Profit earner or cost driver? A combined view of retail banking and payments Bertrand Lavayssière Frankfurt, May 25th
Payments are crucial for Retail Banking Retail banking revenues are rather stable and payments are even more stable Today, the European landscape is very diverse Payment contributions to retail Banking is crucial Pressures for change are strong Anticipating changes creates opportunities
Payments are crucial for Retail Banking Retail banking revenues are rather stable and payments are even more stable Today, the European landscape is very diverse Payment contributions to retail Banking is crucial Pressures for change are strong Anticipating changes creates opportunities
Retail banking revenues and profitability did not suffer massively from the crisis Retail Net Income & Domestic retail banking ROE in 2006,2007 & 2008 10000 Retail banking ROE 35% 8000 3 25% 6000 2 4000 15% 2000 1 5% 0 2006 2007 2008 2006 2007 2008 2006 2007 2008 2006 2007 2008 2006 2007 2008 2007 2008 2006 2007 2008 2006 2007 2008 2006 2007 2008 2006 2007 2008 CA Group Barclays Bank BBVA BNP Paribas Deutsche Bank Intesa San Paolo Rabobank Group Santander Société Générale UniCredit Note : Domestic retail banking ROE not available for all selected banks Source : Capgemini analysis, 2009
GTB businesses were less impacted by current market conditions than other divisions Illustration: quarterly GTB revenue (solid lines) and Group revenue (dashed lines) for 3 selected global GTB leaders 30 000 3 000 Bars: Group net revenue (M or M$) 25 000 20 000 15 000 10 000 5 000 0-5 000 Q108 Q208 Q308 Q408 Q109 2 500 2 000 1 500 1 000 500 0 Lines: GTS division net revenue (M or M$) Source :Capgemini analysis, 2009 Citigroup Deutsche Bank JPMorgan Chase
Payments represent about 2 of global retail revenues and more than 5 of core banking fees charged to clients in Europe Average gross income share by consumer product line in Europe 15, weighted average, 2004 Fee Sources for Core Banking Services by year and by region (%) Global By Region 10 Credit Cards 8% 9 Payments products 2 Current Accounts 14% Deposits and Savings 16% 8 7 6 5 4 3 5 10 % 15% 53% 55% 10 % 10 % 15% 13 % 51% 5 52% 7% 11% 7% 6% 14 % 19 % 66% 8% 47% 33% Mortgages 33% Consumer loans 17% 2 10 % 25% 22% 22% 24% 37% 22% 26% 8% 12 % 2006 2007 2008 2009 Europe Eurozone Europe Non Eurozone North America Asia Pacific Account M anagement Cash Utilization Exceptions Handling Payments Sources : Report on the retail banking sector inquiry, Jan 2007, European Commission; Capgemini analysis, 2009
Payments are crucial for Retail Banking Retail banking revenues are rather stable and payments are even more stable Today, the European landscape is very diverse Payment contributions to retail Banking is crucial Pressures for change are strong Anticipating changes creates opportunities
Major differences among countries in Europe impact the split of fee income 10 9 8 7 6 5 4 3 2 1 Global Fee Sources for Core Banking Services in Europe Euro-zone in 2009, (%) 4 45% 55% 62% 3% 13% 24% 2% 5% 5% 2% 7% 4 35% 3 33% Austria Belgium Croatia Czech Republic 12% 14% 23% 32% 1% 15% 39% 44% 43% 4% 51% 2% 56% 1% 64% 17% 39% 76% 74% 1% 81% 3% 99% 5% 39% 21% 7% 32% 6% 71% 1% 6 56% 19% 1% 2% 46% 32% 37% 28% 14% 1% 28% 23% 24% 17% 19% 1 7% 1% 1% France Germany Ireland Italy Netherlands Norway Poland Portugal Romania Russia Slovakia Account Management Cash Utilization Exceptions Handling Payments Spain Sweden Switzerland 43% 52% 5% UK Source: Capgemini analysis 2009
There are four basic retail banking pricing models in Europe ACCOUNT-BASED TRANSACTION-BASED. PACKAGE-BASED INDIRECT REVENUE- BASED Source : Capgemini analysis, 2009
The diversity in pricing is linked to the historical equilibrium between stakeholders BANKING STRATEGIES REGULATION PRICING STRUCTURE CUSTOMER BEHAVIOURS CUSTOMER ADVOCACY
Payments are crucial for Retail Banking Retail banking revenues are rather stable and payments are even more stable Today, the European landscape is very diverse Payment contributions to retail Banking is crucial Pressures for change are strong Anticipating changes creates opportunities
The fundamentals for growth of non cash-transactions are strong Illustration: evolution of non-cash transactions per inhabitant per country in Europe, 2002-2013 Note : Figures are based on 13 countries covered in the World Payments Report 2009, Capgemini Sources : ECB Blue Book 2006 figures, released Nov. 2007 ; Capgemini analysis, 2009
Payment cards are the # 1 bank s way to deepen its relationship with its clients Estimated share of payments instruments per country in number of non-cash transactions, 2013 CAGR non-cash transactions 8% 5% 15% 6% 14% 7% 6% 12% 14% 7% 8% 11% 19% 2006-2013 10 9 8 7 6 5 4 3 Cheques Direct Debits Credit Transfers Cards 164 contacts per client each year in Europe 2 1 Germany France Spain Source : Capgemini analysis, 2009 Netherlands Italy Belgium Austria Portugal Greece United Kingdom Sweden Denmark Poland
Payments are more of cross-sold products than cross-selling facilitators Main Hook products in Europe - 15, 2005 Mortgages 3,07 Deposit Accounts 1,86 Current Accounts 2,24 Average number of cross sold products 2,07 Main Cross-sold products in the mortgage area, % of respondents of interviews with 54 surveyed retail banks, 2009 Principal current account 57% Credit card Home insurance 42% 45% Life insurance 32% Lending insurance 25% Savings account 21% Debit cards Consumer credit 17% 17% Sources : Report on the retail banking sector inquiry, SEC(2007)106, European Commission ; Capgemini analysis, 2009
Clients acquisition through payments is paying off Country France Offer Banque Accord: low price cards in 2000, and in 2003, add of the cash back option Impact +1million clients in 2006 Germany Dresdner Bank: low cost Banking Package 4 of the clients that left the bank came back in 2001 La Caixa : On co-branding cards, cards personalization, loyalty program (Puntos Estrella) 8.3 million cards +800,000 clients in 2006 Spain UK BBVA : Prepaid cards Restaurant prepaid cards launched in 2005 ING Direct: remuneration of deposits and free basic banking services (e.g. credit card) MBNA : Co-branded cards affinity, community cards with cash back option. 250,000 affiliated restaurants and 25,000 affiliated clients +60,000 clients in 2006 12 million of assets under management First credit card provider in the UK (created 13 ys. ago) Source : Capgemini analysis, 2009
Payments are crucial for Retail Banking Retail banking revenues are rather stable and payments are even more stable Today, the European landscape is very diverse Payment contributions to retail Banking is crucial Pressures for change are strong Anticipating changes creates opportunities
Pressure to maintain investment levels is still high for banks Regulatory pressure : SEPA PSD G20 new rules to come Banks Technology investments : Replacing obsolete IT systems Reducing operational costs Offering new products and services Client expectations in terms of services and product innovation
The regulatory landscape and competition force the transformation of the business model Potential impacts on payment revenues with regulatory intervention 10 9 8 7 6 5 4 Average payments revenue put at risk due to regulation 28% 3 2 1 Commission revenues Revenue at risk due to card interchange regulation Revenue at risk due to float value dating regulation Austria France Germany Italy Netherlands Poland Spain Sweden UK Source: Capgemini analysis, 2009.
Banks are adapting to the environment and to the technologies being implemented Sources of Fees for Core Banking Services in Europe Eurozone (%) Product and Service Price Variations vs. Last Year for Local Active Users ( ) Components of average annual price of core banking services, 2009 (%) Global Average Price Variation, by Product and Service Category, for the Local Active User 2008-2009 ( ) 5 45% 55% 76% 23% 4% 17% 74% 12% 15% 2% 39% 1% 51% 64% 5 3 1 3,3-1,3 0,3-7,0 7% 13% 6% 2% 37% 4 5% 5% 35% 14% 1 56% 2% 1% 23% 71% 6 5% 7% 37% 1% 28% 7% -1-3 -5-7 Account Management Cash Utilisation Exceptions Handling Payments 2009 Austria Belgium France Germany Ireland Italy Netherlands Portugal Spain Account Management Cash Utilization Exceptions Handling Payments Source: Capgemini analysis, 2009.
The development of a differentiated pricing per distribution channel is now significant 140 120 Local Profile Prices in WRBR 2009 Average prices of core banking services, by geographical region for standard active, branch active and internet active profiles, 2009 ( ) 118,5 100 91,9 80 60 78,1 76,6 75,3 75,3 75,3 71,1 61,8 64,5 1 55% 54,3 45,6 70,4 29% 70,3 60,8 31% Internet Active User Active User Branch Active User 40 13% 16% 20 14% 16% - Europe Euro zone Europe Non Euro zone North America Asia Pacific Average Internet active users pay on average 9.5 less than active users and 31 less than branch active users Source: Capgemini analysis, 2009.
SEPA effect on prices is confirmed: the price of electronic payments decreased by about 4 in Europe Eurozone Electronic payments price in WRBR 2009* Average price of electronic payments for local active profile, 2009, ( ) 120 Average Eurozone 57 (vs. 60.9 in 2008) 116 Rest of the world 43.5 (vs. 44.2 in 2008) 100 87 80 81 67 65 71 65 64 60 51 49 47 54 52 52 51 45 40 20 36 31 39 27 27 23 21 20 8 6 0 A B C D E F G H I J K L M N O P Q R S T U V W X Y Z Europe Eurozone Rest of the World In Europe Eurozone, the CAGR for 2006 to 2009 for the SEPA products was (-3.6%). * internal and external wire transfers, direct debits, credit and debit card, and current account. Source: Capgemini analysis, 2009.
Convergence is slowly on the way in the Eurozone Regional Price Discrepancies for the local active profile, WRBR 2006- WRBR 2009 (%) Standard deviation between countries prices within each regional area, 2006, 2007, 2008 and 2009 (%) 10 9 86,6% 84,2% 86,7% 8 75,5% 7 6 59, World Retail 5 4 3 34,1% 30,4% 32, 31,7% 44,7% 42,7% 39,5% 37,6% 41,7% 33,8% 27,4% Banking Edition: 2006 2007 2008 2009 2 1 Europe Euro zone Europe Non Euro zone North America Asia Pacific Source: Capgemini analysis, 2009.
Banks are attacked throughout the Payments value chain - specifically on the Offerings Development and Issuing & Acquiring activities Payment value chain : Banks Offerings Development Contract manage ment Equipments management Issuing / Acquiring Operations processing Business Manage ment Exchanges (CSM) Customer Relation Managem ent Clearing & Settlement systems International Cards schemes Payments Service Providers New entrants (telecommuni cations, distribution) Main activity Secondary activity Targeted positioning Source : Capgemini analysis, 2009
Payments are crucial for Retail Banking Retail banking revenues are rather stable and payments are even more stable Today, the European landscape is very diverse Payment contributions to retail Banking is crucial Pressures for change are strong Anticipating changes creates opportunities
Risk on payments revenues can be counterbalanced by specific initiatives Example of a large retail bank : Revenue projection Revenue projection secured through strategic sales initiatives New initiatives: 6 Risk on commissions Innovative offers Current revenues 4 Risk on volumes Adaptation of offerings per segment Overall retail payment revenues Secure payment revenues Secure payment revenues 2007 2012 2012
To remain a contributor to retail banks business a combination of actions are to be implemented for payments Possible initiatives for banks: Re-assess pricing strategy Improve operational efficiency Invest on innovation stable contribution to overall retail banking the size and importance of layers vary according to the bank Increase payment sales
Payments are crucial for Retail Banking Retail banking revenues are rather stable and payments are even more stable Contribution to Retail banks is around 2 Today, the European landscape is very diverse Customer acceptance of change is critical Payment contributions to retail Banking is crucial A major component of customer relationship, improvement of profitability and innovation Pressures for change are strong Revenues are declining on payments Anticipating changes creates opportunities Proactive actions can compensate for revenues at risks
Profit earner or cost driver? A combined view of retail banking and payments Bertrand Lavayssière Frankfurt, May 25th