The journey to optimise the client experience at an institutional level is far from over. For the majority of corporate and investment banking (“CIB”) institutions, including corporate banking, global markets, and investment banking; client centricity is viewed as the holy grail to maintaining and increasing the share of wallet and thus securing the bank’s profitability and competitiveness in the market.
Here at Deloitte, we are working with our clients to re-discover client centricity within the management of the customer lifecycle, including prospecting, on-boarding, ongoing maintenance, and off-boarding and exit. This is with a view to enable further value to be accessed for both the bank and for their clients.
Historically the largest multinational CIBs, the Globally Systematically Important Banks “GSIBs”, have dominated the market, due to a foundation of entrenched, long-standing relationships that have inhibited new entrants and restricted competition. However, this construct is no longer valid and the market has experienced a number of key changes. These include:
- Investment banks now operate in a market of price-compressed, commodified products, with the industry seeing an increased growth in trading avenues;
- Regulatory changes, designed to facilitate greater competition for services, are making the maintenance of multiple trading relationships less attractive. For example MiFID II, Basel Committee on Banking Supervision, and the International Organisation of Securities Commissions for trading counterparties;
- Much of the buy-side are specialising to appear more attractive in lacklustre returns markets. Therefore the attractiveness of specialist boutiques over firms with broad coverage is favoured; and
- The subsidised business model of extending loss-leading services to clients in exchange for high-margin investment banking division pay-outs is under significant threat. For example book runner privileges in issuance are being pressured by the growing feasibility of direct issuance, and a slowing Initial Public Offering pipeline; and lucrative advisory fees are being captured by boutique ‘rainmaker-heavy’ advisory houses who have steadily gained market share.
Today, there is a belief held by investment banks that becoming ‘more customer-centric’ will deliver on the promise of enhanced customer lifecycle management.
The key elements that investment banks believe they need to rectify to optimise customer lifecycle management are not new, and to date they have failed to address these and unlock the full promise of value. These issues include but not limited to:
- Lack of a single, enterprise-wide view of the customer;
- Isolated on-boarding at the product level;
- Inconsistent experience across business units;
- Heavily dependent on cost-intensive manual processing;
- Lack of customer insights and customisation;
- Regulatory challenges; and
- Cost pressures
Although the issues are understood, there is no single consistent and clear solution. The most common approach is the belief that ‘having more information widely available’ will allow GSIBs to recognise additional revenue generating opportunities or ways to better manage financial and non-financial risk. Whilst simple in theory, creating a central platform in a GSIB is a significant investment, often measured in years and billions of pounds, with many failing to truly take hold. Although we consider that an enterprise-wide investment in capabilities and infrastructure is critical, it is not sufficient to deliver the customer relationships that GSIBs need to cultivate.
Instead of valuing their existing relationships, GSIBs outcompete boutiques and each other by using the scale and reach of the balance sheet. This results in transactional, short-termist, ‘every-exchange-counts’ relationship with their clients and counterparties instead of building in a longer-term, extended services across a broader remit. To do this, a much larger effort is required than simply aggregating an enterprise-wide golden source of data. Leaders need to eschew the activity-focused ‘customer lifecycle management’ and adopt an outcome-focused customer lifetime value lens.
A well-adopted metric in modern digitally-native companies is the optimisation of the amount spent on acquiring and nurturing a customer, versus the profit that a customer is anticipated to bring over the lifetime of their relationship with the financial institution. In a complex financial and political organisation like the modern investment bank, a common basis for measurement and contribution to that lifetime value metric is paramount.
Optimisation of the customer lifetime value requires a careful and dynamic balancing of business unit profitability and compensation, on a customer-by-customer basis, likely to cross multiple business units and international domains. The bank would need to understand; which business units are the ‘acquisition cost’, which are the ‘value creators’, how those might change over the course of a relationship, how to ensure each business unit is recognised and compensated for their contribution to the relationship, and when it may no longer be beneficial for the client and the bank to maintain the relationship.
Without the customer lifetime value goal in mind, any design of customer-facing systems, front office applications1, data platforms, or organisational designs, all requiring significant upfront investment, is likely to leave money on the table.
Following this article, there will be a series of publications that will address various topics in relation to customer lifecycle management of corporate and investment banks with a focus on customer lifetime value in capital markets.
For further information in relation to this topic, please contact Rawad Halawi
1 Refer to our related blog, “Driving Digital Transformation in the Investment Banking Front Office”.