Opinion by Albert Banal-Estañol, tenured lecturer at the Universitat Pompeu Fabra and academic director of the MSc in Corporate Finance and Banking at the UPF Barcelona School of Management
In recent years, we have seen a profound reorganization of the Spanish banking sector. The blocking of financial markets and the loss of confidence in the banking system brought many institutions near to insolvency. The large number of mergers imposed by the process of bank restructuring has reduced the number of institutions and increased their size. Savings banks, which represented half of the sector, have practically disappeared.
You might think that the transformation of the banking sector has already finished. But, as Professor Moorad Choudhry, former treasurer of the RBS and a leading figure in the City of London, argued in a lecture at the Pompeu Fabra University, this process has just begun. As well as a new wave of consolidation and purchases, at European level, that can affect both large Spanish banks such as BBVA and medium-sized institutions such as Banco de Sabadell and Bankinter, the banking sector will see changes in its business model.
In the first place, the banks’ strategy will have to change. Before the crisis, the returns for investors (and for management) determined what products were offered and, indirectly, what resources were necessary, thus determining the financial structure of the bank. The Spanish savings banks and Northern Rock, which featured in the UK’s first bank run in 150 years, ended up with a completely unbalanced structure: financing long-term mortgages with deposits and very short-term debt. Today, it is the financial structure of the bank that determines what resources are available to it, what products it can offer and what the return for investors will be. The wheel is turning in the opposite direction!
Secondly, banks will have to change the traditional approach based on products to a strategy focusing more on the customer. Since the crisis, there has been an increasing commoditization (or standardization) of financial products and services. This situation is putting pressure on the banks to differentiate themselves from each other in a more competitive context, with lower levels of growth and smaller margins. Although banks offer the same products, their customers are different, and there is therefore scope for differentiation. Too often, banks try to do everything for everybody. But this does not work. Banks will have to define a strategy, create an image and develop specific skills. They will need to focus on convenience and simplicity, with more services via the internet, or on personal contact, adding value through the experience of their employees and their relations with customers.
Thirdly, banks will need to process and use the enormous amount of information they have available to them (big data). Banks have a profound knowledge of their customers and their preferences, not only regarding financial services, but also regarding all our behavior as buyers and users of credit cards.
Banks could adapt the services they offer much more closely to the activity in our accounts. Although not necessarily in the short term, technological companies like Google or Apple could come to compete in the banking sector. Their presence (or just the threat of their presence) could transform the banking industry even more quickly. Technological companies do, indeed, have a lot of information on what we like and do. But so do banks. It is still to be seen whether they are able to process it and use it effectively.
Banks have lost the confidence of consumers in recent years, both here and abroad (because of cases like the preferential shares in Spain, the crisis of the Icelandic banks in the United Kingdom, etc.). According to various studies, a large proportion of Apple’s customers would deposit their money with Apple if the company had its own bank. It is still to be seen whether these preferences would be put into practice, but they continue to be worrying for financial institutions. Banking will have to change, and it will have to innovate, not in the financial products it offers this time, but in its business models. It is not an easy program and will require many changes, both at operational level and in banking culture.