Canadian banks need to reinvent themselves through simplification of businesses, deconstruction of products and an end to global universal banking, says EY’s Global banking outlook.

In the aftermath of the financial crisis, new regulations, investor sentiment and evolving customer behaviour are challenging Canadian bankers’ commitments to global universal banking. EY’s report shows that around the world, banks operating on a global scale reported average ROEs of around 7.5% in 2013, while large banks with a less diverse business and geographic footprint achieved an average ROE of around 10.7%. Canadian big six banks had an even higher ROE of 15.54%.

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“Banks themselves are starting to realize that the creation of new products is often less efficient and profitable than expected,” says Andre de Haan, Canadian Leader, Financial Services at EY. “The time has come for banks to simplify.”

Simplifying businesses

EY says there’s little correlation between the breadth of a bank’s product offering and its market share. As a result, banks need to examine what’s truly core to their businesses. Parts of the business that don’t add value need to be improved. If that’s not possible, they need to be identified as non-core or provided to customers through an alternative supplier.

“In addition to reassessing business lines, banks need to re-evaluate their internal operations. If certain back-office functions don’t add a competitive advantage, banks may consider outsourcing them,” says de Haan.

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Deconstructing products

By breaking products into their component parts, banks will enable customers to pick and choose products that truly suit their needs. If banks succeed at differentiated offerings, they’ll increase share of wallet, reduce the cost of operations, and show regulators they’re treating customers fairly.

The need for transformation

For more than a decade, a mix of consolidation and competition in Canadian banking has created complex organizations, with diverse portfolios of products, operating across multiple business lines. EY says Canadian banks need to fundamentally transform their strategies and operating models based on these five key drivers:

1.    Quest for growth

2.    New era of competition

3.    Redefining of the core of the bank

4.    Technology-driven reshaping of banking

5.    Redefining of organizational structures

“The banks that focus on their core businesses and redesign themselves to be more flexible, lean and more responsive to customer demands, will be the most successful in the coming decade,” says de Haan.

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