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What Banking Needs to Become

By: Vanessa Wallace and Andrew Herrick

For all the chaos in the global economy since early 2008, some things have not changed. The vast majority of banks that were in business then are still standing. The purpose of banking is the same. Banks provide a safe haven for the savings of individuals and businesses, they support productive human endeavor and eco­nomic growth by efficiently and effectively allocating funds, and they bridge the divergent maturity needs of short-term depositors and long-term borrowers. If the global financial crisis has demonstrated anything, it is the continuing and essential value of these services to society.

The fundamental needs of banking customers are also unchanged. Individuals and organizations need bank accounts and services that enable them to safely hold cash and make transactions. They need access to credit — in forms ranging from microcredit to massive corporate loans — to enable investment and economic advancement. Individuals, businesses, and institutions need to protect themselves against a range of risks that could not be borne at either an individual or an organizational level. Customers need savings and wealth creation vehicles in which to invest their money. And they need periodic advice on their financial situation and on appropriate products and services.

Finally, the core organizational capabilities that banks rely on as they pursue their purpose and meet customers’ needs are still the same.

What, then, is different? The environment in which banks operate and compete. Three of the world’s largest retail banks are now Chinese state-owned enterprises. Six of the 20 largest banks are new to the top order. Nine are based in the Asia/Pacific region, including two Aus­tralian banks and HSBC Group (whose CEO, Michael Geoghegan, is moving from London to Hong Kong). (See Exhibit 1.) Stand-alone investment banks, which formerly dominated much of the sector, have all but disappeared. Consolidation is creating high levels of concentration in the banking industry; witness JPMorgan Chase’s takeover of Wash­ington Mutual in the U.S., the acquisition of HBOS by Lloyds in the U.K., and Westpac’s merger with St. George Bank in Australia. The ranks of the truly global retail banks are thinning, as yesterday’s titans (such as the Royal Bank of Scotland, Bank of America, and Citigroup) retreat to the security of their home markets and capital bases, and as domestic banks merge, disappear, or narrow the focus of their businesses. The level of government regulation and ownership in the sector has risen dramatically.

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© 2008 Booz & Company Inc.