The US$1 trillion that traditional retail and commercial banks have invested globally over the past three years to transform their IT operations has not yet delivered the anticipated revenue growth, according to a new report from Accenture.
The report — “Caterpillars, Butterflies, and Unicorns: Does Digital Leadership in Banking Really Matter?” — analyzed more than 160 of the largest retail and commercial banks in 21 countries to assess their level of digital maturity and determine if digital leadership is driving superior financial performance, including market valuation, profitability, top-line revenue growth and efficiency.
Among the key findings: Half (50%) of banks are achieving higher profitability and returns on equity, driven by greater operating leverage, but they’re not achieving differential revenue growth — instead competing for high market share of revenue growth in a slow-growth revenue pool. While digital maturity is associated with high market valuations and a better return on capital for these banks, only 12% appear to be fully committed to digital transformation and investing in a digital-first strategy; the other 38% are in the midst of transformation, but their digital strategies lack overall coherence. The remaining half (50%) have not made much visible progress in digital transformation at all and investors are showing a lack of confidence in their future prospects.
“Investors are signaling that they lack confidence in the future value of the traditional banking business model, with the industry languishing near the bottom on market valuation metrics like price-to-book and price-to-earnings,” said Julian Skan, a senior managing director and global Banking lead in Accenture Strategy. “Our research shows that digital leadership drives superior economic performance, and that the gap between ‘the best’ and ‘the rest’ is widening at a pace that should concern banks struggling with digital transformation and overall competitiveness.”
The research analyzed where banks are on the digital maturity scale by looking at several factors: public communication to the market about their digital journey through earnings call transcripts, news releases and stated investment budgets; recognition of digital leadership by third-party industry analysts and observers; and Accenture’s subjective analysis based on its deep financial services experience. The research identified the following three segments of digital maturity:
- Digital Focused: Only about one in eight global banks (12%) appear to be fully committed to digital transformation and are investing toward becoming digital-first banks. This is the only group with a price-to-book ratio above 1x.
- Digital Active: Approximately four in 10 banks (38%) are in the transformation phase but have not communicated a cohesive and compelling digital transformation strategy to the market. Digital efforts are resulting in higher return on equity, with the expectation of more to come.
- The Rest: The remaining 50% of banks have not made significant advancements in digital transformation. To improve their competitiveness, they should align and commit their strategies to digital transformation.
The report found that the real change being driven by digital investment is cost efficiency rather than revenue growth. While “Digital Focused” banks are the most profitable and highly valued, they are achieving higher profitability through better operating leverage — getting more out of every dollar of assets. Positive operating leverage is strongly correlated with digital maturity for digital-focused banks. While these banks have the slowest revenue growth, they have constrained cost growth resulting in a gap of approximately 2 percentage points between revenue and cost growth every year over the last six years. The Digital Active group has also created a gap between revenue and cost growth, of 1.3 percentage points, while the banks in ‘the Rest’ segment created almost no operating leverage at all.
“Digital-focused banks have taken the first step in building a future-ready bank, but they need to pivot their focus from efficiency and move to growth if they hope to close the valuation gap with fintech and big tech competitors encroaching on the banking business,” said Alan McIntyre, a senior managing director at Accenture and head of its global Banking practice. “Digital-active banks have made significant progress in their journey but need to focus on maintaining revenue growth while becoming more efficient and fully digital. To continue to win investor confidence and reap the rewards of digital investment, these banks would do well to focus on balance sheet growth by, for example, using Open Banking to help acquire and manage customer relationships.”
The research also found that the pivot toward digital will likely erode banks’ justification for fee income, whether paying for advice or administrative work. Moving forward, it will be more important for banks to focus on generating income by taking risks associated with running the balance sheet, including interest rate and credit. Digital Focused and Digital Active banks will need to pivot back to a business model in which the balance sheet is the critical driver of income growth or create new fee income revenue streams beyond the boundaries of traditional banking.
“Even the most digitally focused banks have a big challenge ahead and will need to find ways to generate new revenue as traditional fee income gets squeezed,” said Richard Lumb, group chief executive – Financial Services at Accenture. “To achieve stronger returns on their digital investments, banks will need to radically increase market-share based on pricing, take additional risk on new revenue opportunities or add services customers are willing to pay for.”
