Aerial views of downtown TorontoCharla Jones/The Globe and Mail
Canadian banks have just navigated successfully through the worst banking crisis in 80 years. This was not luck, but rather a result of excellent business acumen and sound regulation.
Canada's banks stand tall on the world stage, an accomplishment that all Canadians should celebrate. Elsewhere, there is less reason for cheer. Alongside battered balance sheets, the global crisis has had a profound effect on customer trust and loyalty that will take time to restore.
While much of the current focus is on building a new regulatory landscape and new approaches to risk management, there has been very little discussion of how the business model of banking will change over the next few years. This profound transformation will affect institutions everywhere, and no banks - including Canada's - can afford to stay on the sidelines.
With their relatively healthy balance sheets and strong capital positions, our banks have an opportunity to take bold steps to ensure they remain strong performers in the emerging world of global banking.
What will banks look like in 2012? The business model for many banks has become too complex. Globally, the trend will be toward rationalizing the number of products. Global institutions offering all things to all customers may maintain their geographic reach but will become more specialized.
Regional and local banks will simplify their offerings, adopting a more traditional retail/commercial model accompanied by a more conservative risk policy. However, "back-to-basics" banking will look very different as banks respond more nimbly to customer needs, build new alliances with non-banks to deliver non-core services, and introduce new ways to manage risk.
Canadian banks began this process even before the downturn. A number had presciently limited their exposure to "toxic" structured products and others have set specific "mix" targets for lines of business.
But there is still work to be done in assessing the true attractiveness and ability to compete in some lines of business, simplifying product lines, and identifying the true costs of product complexity in both front and back office.
What is the greatest vulnerability for Canadian banks in this new environment? In a slower-growth world, reducing costs is critical to restoring profitability. Canadian banks, whose expense ratios are materially higher than the best international players, have their work cut out for them. Canada is one of the most "branched" countries in the world, and the combined network cost for the top six banks alone is close to $10-billion annually. Branch rationalization, outsourcing non-core functions and replacing inflexible legacy systems would help shed from 20 per cent to 25 per cent of total costs, a level that is both feasible and necessary.
Canadian banks have made good progress over the past few years in improving their expense ratios and have made some innovative moves, such as the Symcor joint venture for cheque processing and statements. Expect to see more such alliances in the future.
And as the emerging "Net Generation" does more banking online, banks will shift increasingly from an expensive branch system toward less costly, more flexible and more ubiquitous ways to serve customers.
How do they rank on customer satisfaction? Canadians are more satisfied than bank customers elsewhere. In a survey conducted last year by the Canadian Bankers Association, 75 per cent of respondents had a favourable impression of Canadian banks, and one in five said "very favourable."
Contrast this with Accenture's 2008 Global Survey of Customer Satisfaction, which found only one-quarter of customers elsewhere believe their bank is acting in their best interest, and four in 10 had switched banks owing to poor service.
In Canada, innovations in multibranch banking, cheque processing, ABMs, debit cards and online banking - combined with a sophisticated understanding of customer needs - have resulted in much higher satisfaction levels.
Commendable as this is, Canadian banks cannot be complacent. Their challenge now is to move the customer experience to the next level. They need to build new multichannel experiences for customers that maximize "up-sell" and wallet share.
Other opportunities to strengthen customer relationships include product development based on "customer pull" rather than "product push," and pricing tailored-to-local conditions and even individual customers.
How will banks improve their risk management? Stronger regulations and better internal risk management systems have protected Canadian banks during the downturn. But the bar is rising quickly here as well, and our banks will need to innovate in order to retain their leadership status.
The current architecture of risk management is compliance-oriented. This has sometimes led to the creation of separate and distinct infrastructures for gathering and analyzing data and monitoring risk positions - with all the associated costs and redundancies.
In future, the risk function must also innovate to continue to add value. We will see increasing integration of the finance and risk functions. On the retail side, the economic downturn has spawned an uptick in all types of fraud and the need for more effective monitoring.
What are the growth opportunities in the next few years? Canadian banks have the good fortune to choose from a number of domestic and international growth options not available to their weakened peers abroad.
While they have shown admirable restraint thus far, those with established footprints in the United States will likely become more aggressive in coming months as the dust continues to settle and bargain prices prevail.
Beyond the United States, the cachet currently enjoyed by Canada's banks presents attractive opportunities for joint ventures and equity interests that can be scaled up in future.
Domestically, Canadian banks have been eyeing the boundaries of regulatory restrictions on insurance distribution.
We may see these barriers erode further, providing a new source of growth and greater penetration of life products into the mid-market.
Wealth management is another avenue of growth that many of the banks have focused on recently. And given the state of the automobile industry, auto makers and consumers might welcome a bank presence in consumer auto leasing, which has until now been proscribed by regulation.
John Armstrong is the managing partner of Accenture's Financial Services Practice in Canada.