mc kinsey on cooperatives cooperative banks at the cusp of a new era

Cooperative banks at the cusp of a new era

Any use of this material without specific permission of McKinsey & Company is strictly prohibitedCopyright © 2012. All rights reserved

October 2012

International Summit

of Cooperatives

McKinsey & Company

Copyright © 2012. All rights reserved1|

Five trends will provide the “crucibles” that will transform the banking industry over the next decade

Right-sizing the platform

Banks will right-size and restructure their business model to

remain profitable in the face of regulation that drives lower ROE

and higher COE1

Revenues and profits shifting to

emerging markets

2

The distribution of the world’s banking profit and revenue pools will shift dramatically toward emerging markets, where

many more of the world’s largest banks will originate because of

their rapid market expansion

Seamless multi-

channel customer experience

3

Banks will have lean, seamless multichannel distribution

networks and differentiate on the basis of the customer

experience they offer by leveraging the rapidly evolving technology

New competitive threats

4

Banks will battle with new non-bank entrants to “own” the customer relationship and will operate in a more competitive environment

Impact of big data

on banking products

5

Banks will leverage the explosive growth of available data and

computational capacity to improve marketing and operations

McKinsey & Company


Seven key questions emerging for cooperative banks

1 How can cooperative banks exploit their focus on customer satisfaction to gain

market share?

2 Will cooperatives need to look for growth beyond their borders?

3 How can the cooperatives’ branch networks preserve the advantage of proximity

while remaining profitable?

4 How can cooperative banks use their internet presence and social media to

improve relationships with members?

5 How can cooperatives retain their privileged relationships with members in the

face of new non-bank competition?

6 How can cooperative banks develop a common voice to better protect their

interests during regulatory reform?

7 In what ways can cooperatives best exploit their unique attributes to optimize their

balance sheets?

McKinsey & Company


Contents

Overview of key trendsOverview of key trends

Detailed questions for coop banks

McKinsey & Company


Banks will right size and restructure their business model to remain profitable in the face of regulation that drives lower ROE and higher COE

1

Context

▪ Banks’ return on equity (ROE) will be negatively impacted by new regulations

– Basel Ill will require higher capitalization, capital quality, and liquidity

▪ Emerging markets will offer higher ROE than developed economies

▪ Capital will be scarcer worldwide, driving higher cost of equity (COE)

– Due to an investment boom in emerging markets, an aging population, and a rebalancing toward consumption in China

Implications

▪ Banks will need to reduce costs and allocate capital more strategically as they return to the traditional retail model to remain profitable

– Banks will maximize capital efficiency and limit capital-intensive operations

▪ Banks will need to dramatically cut costs and become significantly more efficient

▪ Banks’ physical distribution networks will involve fewer, leaner branches with varying formats adapted to specific segments

– Branches in developed markets will be leaner, with fewer staff, and will perform an almost exclusive front-line function

– Banks will have fewer branches but more of them will be in mass-affluent areas


1

Revenues and profits shifting to emerging markets

2

Seamless multi-channel customer experience

3


4

Impact of big data on banking products

5

McKinsey & Company


Basel III

EU mortgage directive

Country-specific

regulation1

Pre-

regulation

Post-regulation

EU payments

regulation (SEPA)

EU investment

regulation (MiFID 2)

1 Germany: taxes and levies; establishment of a fee-based advisory model; UK: ICB ring-fencing, FSA on PPI, living wills, account switching/portability,

RDRs, taxes, and levies

2 Country-specific regulation in France and Italy has either been implemented already in 2010 or has only low impact, and therefore has not been

modelled

Retail banking ROE, percent

-0.5

-0.1

-0.4

-2.8

13.6

7.0

-2.8

9.5

n/a2

-0.4

-0.2

-0.4

-2.9

13.5

3.5

-0.3

-0.4

-0.1

-2.1

6.6

-0.1

3.1

n/a2

-0.1

-0.1

-0.3

-1.4

5.1

Return on equity will be negatively impacted by new regulations – example of the 4 largest EU markets

SOURCE: McKinsey working papers on risk No. 36, Day of reckoning for European retail banking,

July 2012

1 ESTIMATE

Calculated ROE is not risk-adjusted and therefore does

not differentiate between regulations

that are▪ Risk-reducing (e.g.,

Basel III) and therefore positively impact risk-

adjusted ROE▪ Only reducing

profitability and therefore have a negative impact on

risk-adjusted ROE

McKinsey & Company


Moreover, return on equity will be significantly higher in emerging markets than in developed markets

Other emerging

13.1

19.5

China

9.4

14.1

Other developed

9.6

7.7

Europe1

9.0

6.4

US

9.0

6.7

SOURCE: Reuters; Datastream; Federal Reserve Bank; Global Insight; McKinsey Global Financial Initiative

1 COE based on Western Europe; ROE based on European quoted banks (about 90% from Western Europe)

Comparison of banking industry return on equity (ROE) and cost of equity (COE) by region, not accounting for mitigating actions from banks in response to new regulation (simplified simulation), 2015

ROE forecasts include margin projections but no mitigating actions in reaction to Basel III, Dodd-Frank

▪ Even after restructuring and mitigating actions, ROE of banks from developed markets remains far below that of banks from developing markets

▪ COE will not be much higher in emerging markets than in developed markets

1 ESTIMATE

COE

ROE

Percent

McKinsey & Company


USD Trillions, constant 2005 prices and exchange rates

Global investment and savings

SOURCE: Economist Intelligence Unit; Global Insight; Oxford Economics; World Development Indicators of the World Bank; McKinsey Global Institute Capital Supply & Demand Model; McKinsey Global Economic Growth Database

In addition, cost of equity will increase because demand for capital will outstrip the supply of savings in the coming years

2.1

2008

10.7

7.0

1.6

1981

4.5

3.10.70.8

Other productiveinvestment

Infrastructure

Residentialreal estate

2

22

5

2030 shortfall

2030 globalsavings

2030

24

15

4

▪ There will be a USD 2 trillion shortfall in savings in 2030, due to

– Increased demand for capital fuelled by an investment boom in emerging markets

– Limited savings due to population aging and a rebalancing toward consumption in China

▪ In addition, investors no longer see banks as safe assets and demand higher risk premium

▪ As a result, the cost of equity will be higher

USD 2 trillion savings shortfall will result in higher COE

1

McKinsey & Company


Consequently, banks in the developed world need to carry out dramatic cost reductions to move to sustainable levels of ROE1

Banks need to reduce cost-to-income ratio in years to come

0

25

50

75

100

2000 2002 2004 2006 2008 2010 2012 2014 2016

Cost-to-income ratioPercent

1 Based on the assumption of flat revenues and no inflation for the 2010-2015 period

2 Percentage calculated as cost reduction over estimated total regional operating costs

Japan 14

USA 20

Europe 26

SOURCE: McKinsey Global Banking Practice; McKinsey Global Banking Pools

Target cost-to-income: ~42%

Total cost reduction by

region to offset ROE gap

Percent2

1 ESTIMATE

McKinsey & Company


To remain profitable, banks will restructure to focus more on retail banking and less on capital markets

SOURCE: McKinsey analysis

Impact of Basel III

None

Medium

Low

High

1 Different effects for individual segments might arise depending on bank’s capital allocation

The impact of Basel III on banks’ business lines

Liquidity

and funding

Overall

Regulatory requirements RetailCapital markets

Corporate banking Rationale

OTC derivatives will be significantly affected by CCR increase; retail and corporate banking will only be

indirectly affected via cross-selling

All products with low-risk weight – like capital market

products – will mostly be affected by leverage ratio measures

Consumer finance products and claims toward FIs face an increase in LT funding due to classification as “illiquid”

All short-term funded products – like capital markets products – will be affected (only relevant for cross-selling)

Capital market products will be most affected by market risk (particularly OTC derivatives and cash products)

All products will be affected by reduction of available

capital

Capital

require-ments

NSFR

LCR

Counterparty credit risk

Leverage ratio

Market risk framework

Capital ratio and deductions1

1

McKinsey & Company


Decrease in staffing levels

Decrease in branch density

350

475 -26%

20152010

Bank branches per million inhabitants

Average FTEs per bank branch

10

4-5

-50%

20152010

▪ Fewer FTEs needed as low-value-added

activities move to remote channels

▪ The mix of people will change

With peaks of 30-40% in some countries

SOURCE: McKinsey European consumer and Banking Research and Multichannel Survey

Furthermore, cost cutting will occur through decrease in branch density and staffing levels

1

McKinsey & Company


Branch staff time spent per activity1

1 Includes management, training, and other

Online banking usage

Nonetheless, lower staffing levels must translate into more value-added activities at the branch, such as sales and advice to customers

SOURCE: McKinsey European Retail Banking Multichannel Survey 2010; EFMA

30

30

16

15 3

51

-49%

Other

Back-office

Teller service

Customer service

Sales and advice

Direct first

67

5

30

Online adopters

78

10

8

29

Brick-and-mortar

100

10

10

20

59%Percentage of staff time spent on sales and advice

37%20%

0-10% 15-30% 60-80%

1

Total staff time normalized so that brick-and-mortar equals 100

McKinsey & Company


The world’s banking profit and revenue pools will shift dramatically toward emerging markets

2

Context

▪ Growth will remain slow in developed economies

– Advanced economies are deleveraging, are plagued by high unemployment and public debt, and are struggling to put their fiscal houses in order

▪ Banks will have to compete for market share on a global scale where emerging markets’ players are driving banking growth

▪ In emerging markets, increasing financial depth and rapid GDP growth will drive banking growth

▪ 2.5 billion adults do not use formal financial services today, and the rapidly growing middle classes are driving internal consumption up

Implications

▪ Revenue pools will shift to emerging markets

– Emerging markets will represent 50% of world banking revenue in 2020 (up from 34% in 2010), with more than 60% of revenue growth in banking coming from emerging markets


1


2


3


4


5

McKinsey & Company


Fiscal tightening required in 2010-2020 to meet the Euro con-

vergence criteria of government debt of 60% of GDP by 2030Total government debt, pre- and post-crisis (USD)

The fiscal tightening required to reduce public debt levels will slow growth in developed countries

72

184

89

50

41

40

67

68

44

106

95

113

169

70

74

77

82

115

117

119

125

207

Germany

France

Ireland

Portugal

Italy

United States

Greece

Japan

Canada

United

Kingdom

Spain

20122008X More than 50% increase

23

63

31

12

63

159

31

22

93

78

39

SOURCE: International Monetary Fund; McKinsey Global Institute; IHS Global Insight; McKinsey analysis

1 Japan’s target for fiscal adjustment is set at 80% of GDP

Note: Countries are assumed to undergo a gradual transition in their primary balance in 2010-2020 and maintain a constant primary balance after 2020

4.0

10.4

9.4

4.4

6.0

13.5

7.5

4.9

10.6

15.5

Average adjustment required for G20 countries

13.41

Percentage

of GDPPercentage of GDP

2

McKinsey & Company


World, relative size of banking revenues after risk cost to nominal GDP

0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

20202010200019901980

Banks in emerging and developed markets will have to compete for market share on a global scale

SOURCE: McKinsey Global Financial Initiative; Thomson Reuters

Historical data

Base case forecast

History

Dot-com bubble and burst

Mexico crisis

1987: Black Monday

▪ After 40 years of steady growth in global banking revenue relative to GDP, our McKinsey Global Financial Initiative base case forecast predicts

– Flattening trend

– No recovery to pre-crisis level over the next decade

▪ This, combined with stagnant economic growth, implies that banks won’t be able to grow with the market. To grow, they will have to compete for market share

Forecast

Financial crisis

Banking has entered an era of slower growth

2 ESTIMATE

Percentage of global GDP

Crisis in Southeast Asia

McKinsey & Company


Develo

ped

Em

erg

ing

Financial depth1, YE 2010Percentage of regional GDP

In emerging markets, increasing financial depth will drive banking growth

142

148

168

190

209

280

388

400

457

462

Latin America

Other Asia

India

CEE & CIS2

Other developed

Middle East & Africa

China

Western Europe

Japan

United States

1 Calculated total regional debt and equity outstanding divided by regional GDP

2 Central and Eastern Europe and Commonwealth of Independent States

SOURCE: McKinsey Global Institute, Mapping Capital Markets 2011; McKinsey Global Finance Initiative

2

ESTIMATE

McKinsey & Company


In emerging markets, growth will be more than twice as fast as developed economies, adding more than 160 million middle-class households by 2020

SOURCE: IHS Global Insight; Global Insight; McKinsey analysis

15.1

11.1

26.2

2020

70.5

44.3

2010-20growth

19.3

8.2

2010

51.2

36.1

Developed countries

Emerging countries

5.7%

2.1%

1 Income categories defined per annual income in USD PPP

Householdincome< USD 25,000

Householdincome≥ USD 25,000

2020

1,206

900

306

2011

1,084

945

139

Evolution of world real GDPby regionReal 2005 USD Trillions

Equivalent annual real growth from 2010 to 2020

Evolution of households income distribution in emerging markets1

Millions of households

2

▪ There will be more than 160 million new middle-class households in emerging countries, which is more than the current total number of house-holds in the US

▪ This rising middle class will rapidly drive up demand for financial products

Percent

McKinsey & Company


Nearly 2.5 billion people are still “unbanked” in emerging markets, representing a huge business opportunity for banks

Millions

Percentage of total adult population that is financially excluded

59

58

80

65

49

67

8

53

SOURCE: Chaia et al., Half the world is unbanked, Financial Access Initiative, 2009

Adult population not using formal financial services

2,453

60

136

193

250

326

612

876

Latin America

Sub-Saharan Africa

South Asia

East Asia

Total

High-income OECD

Arab states

Central Asia and

Eastern Europe

2

McKinsey & Company

Copyright © 2012. All rights reserved18|SOURCE: McKinsey Global Banking Pools

22 28

100% =

WesternEurope

US

Otherdeveloped2

China

Otheremerging

2020

6.9

18

23

11

21

2010

3.1

26

25

14

12

Other emerging

2010-20

3.8

11

20

8

29

32

100% =

Western Europe

US

Other developed2

China

Consequently, banks’ revenue pools will shift to emerging markets

1 Banking revenue after risk costs = net interest income + net fees and commissions - risk costs (to account for losses on delinquent loans; meant to

capture “normalized” loan loss provisions)

2 Includes Australia, Canada, South Korea, and Japan

Revenue pool after risk costs1 Origin of absolute change in revenue pool

USD Trillions, 2010-2020Percent

USD Trillions, 2010-2020Percent

Em

erg

ing

m

ark

ets

Develo

ped

m

ark

ets

2

Emerging markets will represent 50% of world banking revenue in 2020

More than 60% of revenue growth in banking will come from emerging markets

McKinsey & Company


Banks will have lean, seamless multichannel distribution networks3

Context

▪ Consumers are using multiple channels to seek information, receive advice and support, and purchase products

– Customers will increasingly demand consistent, continuous service across multiple channels (mobile, internet, social media, phone/video calls, and branches)

– They will expect more customized marketing and individualized products

▪ Low trust and satisfaction in the banking system have made customers less loyal, increasing switching and spreading behaviours

Implications

▪ Simpler banking transactions and sales will mainly take place online and on mobile devices

– The vast majority of financial transactions will take place on the internet and on mobile devices

– For example, mobile banking is growing rapidly and transforming the payments industry

▪ Branches will focus more and more on providing advice and handling complex transactions and sales

– Sales and advice for simple products will increasingly take place outside the branch


1


2


3


4


5

McKinsey & Company


Customers are using multiple channels to seek information, receive advice and support, and purchase products

Quoting Purchase

43%

10%

13%

38%

15%

4%

Percentage of respondents

53%

31%

13%

3%

Channel

1%

Agent to internet/ call centre

Call centre to agent/ in person

Call centre to internet

Internet to agent/

in person14%

Internet to call

centre

5%

4%

2%

15%

1%

31%

Purchase Servicing1

Agent to internet/ call centre

Call centre to agent

Call centre to internet

Internet to agent/

in person

Internet to call

centre

Intr

a-d

irect

Intr

a-d

irect

Channel

Bank

Insurer

example

1 Includes portfolio valuation/new deposit/arbitration/changes in policy clauses and personal data

Pure agent/ in person

Pure internet

Pure call centre

Channel

switching

Pure agent/ in person

Pure internet

Pure call centre

Channel

switching

SOURCE: 2012 McKinsey insurance multichannel excellence initiative – Customer behaviour survey

3 EXAMPLE

McKinsey & Company


1 Percentage of individuals who used the internet/online banking in the past 3 months

SOURCE: McKinsey Multichannel Survey (2010)

Moreover, online banking usage will continue to rise in tandem with internet usage

3

0

10

20

30

40

50

60

70

80

Netherlands

Hungary

Luxembourg

Italy

France

Spain

Greece

Ireland

Germany

Denmark

Czech

Republic

Bulgaria

BelgiumJapan

China

ColombiaArgentina

Switzerland

Middle East

US

Canada

Australia

3025201050

Russia

South Korea

Romania

Slovenia

Finland Sweden

UK

MacedoniaTurkey

Norway

Serbia

India

Brazil

Mexico

Poland

Austria

Internet usage1

Percent, 2009

Portugal

95908580757065605550454035

Brick-and-

mortar

Multi-

Channel

10-15 years

Self first

I

IV

III

II7-10 years

3-5 years

Online

adaptors

Overall market tr

end

Online banking usage1

Percent, 2009

McKinsey & Company


In addition, low trust and satisfaction in the banking system have increased switching and spreading behaviours

Trust in the banking1 system has decreased …

1428

54

A little bit Strongly(worse)

Not(unchanged)

… as has satisfaction with banking services

849496

200920051998

1 Results from German market research launched in December 2009 (sample of 1,056 individuals)

SOURCE: BdB; Ipso; GfK Eurisko Finance 2009; CDJ Survey 2010

Percentage of respondents neutral or satisfied

Percentage of respondents

-50

0

50

Consumers increased switching and spreading behaviours

Jan 1998 Jun 2009

Withdrawals, Deposits, EUR Billions, Netherlands Deposit

Withdrawal

▪ Decreasing trust and satisfaction in the banking system

▪ Perceived risk leading to money switching and spreading

▪ Sharp increase of online usage –information gathering and shopping – loss of “contact” with brands

▪ Decreasing loyaltyand increasing product unbundling

3

McKinsey & Company


Evolution of client distribution preferences

Customers will favour digital channels for simple transactions

40

2015

70

25

5

2010

10

50

50

10100%

2015

20

70

2010

5

45

30

2015

99

0 1

2010

30

40

50

20

2015

30

50

2010

5

45

SOURCE: McKinsey European Consumer and Banking Research and Multichannel Survey

Simple/small ticket sales

Complex/large sales

Transactions/ info requests

Support/ complaints

Digital only

Multichannel

Branch only3

Percentage of clients

McKinsey & Company


For example, mobile banking is growing rapidly and transforming the payments industry

110

60

30

1052

20122011201020092008

CAGR = 119%

2013

SOURCE: Forrester; 2012 World Retail Banking Report survey of 41 banks; Finalta/EFMA Multichannel

Survey 2008; IE Market Research Corporation; McKinsey analysis

Mobile banking usage statistics, global 2005-2015E Gross value of mobile payment transactions

USD Billions

7158

5038

2015

10

17

17

19

2011

5

13

14

18

2010

4

11

12

15

2005

27

9

11

Daily

Weekly

Monthly

Few times

a year

Never

3

Percent

McKinsey & Company


Bank branches will focus more on complex transactions as more interactions move to direct channels

SOURCE: Efma online survey of 150+ European banks, December 2010

9

16

11

4

12

Mortgages 10080 11 4

Investments 10078 7 4

Savings

accounts10077 25

Current

accounts10084

3

4

Consumer

finance

products

10073 8 6

1 Internet, ATM, mobile

43

59

28

10

47

11 3

100381

3

100

100

72

58 100

13 5 100

32 813

531

3

Current sales breakdown by channel2010, percentage of sales

Expected sales breakdown by channel2015E, percentage of respondents

Branches

Agents/brokers

Call centre

Direct channels1

European average

3

Product purchasing

McKinsey & Company


Banks will battle with new non-bank entrants to “own” the customer relationship

4

Context

▪ Non-bank players are infringing on lucrative niches previously dominated by integrated banks

– Remote payments, new currencies, B2B payments, and e-invoicing will transform the payment industry

– In market segments such as lending, bank accounts and transactions, protection and insurance, and deposits and investments

▪ Additional players leveraging existing infrastructures or new business models will infringe on the banks’ traditional playing field

– Direct banks and insurers are rapidly growing among young, wealthy, and educated consumers

– Retailers are expanding their offerings of financial products

– Telecommunications firms are entering financial services

Implications

▪ Banks will maintain ownership of the customer relationship by strategically adjusting their business model to better fight new entrants

– Majority of revenues come from owning the relationship and taking on risk within the value chain

▪ New integrator tools that disinter-mediate services and commoditize products threaten banks’ ownership of the relationship


1


2


3


4


5

McKinsey & Company


Non-bank players are emerging and infringing on lucrative niches previously dominated by integrated banks

▪ New non-bank players are emerging in parallel with industry leaders thanks to innovative new technologies or business models or by taking advantage of regulatory changes▪ New players often occupy specialized but lucrative niches, thereby threatening markets

previously dominated by larger players

Find the best prices

Aggregate and optimize management of personal finances

Make mobile payments

Protect against fraud

Make peer-to-peer payments

4

New products and services offered by new players

McKinsey & Company

Copyright © 2012. All rights reserved28|SOURCE: McKinsey Global Banking Pools

Examples of non-bank players that infringe on traditional banking market segments

Global retail banking revenue after risk costs1 by main revenue segment, and examples of non-bank players that infringe on each segment

2010 Specialty lenders

Technologycompanies

Bankingproducts

Protection and insuranceUSD ~50 billion

Bank account and transactionsUSD ~500 billion

LendingUSD ~1,200 billion

Deposits andinvestmentsUSD ~430 billion

Telecoms

Postal services Specialized private banking players

Retailers

Insurers

1 Banking revenue after risk costs = net interest income + net fees and commissions - risk costs (to account for losses on delinquent loans, meant

to capture “normalized” loan loss provisions)

4

McKinsey & Company


Banks’ payments businesses are particularly encroached on by non-bank players

SOURCE: McKinsey Payments Practice

4

Traditional payments area

Consumer card

transactions

Other

consumer

electronic

Deposits

Business

payments

B2B payments and e-invoicing

Remote payments and new currencies

Information-

based

business

models

Traditional

payments

businesses

Consumer

services

Payment

device

Network Acceptance

device

Merchant

services

Issuer Acquirer

Mobile POS

payments and

acceptance

Information-

based

business

models

Mobile POS

payments and

acceptance

Remote payments and new currencies

McKinsey & Company


Consequently, winning the battle to own the relationship with customers will be crucial for banks…

Collect data and

understand customers

to tailor the offering to

their preferences and

needs

Be customers’ trusted

partner to increase

loyalty and receptive-

ness to new products

Know and

understandcustomers

Owning the

relationship

Be visible to

customers

Have

customers’trust

Be the prime interface with whom

customers interact to have their

attention and be visible to them

4

Owning the relationship

with customers

will be crucial to propose new products

and services and thus to

capture value

McKinsey & Company


… because the majority of revenues come from owning the relationship and taking on risk within the value chain

SOURCE: McKinsey US Payments Map, Release Q4-2011

Non-card electronic

Paper-based

Card-based

Payments industry value chain

Other n/a

Debit

Money transfer

Deposits and instruments

DDA n/a

ATM n/a

Wire

Cash n/a

Cheque

ACH

Book transfer

Prepaid

Credit

Segments that own the

relationship and take on risk

Transaction acquirer1

Acquirer processor1 Network1 Payment

instrument issuer1

Issuer processor1

EXAMPLE OF THE US

PAYMENTS INDUSTRY

1 Acquirer: financial institution that has the account with the payee (merchant or biller) to receive payments. Acquirer processor: operations functions for

the acquirer. Network: institutional clearing and settlement. Issuer processor: operations functions for the issuer. Issuer: financial institution that has an

account with the payor (consumer, buyer, etc.)

4

McKinsey & Company


Banks will leverage the explosive growth of available data and of computational capacity to improve marketing and operations

5

Context

▪ Technology enables leveraging of big data through explosive growth of available data and computational capacity

▪ Leveraging big data can translate into improved decision making, management, and operations for financial services institutions

– Big data has high value potential in financial services

Implications

▪ Banks will adjust their business models to leverage the explosive growth of available data and computational capacity to improve management, decision making, and operations

– Banks will invest in analytical software to take advantage of the information they handle (e.g., buying patterns, financial information)

– Banks will better understand their customers (profitability, levers of value and influence, potential), remember their preferences, and define more granular customer micro-segments


1


2


3


4


5

McKinsey & Company

Copyright © 2012. All rights reserved33|SOURCE: IDC Digital universe study 2011 and 2010; Hilbert and López, “The world’s technological capacity to store, communicate,

and compute information,” Science, 2011; www.vetta.org; McKinsey analysis; McKinsey Global Institute

11050

2020

35,000

2015

7,900

2010

1,300

20052000

Exabytes (= 1 billion gigabytes)

1 Floating-point operations per second 2 Rmax FLOPS

1E+19

16

1E+17

1E+15

1E+13

1E+11

1E+9

1E+7

1E+5

201110092000979085807370611960

FLOPS1 2, log scale

Today’s fastest computers are more than 10 trillion times faster than those in 1960

All the information stored inside the US Library of Congress amounts to <0.00025 exabytes

Data generated worldwide Computational capacity of the world’s fastest computers

▪ Scale: data sets will be massive, >1 petabyte (1 million gigabytes) in size, and built to be easily scaled up

▪ Distribution: data will come from and be distributed both within and outside the organization

▪ Diversity: data will be semi-structured, unstructured, or a combination of different data types

▪ Timeliness: data will be captured and analyzed in real time, allowing for immediate response

Available data will be characterized by its scale, distribution, diversity, and timeliness

The explosive growth of available data and of computational capacity enables businesses to leverage big data

5

McKinsey & Company


The financial services sector is likely to be in the best position to leverage big data

Big data ease of capture index

Wholesale trade

Utilities

Transport and warehousing

Retail trade

Real estate and rental Professional services

Other services

Natural resources

Manufacturing

Management of companies

Information1

Healthcare providers

Government

Financial services and insurance

Educational services

Construction

Computer and electronic products

Arts and entertainment

Admin, support, and waste management

Accommodation and food

High

Low

Big data value potential index2

High

Low

SOURCE: McKinsey analysis

Bubble size denotes relative size of GDP

1 Information includes software and internet companies

2 Determined by industry average of transaction intensity, amount of data per firm, variability in performance, customer and supplier intensity,

and turbulence

5

High value potential

High ease of capture

High value potential

Low ease of capture

Moderate value potential

High ease of capture

Moderate value potential

Low ease of capture

McKinsey & Company


▪ Computational capacity for real-time use has grown from

0.004B MIPS1 to >6,000B MIPS over the past 20 years

▪ Business analytics software spend in 2009 was USD 26.1 billion

and is expected to grow at a 7.6% CAGR through 2014

1 MIPS = 1 million instructions per second. By comparison, modern desktop/laptop computers have processors with ~20,000 MIPS

Predictive modeling

Typical applications:

estimate customer churn;

develop the “next best

offer” for up-sell/cross-sell;

estimate risk

Social network mapping

Typical applications: identify

key purchase influencers;

quantify shifts in sentiments

Neural networks


detect fraud; perform

diagnostics

Visualization tools


visualize risk; understand

correlations

SOURCE: McKinsey Global Institute analysis

By leveraging big data, banks will better understand their customers, improve modeling, and guide decision making

5

McKinsey & Company


Overview of key trends

Contents

Detailed questions for coop banksDetailed questions for coop banks

McKinsey & Company


How can cooperative banks exploit their focus on customer satisfaction to gain market share?

▪ As public banks face pressure to cut

costs, consumer satisfaction initiatives are often delayed

▪ Cooperatives also need to cut costs, but they have the flexibility to sacrifice short-term returns

▪ This flexibility could be used as a competitive advantage in today’s environment

Context Questions to ponder

What dimensions of customer satisfaction are of greatest importance to your members?How does your cooperative understand the specific irritants for customers and their main grievances with competitors (e.g., executive compensation and bonuses, large public bailouts to banks, hidden fees, questionable mortgage approval standards)?

A

Which coop-specific attributes or values could be leveraged to address consumers’dissatisfaction? Which criticisms can the cooperative model address? How strongly does the cooperative model appeal to your consumers now? What is the promise to members and how can your coop make them feel like true owners?

B

E

How is it possible to ensure that your values and system resonate distinctly with members as some public banks begin to resemble coops in their marketing and actions? How will public banks respond to criticism and adjust their models? Will they start encroaching on the cooperative model and, if so, how should your cooperative respond?

What changes to your business model or image would attract new members? How can the image and message be made clear and consistent throughout your organization? How can your coop ensure its image is distinct enough to differentiate it from competitors?

F

How should your cooperative prioritize new investments related to customer satisfaction vs. your current portfolio of initiatives? How can your coop ensure that consumers translate their dissatisfaction with public banks into actions in your favour?

C

How can your cooperative leverage your branch network and workforce, provide better customer services, and further differentiate your coop from traditional banks?

D

1

McKinsey & Company


Will cooperatives need to look for growth beyond their borders ?2

▪ Cooperatives must develop a view on how globalization will affect their current

activities

▪ Banks and coops

must decide whether to expand abroad or focus resources and management locally

▪ Cooperatives, usually local, must assess if their home market is saturated and whether international expansion is desirable

▪ Staying on the sidelines of the global market may put coops at a strategic disadvantage


In what ways would your members benefit from international expansion (e.g., scale or market access)? How would the benefits of seizing rapid growth opportunities in emerging markets percolate down to your individual members in the long term?

A

What capabilities does your coop have that will help it to capture the benefits that an expansion into new markets would provide? What capital and flexibility is required? How can your coop ensure the support of members in such expansions? How would you ensure your coop has the required management knowhow or go about acquiring it?

B

How will the cooperative sector be able to maintain its global market share in banking over the next decades as economic activity shifts to emerging markets? How will cooperative banks maintain their current share of global banking revenue, or will the bulk of the

rapid growth in emerging countries be captured by public banks?

G

How can your coop ensure all relevant and available entry strategies are explored? For instance, will your coop form alliances with other small local cooperatives? How can it follow corporate members with international activities into new markets? How can it make a targeted push in a new market by leveraging high-performing business units?

E

How will the ability to attract top talent and create career opportunities for key personnel be affected by decisions? Will the best talent in banking be interested in local players or will they aim for global organizations? What steps can your cooperative take to attract talent in either scenario?

F

What opportunities exist related to your current member base in which to invest talents and capabilities to better match your members’ interests? For instance, how can your coop invest to improve customer service, grab market share from competitors, and/or expand your offering to non-financial products?

C

Given competitors’ expansion initiatives, how will your cooperative’s decision to expand or not affect the future competitive landscape? How will competitors who venture abroad gain a competitive advantage by leveraging economies of scale and by arbitraging labour costs to optimize their back-office operations?

D

McKinsey & Company


How can cooperatives’ branch networks preserve the advantage of proximity while remaining profitable?

3

▪ Virtualization reduces the number

of branch visits

▪ Thus, physical networks become less central to the client relationship

▪ An oversupply of branches will put pressure on all financial institutions, especially coops

▪ 2 options to consider

– Resize or restructure the network

– Find a new role for the branches


What are the alternatives to the reduction of your coop’s physical footprint to remain profitable? How can your coop’s network be made leaner? How can incentives be found to

attract customers to the physical branches and then retain them? While competitors view their branches as an avenue to cut costs, how can your coop use its as revenue generators?

A

How can your coop transform local branches from a fading channel to a competitive advantage? How can the geographical proximity of your branch network give your cooperative

a significant advantage over rivals and be used to engage members, even as more and more transactions and sales take place online? How can your coop capitalize on competitors’withdrawal from the physical space to strengthen the relationship with your customers?

B

How could potential synergies be unlocked within your coop’s current operations? How large an impact will these synergies have on the value of new and existing offerings? Can these synergies significantly reduce the risk involved in providing a new offering?

E

How could your branches become knowledge centres that provide truly personalized financial advice and planning? How will providing expert financial advice and support encourage local members to enter your branches? What potential exits for attracting a larger member base by providing these services?

C

How could your branches expand their offerings to adjacent products and services that your members desire? How can your coop find and fill some of the gaps left by the shrinking of the welfare state? Could your cooperative expand its offering to non-financial products and make branches or stores the local centres of cooperative activity (e.g., let lawyers use space to offer legal advice to members)? What new member needs could be addressed?

D

McKinsey & Company


How can cooperative banks use their internet presence and socialmedia to improve relationships with members?

4

▪ Traditionally, cooperatives rely on

a strong physical presence in a community

▪ Clients now expect to connect virtually with their bank, and so the physical proximity advantage is gradually disappearing

▪ Banks and coops will compete to engage with their clients through online and social media channels


How will the virtualization of business and social interactions affect your cooperative’s traditional proximity advantage and how should it adjust? As customers spend more time online and as attachment with their local communities is weakening, how will your cooperative

be able to engage them via branch networks? What novel methods can your coop use to engage members?

A

How can your cooperative leverage new online media and the internet to deepen relationships with your customers and better understand their needs? How can your coop engage customers online to better know them?

B

How can your cooperative use new media and the internet to revitalize the democratic process? How can your coop allow members to vote and engage in the democratic process over the internet? How can it leverage social media (e.g., let a special committee interact via social media)?

C

How should your cooperative review and redesign its organizational structure to better adapt to the virtualization of interactions? How are coops’ decentralized structures revolving around local branches to be made optimal? What structures could be considered in which members interact directly with the broader cooperative and not via their branch? How will your cooperative maintain enough control on their brand positioning in a situation like this?

D

McKinsey & Company


How can cooperatives retain their privileged relationships with members in the face of new non-bank competition?

5

▪ Cooperatives’success depends on

loyalty and close relationships with members

▪ Meanwhile, non-bank competition is gaining ground on certain banking services

▪ Thus, cooperatives will have to consider alternative ways to engage their members and protect their privileged relationship


What are the specific threats from non-bank players and do they risk disintermediating your cooperative’s relationship with its members? How will new integrators try to gain “ownership” of the relationship with customers from your coop? How are payment service

providers replacing your coop’s role in the purchasing process? In what ways do new intermediaries risk making offerings generic and easily comparable to other banks?

A

What steps must your cooperative take to maintain “ownership” of the relationship with members? What products or services can your coop offer that would remove or reduce members’ need for non-bank players? How can your cooperative strengthen its relationship with members? How can it put in place powerful loyalty programs, leverage interactions across business lines, or develop new high-frequency services? Should your coop consider acquiring a threatening competitor or developing a similar offering?

B

How can your cooperative take advantage of its attributes to ensure member loyalty remains high? How does your cooperative’s image remind members that they are owners of the organization? How can the ownership aspect of the relationship be used as a platform for high loyalty? In what ways can your cooperative strike alliances with other coops to get the scale needed to be a credible alternative to non-bank competition, for example in the payments business?

C

McKinsey & Company


How can cooperative banks develop a common voice to better protect their interests during regulatory reform?

▪ All banks are facing a stricter regulatory

landscape since the 2008 crisis

▪ Coops face the same regulations as banks notwithstanding their different ownership model

▪ Coops’ interests are not currently well represented and defended, which increases the risk of unintended regulatory consequences


What risk is there that your coop will lose out relative to public rivals from the new regulations that will soon start being implemented? How have public rivals been better at shaping the new regulations and at mitigating their impact on their profitability? Are your cooperative’s interests currently sufficiently well defended by existing organizations? Should coops rely on banking lobby groups to represent them? How can your cooperative ensure that new regulation will take into account its specific structure and needs?

A

What measures can your cooperative take to better educate policy-makers and the general public on the particular characteristics of cooperative banks? Should your coop work with others to fund new think tanks to research and publicize cooperatives’ unique circumstances and needs? Should your coop form a lobby group with other cooperatives to ensure its voice is heard through a united front?

B

Should your cooperative employ some of the more aggressive and direct forms of lobbying that public bank rivals have learned to master? For instance, should your cooperative make large campaign contributions (where legal) to get the ear of politicians and should it hire professional lobbyists to directly influence policy-makers? In what ways would this be compatible or incompatible with cooperative values?

C

How can existing forums or associations carry the responsibility of coops’ common voice? Should new associations be formed? What mandate and governance structure would ensure their legitimacy?

D

6

McKinsey & Company


Can cooperatives exploit their unique attributes to optimize their balance sheets?

▪ All types of banks are facing a stricter

regulatory landscape since the 2008 crisis

▪ Optimizing balance sheets and strengthening capital base is now imperative

▪ Coops’ different ownership and capital structures create specific challenges when raising capital but also offer unique opportunities to explore


How can your cooperative better leverage its deposit base and owner relationship to provide access to capital? In what ways could members’ deposits be repositioned as paid-in capital to better reflect their ownership of your coop? How accurately does the balance sheet illustrate your cooperative’s financial position?

A

How can your cooperative leverage its relationships with members to gather more deposits? What innovative financing tools could be introduced to raise capital and help your coop meet the new higher capital requirements? How can your cooperative introduce and sell new types of shares and deposits that would benefit both the coop and its members? What form should these tools take and how would they work? What has been done in the past, and what can be learned from other cooperatives?

B

Can your cooperative revisit how it redistributes dividends to provide attractive options, both to your coop and to its members? Should your cooperative consider paying a portion of dividends to member bonds that carry an attractive interest rate to members, while providing stable long-term capital to the coop? Should these bonds have additional ownership rights attached to them? How can your coop be more proactive in changing the ratio of retained earnings to dividends to manage economic and investment cycles?

C

How can your cooperative optimize its balance sheet by tapping into capital markets?Under today’s attractive conditions, does it make sense for your cooperative? What are the risks associated with turning to capital markets?

D

7

mc kinsey on cooperatives cooperative banks at the cusp of a new era

Documents

higher banks

threats banks

coop banks mckinsey

worlds largest banks

equity roe

face of new

experience emerging

new era