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Executive summary

While less impacted than other sectors of the financial world, retail banking has evolved significantly as a result of
the 2007–09 crisis. To understand this evolution and its impact on best management practice in the sector, a series
of over 20 indepth interviews was undertaken in mid-2010 with senior executives of leading retail banks as well as
independent researchers, rating agencies, bank regulators and management consultants with deep knowledge of
the sector.

Although the full impact of the crisis is still evolving, several consequences are clear. The strategic value of a
retail banking function is widely viewed as depositgathering, in particular ‘sticky’ deposits likely to remain with
the bank. Pre-crisis, most banks had been lending-driven, and a major drop in retail revenues has taken place
as a result of problems in the loan book.

The interviewees for this survey agreed that retail can be accommodated in a variety of business models, but
that a pure retail bank is unlikely to be viable because of lack of synergies with other businesses such as small
and medium-sized enterprises (SMEs) and wealth management. More important is a clear articulation of a
retail bank’s culture and strategy as well as an understanding of the customer’s needs. The product dimension
is not as critical: sustainable product differentiation is extremely difficult to achieve, although retail banks have
extended their product reach to asset management and insurance to boost revenues. The product focus is on
cross-selling more products to the existing client base.

Management’s central focus is thus on the existing customer relationship. Customer satisfaction indices are
the universal metric for performance measurement. However, many banks lack an understanding of the needs
and behaviour of individual clients. Best practice in the sector involves having a single customer view
incorporating all services used by the client, and only a handful of leading banks have the systems capable of
providing this view. It is widely assumed that a large proportion – if not the majority – of individual client
relationships are unprofitable. Major efforts are being made to match customer needs with the preferred
distribution channel.

In the geographic dimension, as a result of the crisis many retail banks are retreating to their core markets
where they have a significant market share. On the other hand, leading banks in dynamic emerging markets
such as India and Brazil are positioned to expand in their region.

The branch system is widely viewed as the key element of attracting and serving clients who demand advice,
while direct channels are increasingly used to execute transactions. Achieving a seamless interface among
channels is a challenge for many large and complex banks. Upgrading branch staff to provide advice and
‘customer experience’ is also a priority.

Executive Summary

Leadership in retail banking is similar to that of other businesses, but successful retail leadership must identify
with staff and clients as a ‘banker in retail’ and be totally focused on the business. The most successful retail
banks are those with decades of management continuity.

While the critical metric of the cost/income ratio varies widely across the sector, it is extraordinarily difficult to
evaluate the relative importance of such drivers as differential product profitability, efficiency of IT systems,
successful people management, and credit problems in the loan portfolio, Yet it is clear that retail leaders in
developed markets tend to have a cost/income ratio in the low 40s against one in the low 60s for less
profitable entities.
A major impact of the banking crisis has been the increased cost of consumer protection mandated by the
regulatory authorities. As this cost may have a disproportionate impact on the smaller, less profitable clients,
such re-regulation may have the unintended consequence of banks giving priority to larger, more profitable
relationships.

In terms of profitability, the immediate impact of the crisis has been to reduce typical retail ROE metrics from
perhaps 20% or more toward the banks’ estimated cost of equity of perhaps 9–10%. The interviews showed
there is an assumption, however, that a combination of re-pricing, improved asset quality, the disappearance
of many non-bank competitors, and expanding the product line can raise ROE to perhaps 14–15% for the most
successful institutions.

Case studies of retail success include Wells Fargo in the US, Santander in Spain and Svenska Handelsbanken in
Sweden, which have benefited from decades of focus, continuity of culture and leadership, and excellent
management systems.

Looking to the future, retail strategies will focus on deposit-gathering, cross-selling to existing clients rather
than new client acquisition, and developing systems which enable management to track customer needs and
relative profitability. The profile of retail in a diversified bank has been raised by the crisis, while retail will
continue to be a relatively stable and profitable business for such diversified institutions.