Visualizing the Future of Banking Talent
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Many organizations say that their greatest asset is their people. In fact, Richard Branson has famously stated that employees come first at Virgin, ranking ahead of customers and shareholders. So, how do businesses effectively manage this talent to drive success?
This question is top of mind for many bank CEOs. As processes become increasingly automated and digitized, the composition of banking talent is changing – and banks will need to become adept at hitting a moving target.
Six Ways Banks are Becoming Talent-First
Today’s infographic comes from McKinsey & Company, and it explores six ways banks are becoming talent-first organizations:
1. They understand future talent requirements.
43% of all bank working hours can be automated with current technologies.
Consequently, talent requirements are shifting from basic cognitive skills to socio-emotional and technological skills. Banks will need to analyze where they have long-term gaps and develop a plan to close them.
2. They identify critical roles and manage talent accordingly.
It is estimated that just 50 key roles drive 80% of bank business value. Banks will need to identify these roles based on data rather than traditional hierarchy. In fact, 90% of critical talent is missed when organizations only focus at the top.
Then, banks must match the best performers to these roles and actively manage their development.
3. They adopt an agile business model.
Banks will need to shift from a hierarchical structure to an agile one, where leadership enables networks of teams to achieve their missions. As opportunities come and go, teams are reallocated accordingly.
This flexible structure has many potential benefits, including fewer product defects, lower costs, shorter time-to-market, increases in customer satisfaction, and a bump in employee engagement.
4. They use data to make people decisions.
Instead of making decisions based on subjective biases or customary practices, banks will need to rely on the power of data to:
For example, company data can be used to develop a heatmap of the roles with the highest attrition rates. Leaders can then focus their retention efforts accordingly.
5. They focus on inclusion and diversity.
Gender and ethnicity diversification leads to higher financial performance, better decision making, higher employee satisfaction, and an enhanced company image.
Industry-leading banks will set measurable diversity goals, and re-evaluate all processes to expose unconscious biases. For example, one organization saw 15% more women pass resume screening when they automated the process.
6. They ensure the board is focused on talent.
Only 5% of corporate directors believe they are effective at developing talent.
To be successful, boards will need to recognize Human Resources (HR) as a strategic partner rather than as a primarily transactional function. The CEO, CFO, and CHRO (Chief Human Resources Officer) form a group of three that makes major decisions on human and financial capital allocation.
CEOs worldwide see human capital as a top challenge, and yet they rank HR as only the eighth or ninth most important function in a business. Clearly, this is a disconnect that needs to be addressed. To keep up with rapid change, banks will need to bring HR to the forefront – or risk being left behind.
The Making of a Mammoth Merger: Charles Schwab and TD Ameritrade
A look at the histories of Charles Schwab and TD Ameritrade, what comes next after the merger, and the potential impacts on the financial services industry.
Charles Schwab and TD Ameritrade: A Mammoth Merger
In this era of fierce competition in the discount brokerage space, scale might be the best recipe for success.
Charles Schwab has once again sent shockwaves through the financial services industry, announcing its intent to acquire TD Ameritrade. The all-stock deal — valued at approximately $26 billion — will see the two biggest publicly-traded discount brokers combine into a giant entity with over $5 trillion in client assets.
Today we dive into the history of these two companies, and what effect recent events may have on the financial services industry.
The Evolution of Charles Schwab
1975 – U.S. Congress deregulated the stock brokerage industry by stripping the NYSE of the power to determine the commission rates charged by its members. Discount brokers, which focused primarily on buying and selling securities, seized the opportunity to court more seasoned investors who might not require the advice or research offered by established brokers. It was during this transitional period that Charles Schwab opened a small brokerage in San Francisco and bought a seat on the New York Stock Exchange.
1980s – The company experienced rapid growth thanks to a healthy marketing budget and innovations, such as the industry’s first 24-hour quotation service.
This fast success proved to be a double-edged sword. Charles Schwab became the largest discount broker in the U.S. by 1980, but profits were erratic, and the company was forced to rescind an initial public offering. Eventually, the company sold to BankAmerica Corporation for $55 million in stock. A mere four years later, Charles Schwab would purchase his namesake company back for $280 million.
1987 – By the time the company went public, Charles Schwab had five times as many customers as its nearest competitor, and profit margin twice as high as the industry average.
1990s – In the late ’90s, Charles Schwab moved into the top five among all U.S. brokerages, after a decade of steady growth.
2000s – The company made a number of acquisitions, including U.S. Trust, which was one of the nation’s leading wealth management firms, and most recently, the USAA’s brokerage and wealth management business.
The Race to $0
For Charles Schwab, the elimination of fees is the culmination of its founder’s vision of making investing “accessible to all”.
The company’s fees were slowly declining for decades. In late 2019, it finally took the plunge and introduced free online trading for U.S. stocks, exchange-traded funds, and options. The response was immediate and enthusiastic, with clients opening 142,000 new trading accounts in the first month alone.
Although Charles Schwab sent rivals scrambling to match its no-commission trade offer, fintech upstarts like Robinhood have offered free trading for years now. The “race to zero” reflects a broader generational shift, as millennials are simply more likely than earlier generations to expect services to be free.
The Evolution of TD Ameritrade
1975 – The origin of TD Ameritrade can be traced back to First Omaha Securities, a discount broker founded by Joe Ricketts. The company changed its name to TransTerra in 1987.
1988 – TransTerra’s subsidiary, Accutrade, was the first company to introduce touch-tone telephone trading, a major innovation at the time and one of the first early forays into automation.
Early 1990s – Ricketts’s willingness to integrate emerging technologies into the trading business helped his companies achieve impressive growth. In 1997 the company acquired K. Aufhauser & Co., the first company to run a trading website.
The Internet wasn’t a puzzle. We were crystal clear from the beginning that customers would migrate to this.
– Joe Ricketts (2000)
Late 1990s – The Ameritrade brand was solidified after the company changed its name from TransTerra to Ameritrade Holding Corporation in 1996. The newly named company completed an IPO the following year, and established its new brand Ameritrade, Inc., which amalgamated K. Aufhauser, eBroker, and other businesses into a unified entity.
2000s – Ameritrade entered the new millennium as the fifth largest online investment broker in the United States, fueled in part by marketing deals with AOL and MSN.
The modern incarnation of TD Ameritrade took shape in 2006, when TD Bank sold its TD Waterhouse USA brokerage unit to the Ameritrade Holding Corporation in a stock-and-cash deal valued at about $3.3 billion. At the time of the deal the new company ranked first in the U.S. by the number of daily trades.
2016 – TD Ameritrade acquired the discount brokerage Scottrade for about $4 billion. The deal brought 3 million client accounts and $170 billion in assets under management into the company, and quadrupled the size of its branch network.
What Comes Next?
Naturally, the announcement that these massive discount brokers plan to merge has generated a lot of speculation as to what this means for the two companies, and the broader brokerage industry as a whole.
Here are some of the consensus key predictions we’ve seen on the deal, from both media and industry publications:
- After the deal is approved, the integration process will take 12 to 18 months. The combined company’s headquarters will relocate to a new office park in Westlake, Texas.
- Charles Schwab’s average revenue per trade has dropped nearly 30% since Q1 2017, so the company will likely use scale to its advantage and monetize other products.
- The merged company will continue to adopt features from fintech upstarts, such as the option to trade in fractional shares.
- E*Trade, which was widely considered to be an acquisition target of Schwab or TD Ameritrade, may now face pressure to hunt for a deal elsewhere.
Even though these longtime rivals are now linking up, stiff competition in the financial services market is bound to keep everyone on their toes.
I think Joe Ricketts and I agree that our fierce competitiveness nearly 30 years ago is proof that market competition can be a source of miraculous innovation.
– Charles Schwab
Why It’s Time for Banks to Make Bold Late-Cycle Moves
As we enter a late-cycle economy, a staggering 60% of banks are destroying value. Here’s the steps they can take in order to succeed.
Why It’s Time for Banks to Make Bold Late-Cycle Moves
An economic downturn is approaching on the horizon. Amid low interest rates and a manufacturing slowdown, industries and investors alike are scrambling to prepare as the window of opportunity closes.
Banking is no different. After a decade of expansion, the industry is showing many signs of a late-cycle economy. On top of this, a staggering 60% of banks are destroying value. Today’s infographic from McKinsey & Company explores the steps banks can immediately take to succeed in the next economic cycle.
How is Value Created?
In the banking sector, three main factors contribute to value creation:
- The location of the bank
- The scale of its operations
- The effectiveness of its business model
Given that geographic reach is mostly out of a bank’s control, and scale takes time to build, banks must focus on their business model.
There are three universal business model levers that all banks can immediately act on to change their destiny.
1. Risk Management
Banks can protect returns in an economic downturn by managing risk. For example, new machine-learning models can predict the riskiest customers with 35 percentage points more accuracy than traditional models.
To radically reduce costs, banks can transfer non-differentiating activities to third-party “utilities”, through outsourcing, carve-outs, or partnerships. This has the potential to increase return on equity by as much as 100 basis points.
3. Revenue Growth
When customers are satisfied, they generate more value for banks—and vice versa. For instance, customers who report low satisfaction with their mortgage experience are almost seven times more likely to refinance with a different bank.
By materially improving decisive points in the customer experience, banks can increase revenue and reduce churn rates within 12-18 months.
The Four Banking Archetypes
Beyond these universal performance levers, a bank should prioritize late-cycle economic decisions based on the archetype it falls under.
- Market leaders are top-performing financial institutions in attractive markets
- Resilients are top-performing operators despite challenging market conditions
- Followers are mid-tier organizations generating returns due to favourable market conditions
- Challenged banks are poor performers in unattractive markets
Different archetypal levers are available depending on each bank’s unique circumstances.
Banks can find new revenue streams across and beyond banking, leveraging customer relationships and white-label partnerships.
Banks can create value by developing new methods, ideas, products and services. To implement this effectively, banks must set goals for the return on innovation as well as the timeframe.
- Zero-based budgeting
By justifying expenses for each new period, banks can drastically reduce costs. This involves starting from a “zero base” rather than prior years’ numbers.
Here’s how banks across the various archetypes can take action:
For example, while market leaders’ large capital base is best used for ecosystem and innovation plays, challenged banks need to radically rethink their business model or merge with similar banks.
Reinvent, Scale, or Perish
As the late-cycle economy slows even further, no banks can afford complacency. In fact, history has shown that 35% of market leaders drop to the bottom half of peers in the next cycle.
Now is the time for banks to take bold action through universal and archetypal levers—or risk being left behind.
For a more detailed breakdown of the actions that banks can take in this market environment, check out the full report by McKinsey & Company.
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