to makethem feel that their money is well looked after.

Intriguingly, it seems that where a bank has lots ofbranches, it attracts more customers. JPMorgan Chase, America’sbiggest bank, opened more than 200 new branches last year andplans to add 150-200 annually over the next �ve years. Most ofthese will be in areas where it already has a big share of the mar-ket. �It always has been more valuable to increase your marketshare in an existing market than it is to go to a new market,� not-ed Jamie Dimon, the bank’s chairman and chief executive, in a

recent letter to shareholders. Todd Maclin,head of consumer and business banking,reckons that each new retail branch willearn the bank an average of $1m a year.

This simple rulethat the bank withthe greatest branch density in a given mar-ket will win the most customhas de�nedbanking for generations. A study forAmerica’s Federal Deposit Insurance Cor-poration in 2005 found that banks withbigger branch networks were more suc-cessful at increasing revenues and morepro�table than those with smaller net-works. Having a dense branch networknot only helps banks gain a large share ofthe market, it also allows them to charge abit more for loans or pay a slightly lowerrate of interest. �Until now branches havebeen expensive but highly e�cient bill-boards,� says Peter Carroll of Oliver Wy-man, a consulting �rm.

Despite all the innovation and newtechnology that has gone into banks in recent decades, the basicdrivers of retail banking have remained much the same over thepast 100 years. But that is about to change, for three reasons.

This time is di�erent

The �rst is economic. Since the �nancial crisis the pro�tabil-ity of retail banking in many rich countries has plummeted be-cause of rock-bottom interest rates and tangled regulation. Insome places, such as America and Britain, new regulations havealso slashed the fees banks can charge. Banks everywhere haveto hold much more capital. In America retail banks have tradi-tionally made about half their pro�ts from gathering cheap de-posits in cheque accounts on which they pay no interest andthen lend out at a pro�t. Yet with o�cial interest rates close tozero, lending rates have slumped, squeezing margins.

The other big sources of income were fees and charges onoverdrafts, late payments on credit cards and fees charged to re-tailers when customers use their debit cards. New regulations in-troduced as part of the Dodd-Frank act in America outlaw some

Branches

Withering away

Bank branches, hitherto all-important, will become

far less numerous�and look very di�erent

A simple rule�that the bank with the greatest branchdensity in a given market will win the most custom�hasde�ned banking for generations



SPECIAL REPORT

2

1

of these charges and cap others. Sherief Meleis of Novantas, an-other consultancy, reckons that thanks to low rates banks areabout $60 billion a year worse o� than in 2007 and that newrules are trimming their revenues by another $15 billion or so.With such a steep drop in income, about 15% of the currentbranch network tips over into unpro�tability, he says.

In Europe too, low interest rates �are having a very signi�-cant impact on retail banks�, says Pedro Rodeia of McKinsey. Hereckons that, on average, big European retail banks are currentlylosing money on about half their customers’ accounts. For somebanks the ratio is even higher. �Until now, why would you closebranches? There wasn’t the �nancial imperative,� says MichaelPoulos, of Oliver Wyman. �This time it really is di�erent�youwill see people closing a signi�cant number of branches.� Thepotential savings are large. European banks could probably cuttheir costs by some �15 billion-20 billion a year by getting cus-tomers to do more banking online, according to McKinsey.

Give me a buzz

As it happens, customers are already turning to both the in-ternet and their phones for banking without much prompting.The widespread adoption of the smartphone is proving to be the�rst big innovation in banking that is actually causing people tomake fewer visits to bank branches. Earlier waves of innovation,such as ATMs and telephone banking, promised to reduce thefrequency of visits but turned out merely to increase the numberof transactions by making it more convenient to withdraw mon-ey, say, or to check a balance.

Smartphones and tablets, by contrast, are radically chang-ing bank customers’ behaviour, causing them to visit theirbranch far less often but sharply to in-crease the number of transactions withtheir bank. When banks �rst introducedvery basic mobile-banking systems thatallowed customers to check their balanceby text message, interactions went upfrom an average of nine to 20 a month,says CeCe Morken of Intuit, a maker ofpersonal-�nance software used by con-sumers and banks. When banks started toproduce banking applications for smart-phones with touch-screens, �we gotshocked because engagement went upinto the 30s,� says Ms Morken. Whatmakes smartphones so convenient is thatthey allow customers to go online almostanywhere and at any time of day. Manynow pay bills or send money to familymembers abroad over their phones whilethey are away from home, perhaps com-muting to work.

For banks, the most immediate bene-�t of smartphones is likely to be thechance to automate transactions such asdepositing cheques, which are still mostlypaper-based and therefore expensive.This is particularly important in America,where cheques still account for about aquarter of all non-cash payments. Mostbig American banks have introduced ap-plications (�apps�) that let customers pho-tograph cheques as a way of depositingthem, cutting down on millions of branchvisits. The customers seem to love them.JPMorgan says that over the past year cus-

tomers deposited 10m cheques by taking pictures of them(though that is still only a tiny proportion of the 25 billioncheques handled by American banks each year). Further ahead,phones will displace cheques entirely as it will become possibleto send money from one phone to another and small businesseswill accept card payments over their mobile phones.

The third big trend is that people are becoming used to do-ing complicated things such as buying airline tickets or �ling taxreturns online. The main drivers of this are often industries otherthan banking. Sometimes it is even the state. In Denmark, for in-stance, the government oversees the issue of digital identity cer-ti�cates which can be used on both government websites andfor online banking. Whatever the agent of change, it seems clearthat as people become more comfortable online in other areas oflife, they also seem willing to do more of their banking on the in-ternet. Matthew Sebag-Monte�ore of Oliver Wyman cites a Dan-ish banker who got an online divorce, using the Danish govern-ment’s website. �When you are comfortable divorcing online,banking is easy,� says Mr Sebag-Monte�ore. Banking, in short, isbecoming less special.

In America transactions conducted in bank branches arenow falling by about 5% a year, says Mr Meleis of Novantas. InAsia the trend is even clearer. McKinsey reckons that branch vis-its across the region have fallen for the �rst time since it startedcollecting data 13 years ago. In the Netherlands only half of allbank customers have stepped inside a branch in the past year.More than 80% use the internet for banking.

Bradesco, one of Brazil’s biggest banks, has been an enthu-siastic early adopter of new technologies. It was one of the �rstbanks in the world to o�er internet banking, starting in 1996, and

SPECIAL REPORT


2 it remains at the forefront of innovation. Its ATM machines havebiometric sensors that can recognise customers’ palms to savethe need to remember PIN numbers (the machines also checkthat the blood is �owing to forestall macabre robberies). Thebank also o�ers loans by iPhone. It reckons that the cost of han-dling a customer transaction via an automated telephone sys-tem is just 6% of what it would be in a branch. Some 93% of all ofits customer transactions are now self-service.

�Technology for us is almost everything,� says DomingosFigueiredo de Abreu, Bradesco’s vice-president. Even so, thebank has recently opened 1,000 new branches, many in poorerparts of the country. These include a �bank on a boat� that travelsup and down the Amazon’s tributaries, allowing people to openaccounts and borrow money.

Co�ee and iPads

The conundrum facing Bradesco and most other banks theworld over is that even as their customers make less use ofbranches for everyday transactions, the banks have yet to �nd anequally good way of drawing in new customers and doing morelucrative business with existing ones. �Our goal is still to �ll thebranches with customers,� says Lukas Gähwiler, who runs theSwiss banking business of UBS. �Every conversation (in abranch) is a potential advice and sales opportunity.� So insteadof doing away with branches, banks are trying to reinvent them.Many of their experiments seem to involve co�ee and iPads, andthe word �branch� is rarely used.

In the middle of Paris, the ornate iron and glass doors ofBNP Paribas’s �agship �concept store� look out directly onto theOpéra. Away from the chandeliers and down a carpeted corridor

you will �nd bright red, green and yellow beanbags, more whitebenches with iPads and rooms with couches and �at-screen tele-visions. �Here we are in the lounge,� says Nathalie Martin-San-chez, who oversaw the creation of the branch. �The customercan see an adviser while having a co�ee�it is designed to en-courage more proximity, more interaction, more personal con-tact.� This is a laboratory where the bank can test ideas such asgetting customers and their �nancial advisers to sit side by sideor letting customers speak to specialists on a video link.

Online banks, meanwhile, are trying to build a physical in-frastructure to supplement their online o�ering. The new, brightorange ING Direct Café near San Francisco’s Union Squareserves co�ee from Peet’s, a speciality Californian co�ee roaster,and freshly made snacks at reasonable prices. But as well as ask-ing how you want your latte, the baristas also inquire politely ifyou would like to talk about money or open a savings account.To reinforce the sense that this is not a bank, there is a rule againsttransactions. If you try to deposit a cheque, you will be given anenvelope to post it to a processing centre.

Whereas banks in the rich world are trying to make theirbranches more like shops or cafés, retailers in emerging marketslook set to leapfrog them by turning shops into banks. In Brazilone of the country’s fastest-growing providers of small loans isMagazine Luiza. Its main business is selling home appliancesand electronics through stores and online catalogues. Yet it also�nances three-quarters of its customers’ purchases and collectspayments on their loans from its network of more than 600shops. Unlike banks, which want their customers to visit theirbranches as little as possible, Magazine Luiza encourages its cus-tomers to come in to pay their monthly bills in cash because it

gives them an opportunity to sell more tothem. �I cannot really tell you if we are apure retailer or a �nancial company,� saysFrederico Trajano-Vendas, the �rm’s salesand marketing manager. �We are a mix-ture of the two.�

But the new branches that are gettingthe most attention (and, it seems, custom)are Citigroup’s. The resemblance of itsbranches to Apple’s iconic stores is morethan passing. When Citigroup decided tobuild its new network in Singapore, ithired Eight Inc, the �rm that had designedApple’s stores. The bank’s experiment inSingapore marked an attempt to scale upquickly in a sophisticated and competitivemarket. Its 26 branches have gone up insome of the busiest parts of the island andhave won an outsized share of business.The bank is now replicating its Singaporestrategy in Hong Kong, where it hasopened a huge �agship branch in a formerclothes shop in Mong Kok. �We’re �ndingthat if you have one of those branches it isworth ten ordinary ones,� says JonathanLarsen, Citigroup’s head of retail and busi-ness banking for Asia.

Branches are unlikely to disappear,but there will be far fewer of them, andthey will look quite di�erent from the cur-rent model. They will also be far more e�-ciently run. It is the world’s most over-banked country, Spain, that o�ers some ofthe most interesting lessons as to how thatwill be done. 7

Theconundrumfacing mostbanks theworld over is that, evenas theircustomersmake lessuse ofbranches,the bankshave yetto �nd anequallygood wayof drawingin newcustomers




SPECIAL REPORT

BETWEEN A RANGE of arid hills and the encroaching me-tropolis of Madrid stands an oasis with hundreds of an-

cient olive trees dotted all over it. A cluster of bright, modernbuildings sits alongside a green golf course in a valley. Overlook-ing all this is a building one �oor taller than the others, with abright silver dome under which the chairman has his o�ce. Thisserene campus is home to Santander, and in some ways the Goo-gleplex of banking. Two huge data centres�low and built like nu-clear-bomb shelters�provide some of the computer networks tosupport a far-�ung banking empire (�Brazil’s on this one, Britainon the other,� says a guide). The idea behind them is that compet-itive advantage in banking comes from rig-orously standardising computer systemsand procedures around the world and re-lentlessly driving down costs. �Our busi-ness model is extremely consistent every-where,� says Mr Sáenz, Santander’s boss.�We have the same systems everywhere.Exactly the same systems.�

Spain’s two biggest banks, Santan-der and BBVA, have been expanding theirretail operations abroad rapidly in recentdecades, and have managed to do so prof-itably even though their own country’seconomy is melting down around them.Santander, which a few decades ago wasjust a small regional bank, now has sub-

stantial businesses in ten countries around the world. Almost90% of its pro�ts are made outside Spain. BBVA, its biggest Span-ish rival, has also expanded vigorously outside Spain. Betweenthem the two banks manage more than 20,000 bank branches,most of them outside Spain. �Spain’s biggest export is the man-agement of bank branches,� quips one Spanish banker.

Spain is arguably the world’s most competitive bankingmarket. Thanks to its �ercely independent regions, it has a re-markable number of banks for its size. Even more remarkable isthe number of branches, some 43,000, which works out at onebranch for every 1,000 people, or about six times the number inBritain and more than twice as many as in France and America.�With too many players you end up overbanked because everybank wants to be everywhere,� says Pedro Rodeia at McKinsey.This keen competition pushed some smaller banks to lend reck-lessly, causing a banking crisis that blew up the economy. Yet italso forced banks to squeeze out costs, which at Santander andBBVA account for less than 50 cents of every euro they earn, de-spite their huge branch networks. Most large retail banks in othercountries would be happy with anything below 60 cents.

Spanish banks embraced modernisation relatively late.Having been trapped in a bubble for many years during the fas-cist dictatorship, once they were freed they were able to leapfrogrivals in more developed markets. The most important innova-tion was the rapid and almost universal adoption by bank cus-tomers of electronic bill payments. Spain’s banks have a hugeadvantage in not having to process cheques or handle transac-tions in their branches. They have invested diligently in install-ing the latest and most e�ective computer systems, making theirbanks enviably e�cient. Their rapid growth and the economictroubles at home raise some question marks. Even so, they havedeveloped an innovative model of banking that is being export-ed around the world. It may also hold some clues about whatbanks elsewhere may soon be doing.

Joined-up banking

In a branch in downtown Madrid of Banesto, a bank that isowned by Santander, a branch manager pulls up a series ofscreens on her computer. One shows all the balances of a cus-tomer at the branch. At a glance she can see whether the custom-er is pro�table, which of her sta� is responsible for looking after

him and what other banking services hemight need. To non-bankers, it seems in-conceivable that banks may not have acomplete overview of the business theyare doing with each of their customers.Yet only a handful of the world’s bigbanks are able to see instantly that a cus-tomer asking for a credit card may alreadyhave a savings account with them.

Spain’s banks go a step further. Withanother few clicks of a mouse, the branchmanager can see whether the branch it-self is pro�table. She assembles her sta�each morning to discuss which customersmay need to be contacted, perhaps be-cause they have missed a loan repaymentor received an unusually large deposit.

The Spanish model is not just aboutusing technology to drive down costs andpush up employees’ productivity. It alsoallows very small branches to o�er so-phisticated advice and customer service.

Across town, Bankinter, a small buttech-savvy bank, takes this idea a step fur-

ther. Just inside the bank’s entrance is a large computer screenwith a camera and a phone. If customers need specialist adviceon a mortgage, say, and no one can see them, they are connectedby video call with a free adviser in another branch. �As custom-ers use more channels they become more loyal, buy more pro-ducts and are more satis�ed�and that makes good business,�notes Accenture, a consulting �rm. �With a cross-sell ratio aheadof many of their Spanish peers, Bankinter’s customer relation-ships are also more pro�table.�

The �nal element of the Spanish banks’ formula is to con-centrate on markets where they can achieve a signi�cant share.They would rather be deep in a few markets than thinly spreadover many. BBVA, for instance, tried its hand in Brazil but found itcould not reach critical mass. Santander sold its �rst investmentsin the United States to raise the capital to bulk up in Brazil, al-though it has since returned. The Spanish model has been asmuch about banks being local in their main markets as about be-ing international. Yet technology is changing the economies ofscale involved in banking, particularly as banks try to pro�t fromthe vast amounts of data they collect on their customers. 7

Spain

Dispatches from the hothouse

Lessons from the world’s most competitive banking

market

Having been trapped in a bubble during the fascistdictatorship, once they were freed Spanish banks wereable to leapfrog rivals in more developed markets


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1

A BIG BANK hires a star analyst from another �rm, promis-ing to pay a substantial bonus if the new hire increases rev-

enue or cuts costs. In banking this happens all the time, but thisdeal di�ers from the rest in one small detail: the new hire, Wat-son, is an IBM computer.

Watson became something of a celebrity after beating thechampion human contestants on �Jeopardy�, an American quizshow. Its skill is to be able to process millions of documentsquickly by reading and �understanding� ordinary written lan-guage. Computers have no trouble with searching data neatlysorted in databases. Watson’s claim to fame is that it can do thesame with �unstructured data� such as those found in e-mails,news reports, books and websites. IBM hopes that Watson may,in time, do some of the work that human analysts do now, suchas reading the �nancial pages of newspapers, looking at thou-sands of company results and forecasts and producing a list ofcompanies that might be takeover targets soon.

Citigroup has hired Watson to help it decide what new pro-ducts and services (such as loans or credit cards) to o�er its cus-tomers. The bank doesn’t say so, but Watson’s �rst job may wellbe to try to cut down on fraud and look for signs of customers be-coming less creditworthy. If so, Watson will be following othercomputers designed to deal with �big data�. Across a slew ofnew �rms in Silicon Valley and in big banks across the world, arange of new ideas is being tried to crunch data. Some have thepotential to change banking from the bottom up.

In most �nancial institutions the immediate use of big datais in containing fraud and complying with rules on money-laun-dering and sanctions. Even seemingly simple tasks, such aschecking the names of clients against those on a sanctions black-list, become immensely complicated in the real world, wherebanks may have thousands of customers with the same namesas those on the blacklist. Each becomes a false positive that mayembarrass the bank and ruin a client relationship. So banks havehad to turn to computers that can amass data from a variety ofdi�erent sources, including the customer’s nationality and ad-

dress, the names of family members, and whether they havetravelled to or received money from countries on sanctions lists.

When moving on to more complex tasks, such as identify-ing the tiny percentage of fraudulent transactions among themillions of legitimate ones, the demands become ever greater.The problem is getting bigger because as banking has movedonto computers and mobile phones, and payments have shiftedfrom cash to cards or electronic transfers, the opportunities forfraud have proliferated.

The danger of fraud is particularly acute in areas such ascard payments and some of the more innovative kinds of mon-ey transfers that are o�ering cheaper or more convenient ser-vices than those already available. PayPal, which dominates on-line payments, barely survived its �rst year in business after itcame under sustained attack from fraudsters, and several of itsearly rivals were cleaned out and had to close down.

PayPal came up with Igor, a computer system named after aRussian thief and hacker who had opened fake accounts andtaunted the �rm’s security team in e-mails. Igor would look forpatterns, such as a concentration of payments close to the toplimit and their destinations, and then compare those paymentswith all the others in the system. What started at PayPal soonspread to the rest of banking and beyond it.

A better kind of crystal ball

The �rm that has perhaps gone furthest in �nding usefulconnections in disparate databases is Palantir Technologies,which takes its name from the magical all-seeing crystal balls ofJ.R.R. Tolkien’s mythology. It was founded by a group of PayPalalumni and backed by Peter Thiel, one of PayPal’s co-founders.Its speciality is building systems that pull together informationfrom di�erent places and try to �nd connections. Some of its ear-liest adopters have been spy agencies. In America the CIA andthe FBI use it to connect individually innocuous activities suchas taking �ying lessons and receiving money from abroad to spotpotential terrorists. Its other main market is in banking, wherebig �rms such as JPMorgan and Citi use it for a range of activitiesfrom structuring equity derivatives to reducing loan losses.

A stablemate of sorts to Palantir is Xoom, a �rm that spe-cialises in cross-border remittances. It is backed by some of Pa-lantir’s investors and has swapped a senior employee with it, butmore importantly it shares Palantir’s belief that given enoughdata even the toughest risks can be managed. Xoom accepts pay-ments from bank accounts or debit cards in America, then handsover cash in countries such as the Philippines or India. It does nothave much time to �nd out if it has been swindled on a paymentbefore it has to produce the cash. So it has devised a sophisticat-ed computer system that analyses a range of data, the nature ofmost of which it will not disclose.

Some of these checks may seem obvious, but some are noteasy to do when processing millions of transactions and movingbillions of dollars. Moreover, few of these pieces of informationon their own are powerful enough signals for Xoom to decline oragree to make a payment. Yet when the computer looks at all ofthe payments in its system, it is remarkably good at weaving to-gether the bits of information to spot fraud.

It also learns as it goes. When it recently noticed a string ofpayments funded by Discover credit cards and originating inNew Jersey, its algorithms raised a red �ag even though each pay-ment looked legitimate. �It saw a pattern when there shouldn’thave been a pattern,� says John Kunze, Xoom’s chief executive.The pattern it found turned out to have been an e�ort by a crimi-nal gang to defraud the �rm.

The other big users of fraud-�ghting computers are credit-card associations such as Visa and MasterCard. Their systems, as

Big data

Crunching the numbers

Banks know a lot about their customers. That

information may be valuable in more ways than one

Open wide

Source: IDC *1 zettabyte=1 trillion gigabytes †Forecast

Global digital information Zettabytes*

0

5

10

15

20

25

30

35

2005 2010 2015 2020

Created Storage available

F O R E C A S TESTIMATE

1

2005: 0.13

2020†: 34.6



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1

well as those of big card issuers such as Capital One, look at vastnumbers of transactions for unusual patterns or connections.This has allowed them to graduate from simple rules-basedfraud detection (such as whether a credit card has been swipedin locations a long way apart in a short space of time) to morecomplex sorts.

None of these systems is cheap, but they are usually a lotcheaper than falling victim to fraud. Xoom puts its losses throughfraud at 0.35% of the sums transferred. The average for credit-card�rms is about 0.1%, and the best achieve rates of about half ofthat, says Mike Gordon of FICO, the company that inventedcredit-scoring and now also supplies fraud-detection software.Losses on cashed cheques in America run to about 1% a year. Forcompanies selling goods online, loss rates are considerably high-er. CyberSource, an electronic-payment and risk-services com-pany, says that online retailers in Britain reckoned on losses of1.8% of revenue last year.

The high cost of �ghting card fraud has changed the balanceof competition in banking, weakening smaller banks that lackthe scale to build the necessary systems. Many closed or soldtheir own credit-card businesses and instead signed their cus-tomers up to cards issued by large specialists such as MBNA orCapital One. Many smaller banks now think this was a mistake,depriving them not only of an important source of revenue butalso of the opportunity to form the deeper and more lasting rela-tionship with their customers that comes from selling them sev-eral �nancial products. Most important of all, perhaps, it has de-prived them of a rich source of data on their customers’spending patterns.

That may soon change, for two reasons. The �rst is that card

associations such as Visa and MasterCard are getting better atspotting fraudulent transactions as they pass through the net-work, relieving the burden on smaller banks, says FICO’s MrGordon. The main strength of these network-level systems isthat they are able to look at far more transactions than any singlebank could, which helps them to spot fraud patterns on an inter-national scale.

Second, the systems used to crunch data are becomingcommoditised and their price is coming down. Thomson Reu-ters reckons that last year venture �rms invested a total of $2.47billion in companies that want to crunch big data. Much of thisinvestment was in database and storage out�ts that are not spe-ci�c to banks, yet the tools being developed elsewhere are quick-ly spreading. Whereas a decade ago the big banks would get theirsystems custom-made at huge cost, smaller banks can now buysimilar ones o� the shelf at a small fraction of the price.

Bankinter, the tech-savvy small Spanish bank, last yearstarted using a system to analyse complex loan portfolios oncomputers run by Amazon, an online retailer. Cloud computingenables it to hire massive number-crunching capacity wheneverit needs it. These two factors are making it easier for smallerbanks the world over to keep their credit-card businesses tothemselves and lean against the powerful forces for more andmore consolidation in banking.

Panning for gold

As the ability to process large amounts of data becomesubiquitous, banks are discovering that it is good for far more than�ghting fraud. These data also contain hidden nuggets of gold.

One way of using them is to try to sell customers more pro-ducts. Santander sends out weekly lists toits branches of customers who it thinksmay be interested in particular o�ers fromthe bank, such as home insurance. Someof the products banks are o�ering are noteven �nancial. In Singapore Citigroupkeeps an eye on customers’ card transac-tions for opportunities to o�er them dis-counts in stores and restaurants. Citi hasmore than 250 people in Asia working ondata analysis. Last year it opened a new�innovation lab� in Singapore that bringstogether those data analysts with big insti-tutional customers and a large analyticscentre in Bangalore.

If a customer who has signed up forthis service swipes a credit card, the sys-tem can look at the time of day, the loca-tion and the customer’s previous shop-ping or eating habits. If it �nds that heenjoys Italian food, it is almost lunchtimeand there is a nearby trattoria, it can send atext message o�ering a discount at the res-taurant. That may give the bank a secondtransaction and a cut of the extra spend-ing. What makes the system even creepieris its ability to �nd out what proportion ofcustomers take up such o�ers, so it cancontinuously learn to improve them. Themodel for this is Amazon’s online store,which recommends items that a customermight like based not only on what he hasbought previously but also on what simi-lar customers have bought.

McKinsey reckons that some banks


have been able to double the share of customers that accept of-fers of loans and reduce loan losses by a quarter, simply by usingdata they already have. Card networks and other retailers arealso getting in on this business. In America Visa has teamed upwith Gap, a clothes retailer, to send discount o�ers to cardhold-ers who swipe their cards near Gap’s stores. Yet in peering so ob-viously into people’s spending habits, banks run a risk of spook-ing their customers and running foul of privacy advocates.Target, an American retailer, received unwelcome attention earli-er this year when it reportedly discovered from a teenage girl’sshopping patterns that she was pregnant �and mailed her baby-related coupons�before she had told her father.

A less controversial way of using the data banks hold is todraw on them to o�er something genuinely useful to their cus-tomers. Britain’s Lloyds Banking Group is thinking of tweakingits systems to tell customers not just how much money is in their

accounts when they ask for a balance, but also how much theywill have available once all their usual bills are paid. �We havedeep and rich information about customers that we can use togive them better insights, rather than just providing us with bet-ter insight to improve our risk management,� says Alison Brit-tain, head of consumer banking at Lloyds.

Yet even as big data are helping banks, they are also throw-ing up new competitors from outside the industry. One such �rmis ZestCash, which provides loans to people with bad or no cred-it histories. It was started by Douglas Merrill, a former chief infor-mation o�cer and head of engineering at Google. The big di�er-ence between ZestCash and most banks is the sheer quantity ofdata that the �rm crunches. Whereas most American banks rely

on FICO credit scores, thought to be based on 15-20 variables,such as the proportion of credit that is used and whether pay-ments have been missed, ZestCash looks at thousands of indica-tors. If a customer calls to say he will miss a payment, mostbanks would see this as a signal that he is a high risk. But Zest-Cash has found that such customers are in fact more likely to re-pay in full. Another useful signal is the length of time customersspend on ZestCash’s website before applying for a loan. �Everybit of data is noise, but when you add enough of them togetherin a clever enough way you can make sense of the garbage,� MrMerrill said at a recent conference.

ZestCash’s customers are not typical bank customers be-cause of their poor credit histories. Most would normally usepayday lenders. Mr Merrill says his �rm’s interest rates are abouta third of those charged by many payday lenders (although stillan eye-popping 300% or so), and that it is achieving defaults of

well under half the payday industry’s av-erage of 40%.

Wonga, a British start-up that o�ersloans for very short periods, also looks at aplethora of di�erent data sources, such ase-mail-address and social-network sites,to make credit decisions on the �y. Anoth-

er �rm, Cigni�, digs deep into mobile-phone records, crunchingvariables such as the time when calls were made, their frequen-cy and the whereabouts of the callers for clues about their pro-pensity to repay loans. (Disclosure: Jonathan Hakim, the presi-dent and CEO of Cigni�, used to work for this newspaper.)�Banks have to keep up in this arms race,� says Thomas Achhor-ner of the Boston Consulting Group. �They have to make surethey know at least as much about their own customers as anythird party could know.�

Tesco, a large British retailer, collects enormous amounts ofdata on its customers’ shopping habits that allow it to send pre-cisely targeted coupons. When a household starts buying nap-pies, signalling the arrival of a new baby, Tesco usually sends dis-

Even as big data are helping banks, they are alsothrowing up new competitors from outside the industry

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TURN LEFT OFF the main reception to PayPal’s o�ces inSan Jose, open a nondescript door and you step into a

garish living room dominated by a �at-screen television. This is alaboratory for what PayPal calls �couch commerce�: people sit infront of the television buying things with their mobile phones ortablet computers. Next door is a make-believe shopping mallcomplete with a mock hardware store, grocery and co�ee shop.In each, consumers can order, buy and pay for things using theirphones, or even just their phone numbers.

The virtual mall and living room are exercise grounds forthe next big battle in banking: over who will control the new dig-ital wallets that will change the way in which people shop andspend�and, by implication, the way they save and borrow.

On the face of it, the business of facilitating paymentsseems a particularly unpromising one for start-ups to enter. Mosttransfers of money run down a few main highways that linkbanks to one another. They carry huge volumes of tra�c and aregenerally strictly regulated. �They move quadrillions a day andtake just a few crumbs,� says Simon Bailey, a payments expert atLogica, a consulting �rm. To consumers, most payments appearto be free because they are given away by banks as part of a bun-dle of banking services that some customers subsidise throughlow interest rates on deposits.

Yet payments turn out to be a battleground between banksand a slew of innovators trying to disrupt the market. Many ofthese �rms have relatively humble ambitions. Some are trying tograb thimblefuls of the huge �ows of money that wash aroundthe world by concentrating on particular areas, such as cross-bor-der payments (see next article). Yet they �nd themselves gettingever closer to o�ering bank-like services without having to bebanks themselves.

There has been massive growth in supplying payments ser-vices to tradesmen such as plumbers or �ea-market stallholders,which until recently could accept payment only in cash or bycheque. Yet cheques are bouncy, and although cash has its attrac-

Mobile payments

A wealth of wallets

Digital payments pose a serious threat to banks

The way to go

Source: comScore

Online banking penetration*, February 2012, %

*Among total internet users

0 10 20 30 40 50 60 70

Netherlands

Canada

France

Sweden

Finland

Britain

New Zealand

Poland

Belgium

United States

World

2

count vouchers for beer, knowing that the new father will haveless opportunity to go to the pub. The �rm also has banking am-bitions. It already o�ers credit cards and loans and plans to intro-duce full bank accounts. Given the depth of its databases, it maywell assess the creditworthiness of its customers on the basis oftheir grocery shopping.

Other �rms help customers at the expense of banks. Mint,an online �nancial planner, pulls together all of a customer’s �-nancial information from di�erent places. A customer may havehis current accounts with one bank and perhaps a few creditcards with other banks. Mint allows him to see exactly howmuch he has (or owes) in total. Two San Francisco start-ups aretrying to take this idea a step further. ReadyForZero and SaveUpalso aggregate information and help customers cut their debtswith a mixture of advice and gentle nudges. ReadyForZero, forinstance, posts stickers to its customers so they can cover up themagnetic strips of their credit cards if the interest rates are espe-cially high. SaveUp o�ers prizes and rewards to those who cuttheir debt. Yet others, such as Zopa or Prosper, bypass banks en-tirely, letting savers lend directly to borrowers.

A question of trust

The danger for banks is that websites such as these standbetween them and their customers. If customers trust websitessuch as Mint more than they trust their banks, the banks couldend up having to provide commoditised �nancial products atever narrower margins. They may even lose their role as inter-mediaries between savers and borrowers. Andrew Haldane,who has a reputation as a blue-sky thinker at the Bank of Eng-land, reckons that with access to enough information about oneanother, investors and savers may no longer need banks.

�With open access to borrower information, held centrallyand virtually, there is no reason why end-savers and end-inves-tors cannot connect directly,� he said in a recent speech. �Thebanking middlemen may in time become the surplus links in thechain. Where music and publishing have led, �nance could fol-low.� Mark Jenkinson of Capco, a consultancy, foresees the emer-gence of a �nancial market in which consumers own and controltheir �nancial records and give banks access to them only whenthey want to do business with them.

Such a world is not yet imminent. For now, most data aggre-gators operate in America because of the widespread adoptionthere of �nancial-planning tools such as Quicken into which us-ers download their �nancial records. Yet the idea is spreading,presenting banks with a dilemma. Some, such as Citigroup, aretrying to bring all their customers’ data into the bank. Intuit, thecompany behind both Mint and Quicken, as well as a rival �rm,Yodlee, sell software to banks that allows their customers to seetheir spending and balances across all of their accounts.

Others are concerned about the reputational and securityrisks that might arise from importing or sharing data. BNP Pari-bas, for instance, is providing its customers with powerful toolsto analyse their spending, but will not import data on customers’accounts at other banks. �The customer wants power over hisdata,� says Virginie Fauvel, its online-banking director. But �thereis too much risk in aggregationthe bank has to be a safe place.�

One obvious strategy is for banks to o�er incentives to theircustomers to do more business with them, thus centralising boththeir transactions and the information. Standard Chartered, forinstance, o�ers cheaper loans to customers who have multipleaccounts with the bank, largely because it thinks the extra infor-mation allows it to assess risk more accurately. Another methodis for banks to follow their customers out into the physical worldby o�ering them new ways of paying or borrowing on the �y.The most obvious example is mobile banking and payments. 7


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2

3March of the mobile banking parlours

Sources: KPCB; Morgan Stanley

Device shipments, units, m

0

100

200

300

400

500

600

700

800

2005 06 07 08 09 10 11* 12 13

Smartphones Tablets

F O R E C A S T

*Estimate

tions�foremost of which is that it is easily hidden from the tax-man�carrying large amounts of it is risky, and customers canspend only as much of it as they have in their wallets.

In America two �rms, Square and Intuit, lead this marketwith small devices that attach to smartphones and allow eventhe smallest business or tradesman to accept credit-card pay-ments. Both �rms o�er free card-readers to users and then chargethem a fee of about 2.7% of the amount that changes hands. Bothare growing at a rapid clip. Square has signed up more than 1mcustomers since its launch in 2010. Among them is the SalvationArmy, which last Christmas started testing the device to acceptdigital donations alongside its traditional red kettles. Intuit’s Go-Payments, which also launched three years ago, says the numberof its clients increased by 1,200% last year, though it will not givean actual number. �Before this, small businesses would havehad to take cheques or lose sales,� says Chris Hylen, the head ofIntuit’s payments division.

In little over a year, Square alone has increased the numberof credit-card readers in America by about a sixth. The growth ofboth �rms highlights the huge pent-up demand for mobile pay-ments. Both reckon that some 26m small businesses and self-employed people in America had wanted to accept card pay-ments but were put o� by the cost and the paperwork. A tradi-tional card-reader sells for hundreds of dollars, with �xedmonthly fees on top, and applicants have to submit to creditchecks and provide accounts for the previous year�impossiblefor a start-up.

Some big banks sneer at these newcomers, arguing that thetechnology involved in adding a card reader to a phone can beeasily replicated. In fact, the innovation has less to do with thedevice reader than with a business model that has made a hugedi�erence to costs involved in accepting credit-card payments. Itis rapidly overturning a lucrative industry of �merchant acquisi-tion� that allowed banks to earn wide margins for agreeing toprovide credit-card readers to shops. The �rst Square device wasbuilt by Jack Dorsey, one of the founders of Twitter, who found itso simple that he wondered why no one had done it before, saysKeith Rabois, Square’s chief operating o�cer. �They literallymade this thing work in a month,� he explains. �It took anotheryear-plus to navigate the �nancial-services industry.�

The success of mobile payments would not have been pos-sible without the massive growth in the number of smartphonesand the falling cost of computing power, both of which are low-ering the barriers to new entrants in parts of �nance. Smart-phones are vital to this, because by providing consumers withpowerful computing devices and internet connections that arealways on, they open the way to all sorts of other innovations.

Square and Intuit can give away their card readers free in part be-cause all the processing power to run them is already on thephones they are plugged into. �It is a device that can link the on-line and o�ine worlds,� says Zilvinas Bareisis, an analyst at Ce-lent, a consultancy. �The smartphone gives such a rich experi-ence that we are playing games on it, we are tracking stars, so it isa natural extension to check your bank account or even make apayment.� Its use is also spreading fast. Nielsen, a research �rm,reckons that by the end of last year almost half of American mo-bile-phone subscribers had smartphones, compared with undera �fth two years earlier.

The two companies whose online-payments experimentsare being watched most closely are Google and PayPal. PayPalinitially set itself up as a mobile wallet that would allow peopleto beam money from one Palm Pilot (an early handheld device)to another. That idea died pretty quickly when PayPal realisedthat people were not particularly interested in being able tobeam money to someone standing in front of them, but that theydid want a safe way to send money over the internet to peoplewho might be complete strangers. It is now arguably the world’sbiggest bank, with more than 100m account holders. It providesa virtual wallet that can be used to pay for online purchases on acomputer at home as well as for things bought in bricks-and-mortar stores on a smartphone. The wallet can even be com-pletely dematerialised. In shop trials in America, customerswere happy to pay at the till by typing in their phone numbersand secret code.

PayPal is also padding out its virtual wallet with otherbank-like features such as loans. Even after a customer hasbought and already paid for something in a shop, PayPal o�ershim various options for funding the purchase. The amountowed can be debited to his current account, credit card or debitcard. PayPal also o�ers its own line of credit to customers whowant to borrow money to pay for things they have just bought.

A wizard in your pocket

Since customers can link a vast number of di�erent ac-counts to their PayPal wallets, the system can help them ensurethat they always pay for things in the most cost-e�ective way. Itmight suggest they use a store card when shopping at a particularretailer to maximise the number of loyalty points they accumu-late, but propose that they use a di�erent card somewhere else.Such advice poses a serious threat to the banks.

Google is, for the moment, somewhat coy about its walletand insists it is working in partnership with the banks ratherthan trying to supplant them. Its wallet allows customers to storebank-issued cards on their phones, which they then swipeacross a reader when paying for something. Google is interestedin payments because in rich countries more than 90% of allshopping still takes place in real stores rather than online. It toothreatens to stand between banks and cardholders.

In Europe, where the market is more fragmented, the ideaof an electronic wallet has been slower to take o�. iZettle, aSwedish �rm, also o�ers free card readers and charges a fee simi-lar to Square’s and Intuit’s. It reckons it has already expanded thenumber of merchants able to accept card payments by about 15%in Sweden, and has recently expanded into Denmark, Finlandand Norway.

Some emerging markets are leapfrogging rich ones, goingstraight to mobile banking from having hardly any banks in ruralareas. In Brazil and India banks are also reaching far beyond theirtraditional branch networks by using agents. These are oftenshopkeepers in small villages, equipped with mobile phonesand card readers. Customers can make small deposits, with-drawals and money transfers through these agents instead of

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2 visiting faraway branches. The poster-child of mobile banking is Kenya, where some

14m people now save and send money using M-Pesa, a tele-phone-based banking system. It allows them to deposit with orwithdraw cash from a network of small agents. Similar systemshave also been deployed in places such as Bangladesh, Uganda,Nigeria and the Philippines, but with less success.

In this rapidly evolving market even relatively young �rmsrun the risk of being outpaced themselves by fresh and evenmore disruptive innovations. One such very new �rm is Stripe,which has attracted investment from some of the original foun-ders of PayPal and is trying to muscle in on PayPal’s online mar-ket. It wants to make online payments easier to accept for web-site owners than by using PayPal or Google.

The agony of choice

There are two big and interrelated questions about howpeople will behave when they start using electronic wallets on alarge scale. The �rst is whether they will consolidate all theirspending into a single account or spread it even more widelythan they do now. The arguments seem �nely balanced. Thosewho expect spending to be consolidated reckon that when peo-ple are no longer faced with a physical choice, they will simplyuse whichever card or account has been set as the default. Thosewho think that spending will be spread more widely point outthat phones eliminate the inconvenience of carrying around alot of di�erent cards, which may prompt some consumers tohave more banking relationships.

The second question is whether consumers will use justone electronic wallet on their phones, choosing between, say,Google, PayPal and their own bank, or whether they will haveseveral. Most analysts think that consumers will gravitate to-wards a single electronic wallet which will hold many cards.This is because there may be signi�cant bene�ts to be gainedfrom aggregating transactions and the data associated withthem. For example, PayPal’s wallet will allow consumers to usevarious stores of value besides money when paying for goods orservices. These could include coupons, loyalty points fromstores and banks and air miles from airlines. PayPal stands to pro-�t from steering customers into shops, perhaps by remindingthem that they have unused coupons. It could also tell shopkeep-ers about the tastes of their customers, allowing retailers to maketargeted shopping o�ers (�this would look great with the blackskirt you bought last week�) or extend credit on the �y.

Google, too, is hoping to do far more with its wallet thanprocess payments, which it sees as akin to queries typed into itssearch engine. In the same way that it sells advertisements thatare precisely targeted to a user’s search, it hopes to be able to de-liver o�ers matched to people’s spending patterns.

Innovations of this sort are forcing big banks and the credit-card networks to respond in kind, either by teaming up with theinnovators or building their own competing systems. Some aredoing both. Citigroup is working with Google; at the time ofwriting it is the only bank to have its card in the Google wallet.�I’m not sure any of us will carry [physical] wallets ten yearsfrom now,� says Michelle Peluso, the head of marketing and in-ternet banking for Citigroup’s consumer business.

JPMorgan has built its own network to allow people tomake payments by e-mail, using their phones or computers. InBritain Barclays recently introduced a similar system. �Technol-ogy is to some extent disintermediating legacy banks,� says An-tony Jenkins, the head of retail and business banking at Barclays.�But we also see it as a huge opportunity because with our accessto the banking system and our technology we can build these[systems] ourselves.� 7


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STANDING JUST INSIDE the entrance to Wells Fargo’s heado�ce in San Francisco is a magni�cent antique stagecoach

complete with a strongbox and a seat next to the driver for the�shotgun messengers� who worked for the bank. It is a reminderthat in the not-too-distant past one of the main jobs of banks wasto lock money in boxes and move it around the world underguard. For companies, these days, big global banks provide a vir-tual version of this, with networks that let them sweep up cashfrom far-�ung outposts every day. For the biggest �rms andbanks, the money never stops �owing. It follows the rising sun,�nancing trade and payrolls, and then moves on as night falls todo the same again in another part of the globe.

For consumers who want to �wire� money to some far cor-ner of the world, less has changed since the days of the Old West.If you try to send a small amount of money from America to thePhilippines, say, or Mexico, you will probably have to queue at aneighbourhood money-transfer agent and pay a fee that couldeasily reach 10% of the value of the remittance.

The World Bank reckons that cross-border remittances add-ed up to $483 billion last year. These are mainly small amountssent regularly by migrants to their families back home. As thenumber of migrants has swelled, so too have the remittances: byabout 8% annually in recent years, says the bank.

Surprisingly, most big banks have shown little interest inhelping these �ows along. The Organisation for Economic Co-operation and Development reckons that banks handle just5-10% of remittances between America and Latin America, oneof the world’s biggest payment corridors . Although the marginsare fat, banks largely avoid this business because the existing in-terbank transfer systems were built to move money in big lumpsrather than by the spoonful. So most banks have o�ered small-scale cross-border transfers as an afterthought and made themso expensive and inconvenient that they are rarely used. Mosttake days to process, and if a payment goes awry the customergets little help. A charge of $25 or more to send money to anothercountry is common, and banks often load on extra fees of 2-3%

when they switch currencies. Many banks charge not only forsending money but also for accepting it. A World Bank study in2009 found that banks charged an average of 12% for small remit-tances, whereas money-transfer agents such as Western Unionaveraged 9%.

Western Union is the gorilla of money transfers, handlingclose to $1 in every $5 that is wired around the world. Last year itsent close to $80 billion, working through almost half a millionagents. Its next-largest global competitor is MoneyGram, whichtransfers about $20 billion a year. UAE Exchange is a bit bigger,but still has a strong regional focus. There is also a plethora ofsmall money-transfer agents that spring up in kiosks and grocery

Remittances

Over the sea andfar away

The business of sending money across borders is

lucrative, fast-growing and ripe for change

stores in areas with large migrant populations.Even though they undercut the banks, money-transfer

agents earn mouth-watering margins on remittances. WesternUnion’s were above 28% in many of its biggest markets last year.Margins are so fat because pricing is far from transparent. West-ern Union, for instance, sets prices for individual customers de-pending on where they are and the amount they send. To wire$500 to Mexico from Dallas costs $14. To send the same amountfrom New York costs $25.

The nimble shall pro�t

Given such margins, this market is attracting some interestfrom new tech �rms that think it is ripe for disruption. One of thebest-known of these is Xoom, a San Francisco-based internet�rm backed by some of the smartest money in Silicon Valley. Itcharges a �at fee of $5 or $6 per transaction. The reason it is ableto keep it so low is that it has moved one leg of the transactiononline. Most remittances are deposited in cash and withdrawnas cash, but Xoom has managed to persuade almost all its cus-tomers to make their transfers from bank accounts (a few use

credit cards, which are more expensive forXoom). The company is still tiny com-pared with rivals�last year it handledabout $1.7 billion�but it is growing fast. Itsservice is very convenient. Many custom-ers send money from their bank accountsusing their phones while commuting to

work. This year Xoom expects to transfer about $3.4 billion. Itreckons that even with charges this low it can achieve better op-erating margins than Western Union.

If Xoom can save money by moving one leg of the transac-tion online, then why not move both legs? John Kunze, the com-pany’s chief executive, explains that the recipients are often incountries with undeveloped banking systems and a strong pref-erence for cash. �The rule we have is never ask Mom to changeher behaviour,� he says.

For those who are willing to move onto an entirely elec-tronic platform, transferring money abroad can be a lot cheaperstill. CurrencyFair is a peer-to-peer marketplace that started up

4No rhyme or reason

Source: World Bank*Corridors with over $500m in transfer flows, out of 31

remittance-sending countries to 90 receiving countries

Cost of remitting $200*, Q1 2012, $

Japan

Japan

Germany

France

France

SouthKorea

China

China

Algeria

China

Italy

Canada

NewZealand

France

Australia

China

India

China

Tunisia

Philippines

Most expensive:

Least expensive:

38.16

35.76

34.02

29.20

28.26

19.76

19.66

19.26

18.64

18.56

Even though they undercut the banks, money-transferagents earn mouth-watering margins on remittances



SPECIAL REPORT

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1

just over a year ago after one of its founders, Brett Meyers, wascharged huge bank fees hidden in the exchange rate when trans-ferring money abroad. After that, he started ringing up friendsabroad to see who wanted to swap currencies. The result was anonline marketplace that matches people wanting to buy and sellcurrencies. In the main corridors, such as that between Britainand the euro area, very little money ever crosses borders. Some-one wanting to sell sterling and buy euros deposits their poundswith the �rm and is matched with people who have depositedeuros and want sterling. Whereas most banks charge about 2.5%through the spread between their buying and selling prices for acurrency, on CurrencyFair the participants decide on the rate. If atransaction is completed, CurrencyFair charges 0.15% of its valueand a small fee to send the money to the recipient’s bank accountin the new currency. In practice this means that for the momentpeople would generally need an account in each country, or atleast a friend to whom they could send money. CurrencyFairsays it is planning to add cash delivery. If matching parties can-not be found, CurrencyFair itself will quote a rate that it obtainsfrom wholesale markets, with a fee of about 0.5% added on.

Another option is sending money from one phone to an-other. M-Via, an American �rm, lets people in America top uptheir phones at 7-Eleven stores or other shops and then send themoney to other members. Cash can be withdrawn from ATM

machines using cards linked to the accounts, or the money canbe spent using a debit card.

New online services are emerging for businesses too. TheCurrency Cloud, a London-based �rm, has received $4m in fund-ing from venture capitalists to build an automated foreign-ex-change system to help businesses make and receive payments in140 currencies.

Boots on the ground

But good ideas on their own are not enough to overcomethe many barriers to entry in this business. Perhaps the biggestone is the need for a network for taking in and handing out cash.Western Union, for instance, has kept increasing its share of themarket partly because it has raised the number of agents in itsnetwork nearly �vefold over the past few years. Branding is alsoimportant. Western Union is able to charge more than some ofits competitors because its customers are willing to pay a pre-mium for a well-known name with which they feel safe.

A third barrier, and one that will probably become higherwith time as more transactions move online, is knowledge andrisk control. �If you aren’t very good at fraud detection in thisbusiness, you either end up bankrupt or in jail,� says Xoom’s MrKunze. �The fraudsters are reading all the books we are. They arePhDs themselves.�

Given these barriers, many of the new entrants are likely tolook for alliances and partnerships rather than try to disrupt themarket alone. This has already started to happen. M-Pesa, theKenyan �rm that allows people to send money to each otherover the phone, has teamed up with Western Union to let peoplein 45 countries send money directly to M-Pesa’s users in Kenya.

New entrants to this market do not need to take a dominantshare of it to make a big di�erence to the way it operates. In mostof the main corridors with plenty of competition, the feescharged by banks and traditional money-transfer agents are fall-ing sharply. One old-school bank that is successfully making thetransition to the online world is India’s ICICI bank, which be-tween 2008 and 2011 increased its share of the remittances mar-ket by well over 50%, making it number four in the global rank-ings, according to Aite Group, a research �rm. Its customers areboth tech-savvy and price-conscious, and they quickly took tocheaper internet transfers. 7

�STRATEGICALLY, I THINK in terms of millionaires and bil-lionaires,� says Jürg Zeltner, the head of wealth manage-

ment at UBS, a Swiss bank. It is a claim that many big bankswould like to make about their clients. Few can. With a squeezeon revenues from banking services for more down-at-heel folk,many of the world’s biggest banks, as well as some smaller ones,hope to plump up their pro�t margins by serving the verywealthy. Yet margins in private banking and wealth manage-ment are also being squeezed, and new competitors from out-side banking stand a good chance of breaking into this market.

Self-evidently, the big attraction for banks is that rich peo-ple have more money to invest and spend on advice than poorerones. De�nitions of rich customers vary from bank to bank andregion to region, but there is a rough pecking order. Customerswith �nancial assets above $1m (not counting their homes orbusinesses) are generally classi�ed as high-net-worth individ-uals, and those with assets of $10m-30m as ultra-high-net-worth.The Boston Consulting Group puts the total investible assets ofthe world’s wealthy at around $122 trillion last year, almostenough to buy all the shares traded on the New York Stock Ex-change ten times over. Capgemini and Merrill Lynch come upwith a more modest estimate of about $43 trillion. Whichevernumber is right, the market is certainly big enough to be interest-ing; and everyone agrees that it is growing quickly. The richworld is still home to most of the world’s money: about a third isin America and another third in Europe. Yet the fastest growth isin Asia, where the assets of the rich increased by almost a �fth in2010 (see chart 5, next page).

The market is lucrative as well as large. Before the 2007-08�nancial crisis private banks generally earned revenues of about1% of the assets they looked after. Those in �o�shore� centressuch as Switzerland, which used to be discreet to a fault, tendedto ask for a bit more and those in America a bit less. According toMcKinsey, such fees left banks with a margin of about 0.35% oftheir clients’ money under management. There are other attrac-

Wealth management

Private pursuits

Many banks are hoping that wealth management can

restore their fortunes


SPECIAL REPORT


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1

tions to this business: it does not require large amounts of regu-latory capital and it is easy on the balance-sheet since most veryrich people lend more to banks than they borrow from them.

New capital regulations are making it even more enticing,though rules chipping away at bank secrecy have the oppositee�ect. The Basel 3 rules requiring banks to set aside plumper cap-ital cushions against loans that may go bad are causing many toshrink their loan books and expand in areas that do not requiremuch capital, such as private banking. And with banks having tofund more of their balance-sheets from deposits rather thanfrom �ighty capital markets, they are scrambling to get theirhands on a bigger share of this wealth.

Good things come in small packets

Yet few banks have managed to scoop up a signi�cant partof it. Scorpio Partnership, which gathers data on the industry,reckons that the 20 biggest private banks and wealth managerslook after little more than $11 trillion between them. The frag-mentation of the market makes it attractive to newcomers,which reckon they stand a fair chance of grabbing a slice of it, aswell as to larger incumbents, which are intent on getting more.�Every other billionaire has an account with us,� says Sergio Er-motti, UBS’s chief executive. Even so, he thinks there is consider-able scope for the bank to increase its share of the market, notleast by doing more business with existing customers.

That may be harder than it sounds. Rich people are moredemanding and cost more to serve than the poor. Most privatebanks or wealth managers try to strike a balance between costand revenue by giving di�erent clients di�erent amounts of ser-vice. The extraordinarily rich get extraordinarily good service,with expert advice on anything they could possibly want, fromhelp with �nding a yacht broker to information on the bestboarding schools. Such advice generally does not come cheapand is di�cult to scale up. The very best private bankers tend tobe well educated and well versed in �nancial markets�the sortof people who might be chief investment o�cers at fund-man-agement �rms. It helps if they have gone to the right schools, areover 50 and perhaps play polo. �Wealthy clients want relation-ship managers who are just like them,� notes one private banker.At the same time banks do not want their star managers to gettoo close to their most lucrative customers, because they areworried that if the managers leave they might take their clientswith them. The very best employees are disproportionately wellpaid, as in investment banking.

In Asia and Latin America, the fastest-growing markets for

private banking, these problems are mag-ni�ed by a shortage of experienced bank-ers, particularly older ones. �In Asia se-niority is incredibly important,� saysChristian Edelmann of Oliver Wyman.�You just can’t have a 30-year-old bankerservicing a 50-year-old entrepreneur.�

At the same time as the cost of hiringprivate bankers is rising, revenues in priv-ate banking are falling. Since the �nancialcrisis, fees in most rich countries havedropped by 10-20%. This is partly becausethe wealthy demurred at paying throughthe nose as they watched their assetsplunge along with everyone else’s. Manyof them also moved their money out ofrisky or complex investments to saferones such as government bonds or cash,which promise lower returns and gener-ate much lower fees.

Moreover, competition on fees is intensifying, especially atthe top end. Over the past few decades many billionaires haveset up their own �family o�ces�, which provide many servicespreviously supplied by private banks. They often employ in-house investment managers who negotiate hard on fees. �Ourultra-high-net-worth clients are institutional clients,� says Mr Er-motti at UBS. �We treat them like we treat our clients on the insti-tutional side in the investment bank.�

As rich clients behave more like institutions, it also be-comes easier for big investment banks to win their business.Goldman Sachs and Barclays have been particularly active inthis �eld, o�ering sophisticated investment-banking products.Investment banks can also o�er rich clients the chance to puttheir money into companies before the shares are listed. Gold-man Sachs, for instance, led a $1.5 billion private placement ofshares in Facebook in January 2011 which it o�ered to its privateclients outside the United States. In Asia and Latin America,where the numbers of very rich people are growing fastest, thebig global investment banks are also stepping up their e�orts toget deposits to fund their investment-banking and corporatebusinesses. That, too, will drive down margins for traditionalwealth managers, forcing them to pay more attention to themerely rich rather than just the extremely wealthy.

On the top �oor of an upmarket shopping mall in Singa-pore, next door to a spa o�ering beauty treatments and mas-sages, is an establishment that looks like a private club. Its wood-

5IrresistibleAssets under management, $trn

> $1m< $1mHousehold investable assets2008 2010

0

10

20

30

40

LatinAmerica

Middle Eastand Africa

Japan Asia-Pacific(excluding Japan)

Europe UnitedStates

102.3 121.8

35.6 47.466.7 74.4

WORLD TOTAL

Source: Boston Consulting Group



SPECIAL REPORT

2 panelled walls are hung with artworks and there are book-linedcorners with comfortable chairs. The only hint that this is a bankis a guard with a large revolver strapped to his belt who standsnear the entrance. Here clients of the private-banking arm of Citi,an American bank, can get advice on anything from buying aprivate jet to setting up a trust for their children. This is familiarterritory for the traditional wealth managers who o�er such ser-vices to customers with tens of millions of dollars to invest. But itis new ground for big corporate and commercial banks such asCiti, JPMorgan Chase and HSBC that now hope to cater to theneeds of those who can invest mere millions.

This is the part of the market that banks have traditionallyfound di�cult, because the revenues it generated never quitematched up to the costs of providing the elaborate service it re-quired. Big banks are having another go now because they hopethat thanks to new systems and technology they can partly auto-mate what was previously bespoke investment advice. Themeeting rooms may still be mahogany-lined, the advisers maybe bright and polished, but much of the thinking about asset al-location and risk management will be done by computers.

For HSBC the big opportunity is peo-ple with less than $5m to invest. �That iswhere you can get the intersection of thebest economics [and] you can build thebest industrial solution,� says Simon Wil-liams, HSBC’s group head of wealth man-agement. The bank already has millions ofa�uent customers who use its credit cardsand current accounts. The challenge is toget them to give it their investment busi-ness too.

Citigroup has grown big in Asianprivate banking and wealth managementby rigidly segmenting its customer base. Ito�ers its highest level of service only tothose who put $10m or more with thebank, but thanks to heavy investment intechnology it is now able to provide so-phisticated �nancial products and adviceat relatively low cost to customers whomtraditional private banks would not have found pro�table. A bigselling point for banks with large international branch networkssuch as Citi and HSBC, and even regional powerhouses such asStandard Chartered, is their reach abroad. A�uent clients wantto be sure that they can quickly get help if they lose their walletswhile travelling, say, or need to send money across borders.�Even a billionaire needs a credit card, he also needs onlinebanking, he needs to be able to write a cheque,� says JonathanLarsen, Citi’s head of consumer banking in Asia.

Yet the big network banks are also facing new competitionfrom fast-growing domestic banks in emerging markets. ItaúUnibanco, Brazil’s biggest private bank, has built a business thatis the envy of many international rivals, and is expanding fastacross the region. In Asia, banks such as China Merchants Bank,Hang Seng Bank, OCBC and HDFC are bundling investment pro-ducts with banking services for wealthy customers, says JohnCaparusso of Standard Chartered in Hong Kong.

Smaller, cheaper, better

Specialist �rms have also entered the market, o�ering ad-vice that they say is free from the con�icts of interest that bedevilnetwork banks (which generally try to earn a commission fromselling investment products) and investment banks (which oftentry to sell their own products and channel trades through theirown brokers). One such �rm is Vestra Wealth, formed by a group

of former UBS wealth managers. �There is an inherent con�ict be-tween trying to be an adviser and trying to sell a product,� saysDavid Scott, one of the �rm’s founders.

The biggest threat to incumbents, however, comes from out-side the traditional banking sector, where hungry innovators aretrying to cut the cost of investment advice and wealth manage-ment drastically. The most fertile ground for many of these new�rms is in California, where a generation of technology entrepre-neurs that made its money online is preparing to invest it onlinetoo. The region is already awash with traditional wealth manag-ers. UBS, Goldman Sachs, JPMorgan and others are expanding inSan Francisco and around Silicon Valley. They have recently beenjoined by online rivals such as Wealthfront, MarketRiders andPersonal Capital, all of which use technology to help clients buildcustomised asset portfolios at a small fraction of what traditionalwealth managers would charge.

Wealthfront, which is aiming its o�ering squarely at SiliconValley’s new rich, will manage money for a fee of 0.25% a year, us-ing sophisticated algorithms that measure risk tolerance andbuild a diversi�ed portfolio. Another new entrant is PersonalCapital, started by Bill Harris, a former chief executive of PayPaland Intuit. It tries to straddle the world between cheap onlinewealth management and the old world of private banking. Cus-tomers can sign up online but the �rm provides expert portfolioand tax-management advice and assigns wealth managers to in-dividual customers. In Britain a �rm called DCisions hascrunched the data on millions of portfolios to obtain risk-adjust-ed returns as benchmarks for new investors. The data show upclearly how wealth managers’ fees have a�ected the value of theportfolios and what di�erence the managers’ advice has made.

Tom Blaisdell, a partner at DCM, a venture fund, manageshis savings through MarketRiders. For a �at fee of $14.95 a month

the �rm assesses his tolerance for investment risk and helps himconstruct a portfolio of investments using exchange-traded fundsthat he can buy through any discount broker. The �rm monitorshis asset allocation as markets move and sends him quarterly in-structions on what to buy or sell to rebalance his portfolio. �I’vegot a personal rant on this but 90% of what people call ‘investing’in this country is what I call ‘gambling’,� says Mr Blaisdell. �It is abig area for innovation.�

Betterment has a simple interface that allows its customersto divide their investments between a basket of stocks and one ofbonds. For a fee of 0.15% the company will keep rebalancing theportfolio between the two. Among its investors is Sean Parker,Facebook’s founding president.

Many private bankers are openly scornful of such do-it-yourself wealth management. They point to the rise of onlinestockbrokers a decade ago that led to predictions of the death ofwealth management. Yet their business is bigger than ever be-cause most customers are not con�dent enough to trade.

Even so, the newcomers’ in�uence is already changing theway the rest of the market works. Fees across the industry are fall-ing and becoming more transparent. That will force banks to o�ertheir own online wealth-management services and to invest inonline systems that will provide sensible advice at low cost.Those that are best placed to succeed are likely to be large interna-tional banks with extensive retail branch networks. 7

The biggest threat to incumbents comes from outsidethe banking sector, where hungry innovators are tryingto cut the cost of wealth management


SPECIAL REPORT


1

ALMOST TWO DECADES ago Bill Gates, one of the foun-ders of Microsoft, famously dismissed retail banks as �di-

nosaurs�. Conservative bankers regularly trot out this anecdoteto show that it is naive to expect rapid change in such a tradition-al business. Would-be innovators in banking, for their part, oftenquote another comment by Mr Gates: that people tend to �over-estimate the [technological] change that will occur in the nexttwo years and underestimate the change that will occur in thenext ten�.

Banking has been surprisingly little touched by the rise ofthe internet. It may have embraced many of the trappings of dig-itisation, such as providing customers with online access to theirbank accounts, yet retail banks have invested more e�ort inbricks than in clicks over the past decade. At a time when busi-nesses from music stores to travel agents have already disap-peared from most high streets, the banking industry, which in themid-1990s by some estimates already had more square metres ofretail space than did general department stores in America, hasbuilt yet more branches.

Many bankers are feeling complacent. Having been told inturn that the credit card, the ATM and the telephone would com-pletely transform their business, and then found that businesscarried on much as usual, they have been rightly sceptical aboutsimilar predictions for the internet. Those who decided to adoptdigital technology early on incurred huge costs in building newcomputer systems on top of the outdated ones that were alreadyin place, for little immediate bene�t. Francisco González, thechairman and chief executive of BBVA, compares this task tochanging the engine on a lorry as it is speeding down a road.

Yet their past scepticism over digitisation now threatens toleave the banks dangerously unprepared for the future. �Tech-nology is at a turning point,� says Mr González. �In a few years’time you will see that there is a very new way of doing things,and valuations of banks that are doing them will change drama-tically.� The migration of banking transactions and customersfrom branches to mobile phones and to the internet promises totransform not just the ways in which people bank, but alsowhom they bank with.

The lure of cheaper money

The �rst big impact of widespread digitisation is likely to bea transformation of the cost base of those banks that embrace it.For example, Santander has a cost-to-income ratio of 45%, thelowest among big international banks (see chart 6). Such lowcosts allow banks to o�er more attractive rates on loans and de-posits yet still earn pro�ts that will keep shareholders happy.This means that more e�cient banks will inevitably get a biggershare of the cake in concentrated markets, such as Britain, andbuy weaker, less e�cient competitors in fragmented marketssuch as America. That may do much to restore pro�tability to abusiness which has been mercilessly squeezed by requirementsfor higher capital ratios, at a time when wholesale funding is be-coming more expensive or drying up altogether.

Small, local banks are likely to su�er most. As consumersdo more banking online and on their mobile phones, it is becom-

ing less important to maintain bank branches on every streetcorner. The emphasis now is on clever (and costly) mobile-bank-ing applications and tools that allow customers to aggregatetheir data and manage all their accounts from a single screen.

Observers have long been predicting a �hollowing out� ofthe middle in banking in which only the very big and e�cientand the very small and local would prosper. The high cost oftechnology and the gains it promises are now tipping the bal-ance more �rmly in the direction of the very big ones and againstsmall regional or community banks. And although the big banksthat concentrate mainly on domestic business�such as WellsFargo in America, Itaú in Brazil and Lloyds in Britain�enjoy enor-mous advantages in their home markets, they now face severalfresh challenges.

For dominant domestic banks the big obstacle to growth isthe need to keep the regulators happy. Banking is among theworld’s most tightly regulated businesses. In the years since the�nancial crisis regulation has become more intrusive. This inhib-its innovation and raises barriers to entry. Much of the experi-mentation and innovation in banking has therefore taken placeon its fringes: in facilitating payments, for instance, or in �ndingnew ways of crunching data. If disruptive technologies were tothreaten the existing order, and hence �nancial stability, regula-tors would probably throttle them.

At the same time regulators are trying to stop banks fromgetting too big. Lloyds is having to sell some branches to reduceits dominance of the market. In America, Wells Fargo, JPMorgan,Bank of America and other large domestic banks are alreadybarred from buying other American retail banks. They can stillgrow organically, but if their share of domestic deposits risesmuch above 10% they may come under pressure to call a halt.

That is likely to make them turn their attentions abroad,even as international competitors such as Santander and BNP

Paribas start to gain ground in their home markets. Some new re-gional powerhouses are already emerging. South Africa’s Stan-dard Bank now has branches across Africa. Singapore’s DBS

Bank is spreading across Asia and is becoming a formidablecompetitor to the big international banks such as Standard Char-tered, HSBC and Citigroup in some of the world’s fastest-grow-ing markets.

Until now, retail banking (unlike the investment andwholesale sort, which are largely international businesses com-peting in global markets) has not travelled well, but that is chang-ing, for two reasons. One is that digitisation is at last producingsigni�cant economies of scale across national borders. Banks areincreasingly able to centralise computer systems and to use com-

Winners and losers

World, here we come

The biggest bene�ciaries from the retail renaissance

will be large international banks

Marginally significant

Source: Deutsche Bank

Cost-income ratios, selected banks 2011, %

6

0 10 20 30 40 50 60 70

Standard Chartered

Crédit Agricole

Intesa Sanpaolo

HSBC

BNP Paribas

Barclays

UBS

BBVA

Banco Santander

ering signi�cant bene�ts to con-sumers. In countries with ine�-cient or oligopolistic bankingmarkets a new outpost of a largeinternational bank can often un-leash competition that im-proves the service provided byall banks in that country. It alsoallows the small but growingportion of people who work orstudy abroad to bank seamless-ly with the same institution thatthey use at home. This eases thetravails of opening a new ac-count abroad (which soundssimple until you try it) andtransferring money across bor-ders.

The impact will soon befelt not just in retail banking butalso in the high-�ying world ofwholesale and investmentbanking. As big retail banksspread, they will be well posi-tioned to match buyers and sell-ers, borrowers and savers acrossborders. Some of the huge �owsof money that before the �nan-cial crisis surged through capitalmarkets, leaving rich pickingsfor investment bankers who ar-ranged bond and share issues or syndicated loans, will now �owthrough the internal pipes of international banks. Firms such asMorgan Stanley, Credit Suisse and UBS, which previously postedbankers in the world’s �nancial capitals and �nanced deals inthe capital markets, will now play second �ddle to global retailbanks that are able to tap the savings of their customers.

Little more than a decade ago most retail banks feared theinternet. Then they decided largely to ignore it. Now it is becom-ing ever clearer that the future belongs to those that are nimbleand far-sighted enough to embrace it. 7

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SPECIAL REPORT


2


mon platforms. Jan Verplancke, the chief information o�cer of Standard

Chartered, says that international banks build their large com-puter systems in the places that have the most reliable communi-cations and power networks and are least prone to natural disas-ters. For his bank, that means running much of its globalnetwork out of Hong Kong and London. Until recently, incom-patible legacy systems made it very hard to use common com-puter systems across di�erent countries. Now it is getting easieras banking moves from bespoke mainframe computers to racksof smaller servers that can be scaled up as needed.

The second reason why internationalisation is spreading iswhat McKinsey’s Mr Rodeia calls �economies of skill�, meaningthat successful banks are getting better at standardising their pro-cedures and systems. The trailblazer has been Santander, but itsrelentless e�ort to make its systems exactly the same every-where is being emulated by Citigroup, HSBC and Standard Char-tered. When Citigroup hit on a successful branch format in Singa-pore, it quickly replicated it across Asia and in the Americas.

This is not to say that local scale is unimportant. As a rule ofthumb, both HSBC and Santander reckon that to operate e�ec-tively they need at least 5-10% of the market. Standard Charteredprovides a full range of services in markets where it is strong anda pared-down version in countries where it has only a smallshare of the market. �We recognised early on that we could notbuild a full-scale Standard Chartered everywhere, so we focusedon how we would compete rather than doing one size �ts all,�says Steve Bertamini, the head of its consumer bank.

You’ll never walk alone

Economies of skill can also involve �softer� advantagessuch as sharing knowledge across networks. Jean-Laurent Bon-nafé, the chief executive of BNP Paribas, says of its Americansubsidiary: �The main synergies we have with Bank of the Westis the way we run the bank. This is a mid-sized bank that has100% access to anything that is interesting to it within the BNP Pa-ribas group.� For example, in the middle of San Francisco a com-manding storefront is being refurbished for a new wealth-man-agement business being started by Bank of the West. It is using ablueprint provided by its parent but new to the local market.

The internationalisation of retail banking is already deliv-

may 19th 2012 retail renaissance - the economist...2012/05/19 · with its siblings along...

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