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Canadian banks have an enviable record for stability and performance over the past 20 years. Even into 2013, we are continuing to see remarkably good performance.
However, the next few quarters are likely to be very challenging as key forces start to impact top- and bottom-line results. These include the global headwinds we are seeing as the European economy continues to stall, slow growth in the Canadian economy and the high degree of debt among Canadian consumers, who can no longer be the growth engine for the domestic retail businesses.
While these cyclical factors present near-term challenges , more fundamental ones exist for the banking industry globally and in Canada, and it is vital that the industry start to address them.
Canadian banks have a business model in retail banking, which will not be sustainable in the future. While most industry executives would acknowledge that the world is changing, there is not a universal recognition with respect to how fast this is likely to occur. The answer is quickly , meaning that now is the time for our banks to take a leadership position in rethinking the retail bank of the future.
In doing so, they can drive innovation that will position them well both for profitability in the domestic market and success abroad, as they increasingly look to growth beyond the Canadian border.
In Canada today there are almost 10,000 bank branches, including credit unions. This branch structure costs well over $10-billion to operate annually, or more than $300 per person in the country. There are other costs associated with the current banking model. For example, moving paper cheques each day from these branches for processing costs the industry almost $100-million a year just in transport costs, let alone the associated processing costs.
This infrastructure, as well as the hundreds of millions of dollars in costs for call centres, paper statements, and so on is increasingly irrelevant to today’s millennial customers. The idea of having to go to a branch is foreign to them – they expect to transact and purchase using their smart phones, iPads and laptops. With changes to e-signature rules, it is easy to envision a world where virtually every transaction can be done online or perhaps in the home, as roving, mobile-enabled sales forces increasingly penetrate the market for more complex products and advice based services.
Now accounting for 35 per cent of the Canadian banking consumer population, by 2022, today’s millennials and those following them will represent more than 50 per cent of banking consumers. As mobile functionality evolves and is adopted by this segment, and even older consumers, the branch infrastructure will be rendered increasingly obsolete. While all banks are engaged in developing mobile solutions, the pace has been relatively slow and they risk being left behind by more aggressive non-bank players such as Pay Pal, Google, Apple and global payments players such as American Express.
The speed with which this sea change is likely to occur should not be underestimated and with this, the overall impact on bank operating models and infrastructure. One has only to look the cautionary tale of Blockbuster, which, from a peak valuation of $5-billion in 2004, fell to $24-million by 2010, as online competitors such as Netflix disrupted their business model, seemingly overnight.
The Path Forward
So what are the steps forward-looking banks can take to address these issues?
The next few years are likely to see massive change in how consumers interact with their banks. Canadian banks have a unique chance to lead the way. But it will require an aggressive innovation-driven mindset and a willingness to reduce reliance on an increasingly obsolete banking model.
Source: The Globe and Mail