BCG: Retail Banks Must Focus on Organic Growth

The report, Striving for Organic Growth in Retail Banking, highlights that the retail banking sector generates more than half of all revenues in the global financial-services industry, and that improving retail banking performance will be a major priority for financial institutions in the years ahead. The report also outlines ten levers that BCG says are critical for enhancing performance through a growth-based strategy.

The report is based primarily on an extensive benchmarking survey involving 70 major retail banks -- including many regional and international leaders -- from all major financial-services markets. The survey captured a broad range of qualitative and quantitative data, which BCG analyzed with the aim of distilling best practices from the top players.

The report notes that the retail sector is among the most efficient users of capital within the global banking industry. For 75 percent of BCG's survey participants, the return on equity (ROE) for the retail business was consistently higher than the ROE for the bank as a whole. Accordingly, the retail side is a strong driver of profits, the report says, illustrated by an estimated compound annual growth rate (CAGR) of 8 percent in pretax profits for BCG's survey participants from 2001 through 2004.

The report says that retail banks should ride the growth wave in order to increase profits in the coming years. "Cost-reduction programs have brought measurable benefits to retail banks over the past decade," says Carlos Trascasa, a BCG senior vice president and lead author of the report. "But many institutions are nearing a point where further cost cutting may weaken frontline sales capabilities and therefore hurt market share. As a result, we believe that the key future differentiator between market leaders and poor performers will be growth."

According to the report, heavy consolidation has increased the number of strong competitors in many markets. These large players are driving fierce competition for customers in high-value segments such as private banking, mass affluent, and small-and-medium-sized enterprises. The report adds that the success of monoline product specialists is likely to drive a greater product- based focus for some European banks as they attempt to improve their offerings in areas such as cards and personal lending. Both consolidation and the entry of new competitors make growth even more necessary -- but increasingly difficult -- for retail banks, according to the report.

Among the ten growth levers that BCG advocates are de-commoditizing product offerings, becoming a true retailer, honing pricing strategies, and ensuring that multi-channel investments pay off. In discussing the levers, the report draws insights from BCG's benchmarking exercise to explore how retail banks in all regions can approach them, and highlights examples of best- practice banks. BCG says the true winners in retail banking in the years ahead will be those players that continuously refine these levers, and that maintain an unrelenting commitment to change.

"The levers we recommend may appear to be similar to strategic initiatives that some banks have previously implemented with average or even poor results," Carlos Trascasa says. "In fact, they represent a considerable leap in sophistication since they are based on the activities and behaviors of high-performing banks that have successfully used the initiatives to achieve leading market positions."