Banks spending big bucks on digital, but not getting anticipated revenue gains

28 June 2019 Consulting.us

Global commercial and retail banks have spent $1 trillion on IT operations (hardware, software, services, and IT staff costs), but the investment hasn’t yet delivered anticipated gains in revenue, according to analysis from Accenture. The report examined 160 of the largest global banks to see how digital transformations were impacting their financial performance.

The Accenture study (“Does Digital Leadership in Banking Really Matter?”) found that half of banks are achieving higher profitability and returns on equity because of greater operating leverage, but they’re failing to achieve differential revenue growth.

The consulting firm created a digital maturity scale based on their own subjective analysis and ratings of digital leadership by third-party industry analysts. Twelve percent of global banks were tagged as “digital focused” – fully committed to digital transformation and investing toward becoming digital-first banks. Digital focused banks were the only segment with a price-to-book ratio (share price x outstanding shares : net assets) above 1x.

Thirty-eight percent of banks were deemed “digital active” – in the transformation phase but without a cohesive and compelling digital transformation strategy. Their efforts have resulted in a higher return on equity, according to the study.

The remaining 50% of banks (“the rest”) have not made much visible progress in digital transformation, with investors showing a lack of confidence in their future prospects. 

Growth in Revenues, Costs and Assets

“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,” Julian Skan, senior managing director and global banking lead at Accenture Strategy, said.

The central change being driven by digital investment is cost efficiency rather than pure revenue growth. Digital focused banks had the lowest growth in revenue (3.5%) between 2011-2017 compared to digital actives (4.2%) and the rest (5.8%), but their cost growth was much lower. Digital focused banks were able to constrain cost growth at 1.6%, allowing for a gap of approximately 2% between revenue and cost growth over the last six years. Digital actives had a gap of 1.3%, while “the rest” had nearly no operating leverage (0.1%).

The Accenture study also uncovered that the digital pivot will likely erode banks' justifications for fee income, including payment for advice or administrative work. Banks will have to situate the balance sheet (including interest rates and credit) as the central driver of income growth, or else seek out new fee income outside the traditional areas of 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,” Richard Lumb, group chief executive of financial services at Accenture, said. “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.”

Related: Neobanks pressuring traditional retail bank models


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