Banks Must Evolve Business Model or Die: Report

A new report from KPMG says the industry is at a crossroads and needs to re-focus its business strategy on selling products and services.

The banking industry is at a crucial point in its existence where an increased focus on generating new sources of revenue through better connectivity with customers will be critical to drive future growth, according to a new report from KPMG.

The report, titled "Banking Outlook 2014: An Industry at a Pivot Point" notes that while banks have been able to hold the fort during these last four years after the financial crisis -- bolstering balance sheets, adapting to new regulatory regimes and cutting costs -- they have not been able to grow their top line.

According to KPMG, this is now the critical step facing the banking industry: banks must -- in addition to their current focus on cost reductions and continued process improvement -- include in their business strategy a major focus on selling products and services.

“Banks must switch from a business strategy anchored in defense -- selling businesses, reducing headcount, and offshoring, in order to cut costs -- to one centered on offense that is all about selling products and services that meet customer demands and needs,” said Brian Stephens, national leader of the Banking and Capital Markets practice at KPMG LLP, in the report. “The banks that embrace change and systematically transform themselves to become more customer-centric will achieve a competitive advantage in the marketplace.”

KMPG notes several strategies that banks should pursue in order to achieve this goal. Firstly, they must find new ways to connect with customers by leveraging information technology to better understand what customers want and how banks can deliver it. Related to this is a focus on improving their abilities to effectively manage and leverage data, including their analytics and predictive modeling capabilities, the report notes.

Among other suggestions given by the firm are for banks to explore the use of cloud and other emerging technology to contain costs and accelerate the pace at which they can effect change.

Further, banks should also reexamine merger and acquisition opportunities, not only to grow their businesses and squeeze further efficiencies from operations but also to achieve the critical mass needed to undertake the transformative changes required of them, advises KPMG.

KMPG also predicts the next industry crisis could center around IT, given the amount of data banks possess, and how valuable that data is, combined with the complexity of most bank IT systems, some of which are highly integrated and others disjointed.

"All this will put a heightened burden on IT in the years ahead, when it must play a central role in allowing banks to pivot from defense to offense," the report states. "IT must provide the information needed to determine which services and products will actually boost ROE. It must enable efforts to connect with customers, both retail and commercial. It will form the backbone of new products and services. It must help drive the efficiencies that still elude many banks. And, of course, it must continue to meet regulatory demands and defend against cyber security breaches. None of this will happen if banks don’t approach IT the right way, and don’t move past the notion that using technology to attract and retain customers is an IT job. It is, unquestionably, a top-of-the-house strategic imperative, and everything about these changes in technology must be driven by the customer and the business imperatives."

Bryan Yurcan is associate editor for Bank Systems and Technology. He has worked in various editorial capacities for newspapers and magazines for the past 8 years. After beginning his career as a municipal and courts reporter for daily newspapers in upstate New York, Bryan has ... View Full Bio