Managing through disruption: banks confronted by disruptive forces are reshaping operations to better serve their customers. Seven strategies that can help banks reinvent their business model and manage the transformation of their industry are strategies that can be adopted by other industries as well.

• Author: Klick, Anthony
• Position: Banking Relationships

Banks are being confronted by disruptive forces ranging from the lingering effects of the financial crisis and recession and expanded regulation, to changes in consumer spending, saving and borrowing behavior. As a result, they are reshaping their operations and tearing down product-focused silos to more effectively reach and serve their best customers.

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They are also introducing new mobile banking and social media applications and shifting from pushing products to selling relationships and providing a more integrated and valuable customer experience.

The steps that banks are taking have lessons for businesses more broadly. In fact, the challenges facing banking closely resemble those that have affected other sectors, especially those that are service-oriented. The financial crisis, for instance, accelerated a preexisting shift to greater regulation. The Dodd-Frank Wall Street Reform and Consumer Protection Act alone could reduce banking profits by up to 12 percent during the next half-decade by limiting the fees banks can earn from products such as credit cards, restricting access to credit and increasing compliance costs.

Other regulatory initiatives also will have an impact. The Credit Card Accountability Responsibility and Disclosure Act of 2009 could decrease the banks' interest and fee income. Changes to Regulation E could reduce banks' fee income from electronic fund transfers by up to $1 billion. Higher Federal Deposit Insurance Corp. insurance premium prepayments are further reducing profits.

Furthermore, the Basel III accords--still in the process of adoption--could triple regulatory capital requirements. The impacts of this regulatory push are widely recognized. Indeed, in a recent survey of CEOs conducted by PwC, nearly 90 percent of banking sector leaders said that overregulation was their greatest challenge.

Factors Affecting Banking Revenue

Changes in consumer behavior in the wake of the financial crisis pose their own challenges. After a generation of debt-fueled consumption, Americans have begun a lengthy process of delever-aging, reducing spending and increasing savings. The limits on credit availability that new regulations are fostering will further constrain household debt.

The personal savings rate, recently in the low single digits, is now in the 5 percent-6 percent range and could reach double-digit levels within a few years. Less spending and lower debt will further reduce the fees and interest that have been a significant source of banking income.

Expanded regulation and shifts in personal financial behavior will slow revenue growth, increase operating costs and depress profit margins for years to come. In the face of these challenges, banks have few good options. In a highly competitive environment, raising prices often is not possible.

Adding new fees is already meeting significant resistance from...