Keep calm and transform on Keep calm and transform on

The good times are rolling for U.S. banks. And, according to a new survey by KPMG, bank CEOs are feeling confident. But they also recognize that the industry is in the midst of dramatic and fundamental change. What role their organization will play in the banking industry of the future will largely depend on the decisions they make today.

The transformative energy within the U.S. banking sector is almost palpable. Digital transformations are in full swing; tax reforms are helping boost activity and returns; and new technologies are changing the ways banks operate and interact with their customers.

The financial numbers are also looking good. Aggregate net income was up 27.5 percent year-over-year in Q1 2018 (largely due to higher net operating revenue and lower effective tax rates). Net-interest income was up 8.5 percent; non-interest income was up almost 8 percent. And that has boosted the average industry Return on Assets (from 1.04 percent to 1.28 percent year-over-year). (Source: FDIC Quarterly 2018 Volume 12, Number 2.)

It’s no wonder U.S. banking CEOs are feeling confident. In fact, in a recent survey of U.S. banking CEOs conducted by KPMG International, every bank CEO surveyed voiced confidence in their company’s growth prospects over the next three years. Nearly a third said they were very confident.

New growth drivers emerge

While confidence may be riding high, most bank executives to whom I talk are focused on certain fundamental drivers of change within the industry (the 10 biggest of which I’ve identified in the attached graphic).

These drivers are beginning to transform the banking and capital markets industry in many ways. Consider, for example, the evolving nature of:

• Customer experience: Banks and their markets are being disrupted by digital transformation and the adoption of disruptive technologies. Most banks are making strong progress on their efforts to transform into digital organizations; our survey shows that 80 percent of U.S. bank CEOs think their digital transformation program will start to deliver significant results within the next three years.
• Cost and compliance: These same technologies and digital efforts have unlocked an entire universe of new opportunities for banks – to drive down costs through improved efficiency and to leverage data and analytics to enhance compliance.
• Regulatory: At the same time, the regulatory world is evolving – new accounting standards, new tax rates and changes to existing banking regulation are all creating fundamental changes for US banks.

The right capabilities to thrive
The good news is that U.S. bank CEOs seem to be up for the job. Ninety percent say they are personally prepared to lead their organization through a radical transformation of its operating model to maintain competitiveness. They are just as confident in the ability of their existing leadership teams.

Yet – given the rapid pace and scope of change now underway – I believe there are two areas where bank CEOs will need to focus if they hope to capitalize on these new drivers of change in the market. The first is improved agility and flexibility. As James Liddy, KPMG International’s Global Financial Services Chairman noted in a recent blog post on the topic, organizational agility will be key to ensuring that investments into transformation pay off.

The second – but equally important – area is in improving the confidence of their organization’s risk management and decision-making capabilities. Our survey suggests that bank CEOs may not trust the insights they are receiving (80 percent say they have ignored insights from their D&A because they went contrary to their own experience). And many may lack the tools they require to make confident decisions going forward (just one-in-ten plan to increase their use of predictive models or analytics over the next three years). As new business strategies and models are considered and adopted, management will also need to make sure the bank’s risk management capabilities are keeping pace.

What do you want to be?
If our predictions about the future are correct, bank CEOs will need all the agility, analytics and risk management prowess they can get. We believe that – as banks shift their customer interactions from branches to digital channels – they will be forced to adopt one of three main models.

• Platform leader: Some of the leading banks will shift towards a platform-based business model that leverages partnerships within the ecosystem to deliver a thorough customer experience.
• Platform participant: Most banks will find a niche on the platforms by creating unique products or services that are embedded into the broader customer experience.
• Financial utility: A certain section of banks will be relegated to providing core financial capabilities to the platform leaders through standardization, efficiency and cost optimization at scale.

One look at the platform leaders in other industries – the likes of Amazon, AirBnB and Apple – suggests that agility and analytics are absolutely fundamental to success. Those banks hoping to leverage their digital capabilities to become banking platform leaders will need to start emulating these capabilities if they hope to win in tomorrow’s marketplace.

U.S. bank CEOs certainly have good reason to be confident. But they need to remember there is still a lot of change afoot and critical decisions to be made. It’s time to keep calm and transform on.