How does a bank stay efficient and competitive in a climate of continued regulatory and macro economic pressure, zero-interest rates and widespread digitalisation? At the Q2 2015 FDE breakfast meeting in Stockholm, keynote speaker Göran Bronner, CFO of Swedbank, highlighted how each challenge has been dealt with individually.
Sweden's Mans Zelmerlow has just won the Eurovision song contest, so the mood at Stockholm's Grand Hotel was upbeat when Finance Director Europe's Steve Dunkerley welcomed the 40 or so delegates to the latest breakfast briefing. Pieter van den Goor, head of Nordics for event partner Genpact, sets the scene with some stark statistics that laid bare the extent to which the 2008 financial crisis changed the banking landscape.
"In 2008, 22% of the total market cap of the Fortune 500 was created by financial services institutes - today it is just 10%," he says. "From a regulatory perspective, banks are spending five times more than they did in 2008, and new economy banks are challenging the older institutions with peer-to-peer lending, innovative payment solutions and crowd funding".
Van den Goor explains how banks and corporate alike are responding to the challenge by evolving their operating models.
"What we see now is that companies are opting to develop hybrid models where certain parts are retained either onshore or near shore, and transactional processes are being delivered remotely from offshore locations to access scalability," he continues.
"Genpact helps clients design, transform and run intelligent business operations that assist them in becoming more competitive by supporting their growth and managing cost, risk and compliance across a range of functions such as finance and procurement, financial services account servicing, claims management, regulatory affairs and industrial asset optimisation."
He carries on to explain the opportunity for technological and big-data change to achieve realistic, flexible and effective processes that can make companies more competitive.
The focal points
This focus on efficiency and the "harnessing of technology, analytics and process" by van den Goor was in the spirit of the keynote address by Göran Bronner, CFO of Swedbank. Bronner began his speech by highlighting the three key factors having a significant impact on his company and the banking sector more generally: regulation, the wider macro environment and - perhaps most critically in his opinion - digitisation.
Taking each in turn, Bronner says the issue of regulation was perhaps the most straightforward to deal with. Having praised the regulator's response to the 2008 global financial crisis, which saw banks across Europe being told to carry greater capital reserves, he went on to say that the benefits of that approach are still being felt.
"Those changes forced Swedish banks to become much more secure and we have really got the benefit of that," he tells delegates. "If you look at the cost we face for raising funding out there compared with other banks in Europe and how the Swedish banks in general are perceived, it's a very good perception and I think that has come to the benefit of all borrowers - households and corporate."
In Bronner's mind, the benefits of the original regulation - stronger banks, less reckless lending - were in danger of being diluted by further rules imposed by the European authorities, also designed to protect borrowers.
"That will reshape the business model much more than the regulations surrounding capital and liquidity because it focuses on reforming the business model that we operate in the retail banking arena and to the benefit of the consumer generally," he says. "So it's also a positive aspect of society, but it puts a lot of strain on banks to change in general. So we need to keep an eye on the regulation, and, definitely in some areas, it will change the business model and it will change the cost of doing business to some degree. We need to adapt to it, work with it, implement it and we will be okay."
On the macro
Moving on to look at the macro economics, Bronner acknowledges that Swedbank doesn't operate in a vacuum and cannot escape the prevailing head winds of the macro challenges.
"It's a very important point that we expand the housing stock in Sweden, as in other countries," he says. "It will be extremely beneficial for Sweden in doing so, in creating wealth going forward, but the domestic economy is actually doing very well - we have credit growth and we see that in the payments, fees and so forth that activity is rather high".
However, he cautions, for those bullish over Sweden's prospects, the fact remains that for industries dependent upon the global market, the outlook is more subdued. "I think, in general, top-line growth is not really there, and while the corporate sector is very healthy and creates a lot of stable cash flow, it doesn't currently generate credit growth. So that part of the economy is rather subdued, although we hope that it will at some point in time enjoy better growth as well."
So what of digitisation? Will this trend, which has transformed so many other sectors, really prove a game-changer in banking? Bronner believes that along with all the benefits for banks and their customers, there will be costs to bear for established players in the market.
"First, it will mean lower margins and, beyond that, I think that keeping up with client interaction and market share for the banks will be much more difficult," he continues. "Put simply, we will need to do that at the cost of lower margins. You could say that our IT system is our burden - it costs us money, and if you are a new entrant to the sector, you actually have an advantage in your 'cost to serve' - it's so much cheaper. But on the other hand, new entrants don't have any clients, although [they] will find it much easier to penetrate and to create systems." So the IT complexity is a disadvantage for us to work with, the CFO believes, but it's not only that.
"I also think that the stakeholder model is changing," he states. "If you think about an old stakeholder model where you have society shareholders, staff and clients, the clients are becoming much more powerful and you need to recognise that is actually happening."
So what of Swedish banks? Will they now find themselves more exposed to the ups and downs of the European economy? "I think Swedish banks have a huge advantage in the terms that the infrastructure of certain part in the market, especially in the payments arena, is commonly owned. For instance, look at Swish, which is fantastic. Who's going to compete with us on that?" Bronner asks.
Bronner says that with new entrants like Apple Pay and Google, you can do real-time person-to-person payments free of charge, and even if banks were to introduce more charges, it's impossible for someone to compete because their industry efficiency is so good. That's the benefit of being a small country, nine million inhabitants and actually rather oligopolistic banking market that you can create an infrastructure that is used fantastically and efficient.
"I think banks are doing many other processes themselves and we duplicate a lot of [those] and even product areas that may - in a more stressed and pressed revenues climate - outsource and come together to do perhaps with a third party rather than doing it ourselves," he says. "There are many areas where you see a lot of third parties being much more efficient at producing something that banks historically have done themselves. It's really what the industry has been doing for a large number of years."
Naturally, those in the audience concerned with future prospects wondered whether banks are doomed to undergo creative disruption in the same way taxis and hotels have at the hands of new, digitally led disrupters? Bronner is cautious.
"First of all, I think it will be impossible for banks to keep the client relationships that we had in the past, because there will be new models pushing in between us and the client, and I don't think we can win that event to a full extent. We need to be realistic in that," he says.
"But the important thing for us going forward is to focus on what is the 'value creation' part of the model and to be much more used to having layers between us and the clients. Alongside that is the fact that, with banks, historically all clients came to the branch; they just had to because that's where the bank was, and no one else could do anything that banks did. But when the branch becomes so much less relevant for the consumer part of the business and it becomes digitalised, the bank needs to come to the client."
The CFO admits that development demands a hugely different approach from banks in order to retain their connection with clients. "We want to meet them on their buying occasions - whether they buy a house or they [get] divorced - all these big things when you decide what to do with your money. So that will be a big challenge for us - to behaviourally change from being reactive to becoming proactive. And that is really difficult," Bronner believes.
So how will banks on the back foot in such a dynamic market respond? What tools do they have for the battle? "We have one advantage in that we have big data," he continues. "If I look at Swedbank, we have 50% of the acquiring market in Sweden, and we are number six in Europe, which shows how digitalised the Swedish clients are in using cards. What that means is that we basically know what the clients are doing; we know what our 40-year-old white male is doing on a Friday between 6 and 8pm in this area, so you can direct your sales pitch if you commercialise your big data to a greater extent.
"In Sweden, we're struggling with collecting all the data in one place, but in the Baltic states, for instance, they already have it in one place because they have a much younger IT generation. From there, we can see that we can use that more in the digital sense - being more 'offering-oriented' in that perspective. We are getting there," Bronner concludes.