GCC’s retail banking revenue growth projected to slowdown
Post-pandemic revival depends on cost control and digitisation
Dubai: Revenue growth from retail banking across GCC is expected to slowdown in the next few years according to Boston Consulting Group (BCG).
A recent BCG study showed the projected revenue outlook of retail banks in key economies in the GCC, which includes the UAE, Saudi Arabia, and Kuwait in three retail banking revenue growth scenarios. In all three projected scenarios of 2019 – 2024, revenue growth is subdued when compared to the strong growth recorded in 2014 – 2019, a 5.5 per cent compound annual growth Rate (CAGR).
The pandemic has taken a toll on the retail banking sector, and we believe that a slow-recovery scenario is most likely to occur for GCC retail banks.
In a quick-rebound scenario, the retail banking revenues in the region is estimated to grow from $26.4 billion in 2019 to $28.6 billion in 2024, at a CAGR of +1.6 per cent. In a slow-recovery scenario revenue is expected to shrink by a CAGR of -0.1 per cent to $26.3 billion and in a deeper-impact scenario, BCG estimates banks’ retail revenue pool to shrink by a CAGR of -2.1 per cent.
“The pandemic has taken a toll on the retail banking sector, and we believe that a slow-recovery scenario is most likely to occur for GCC retail banks,” said Godfrey Sullivan, Managing Director and Partner, BCG. “In this scenario, the revenue pool of regional retail banks will approximately reach the 2019 level only by 2024, essentially a flat market.”
Slowing consumer loans and deposits
Findings from the BCG study indicate that the most affected retail banking products in regional banks because of the pandemic are consumer loans and deposit revenues. While loans (mortgages and consumer loans) and deposits accounted for 80 percent of retail banking revenues in 2019, recent events highlight that payment, mortgage, and investment products are now likely to be the main sources driving retail banking revenue growth. The acceleration of digital payments and e-commerce adoption in the GCC will be a factor to contribute and benefit the revenue growth.
“In a low revenue growth market, bank growth comes from taking the market share, and they compete by providing more appealing and relevant offerings, which is better for the end-users,” said Sullivan. “With shifting consumer preferences and increasing population growth, a lot more focus on better implementation of data and analytics in the organization and cross-selling their full breadth of products to their existing customer base is key to remain competitive.”
In the current market conditions, retail banks face tremendous challenges to improve customer experiences, grow revenue, build sustainable capabilities, reduce costs, and enhance the quality of their controls. They must start to reimagine their strategies and consider the following:
Focus on costs
The successful retail bank of the future cannot operate with the cost structure of the present and remain competitive. BCG’s analysis shows that the operating costs of the best banks are already about 40 per cent lower than those of the typical bank, and they have roughly 50 per cent fewer employees. These banks make larger and more sales, and they do so with branches that are less transaction-focused.
Top banks globally open 69 per cent more accounts per branch full-time equivalent and conduct 80 per cent fewer branch transactions per customer, compared with the typical bank. Banks that are not planning now for a major step-change in their cost structure will find themselves at an unsustainable competitive disadvantage.
Way forward is digital
Retail banks can achieve their goals by focusing on their key value streams—a series of value-adding activities that they can undertake to produce a result that customers want—and by redesigning and digitizing them from front to back.
The study notes that successfully implementing an integrated approach requires bold business goals, reimagined end-to-end customer journeys, simplified and automated processes, improved risk controls, transformed technology, and integrated teams.
By digitizing their main value streams, banks will fundamentally change the way all functions operate, including distribution, relationship management, risk and compliance, and IT.
“The retail bank of the future requires organizational change and building digital capabilities, which takes time. With low-interest rates likely to continue, fee income becomes key, including enhancing wealth management offerings as banks look to advise their clients on better ways of growing and protecting their wealth. In addition, addressing key priorities, such as digitizing all major value streams will help regional banks manage the added pressure from the global pandemic and start to build the bank of the future,” said Sullivan.