The Future of the Financial Services Industry

Barbara G. Stymiest
Chief Operating Officer
RBC Financial Group
UNB Futures Atlantic Symposium

September 14, 2007
Fredericton, New Brunswick

As I was getting ready to meet you today, it occurred to me that it's easy to find people willing to tell you what they think is going to happen in the future.

Maybe it's your parents guiding you to what they think is best for you, or movie directors and sci-fi writers who insist that the future will have flying cars and jetpacks, or pundits willing to tell you that everything you are doing today is wrong for tomorrow. Prognostication is a busy field.

The most famous predictions seem to be those that go horribly off-course - especially when they're made by very smart people at the top of their field. Thomas Watson, the famous IBM chairman was smart enough to understand that computers had a future. But in 1943 he failed to see their full blown potential when he predicted: "I think there is a world market for maybe five computers."

So if you are here this morning to hear outlandish or bold predictions about the future of the financial services industry, I'm afraid you're out of luck. I am in no hurry to be googled by people looking for famously, or infamously, failed predictions.

What I will do is outline some of the major trends that I think will affect the financial services industry over the next 10 to 15 years, and give you a glimpse of how we at RBC are approaching these challenges. Finally, I'll close with a comment about the implications these trends have for you as prospective participants and future leaders of this industry.

As I begin, let me give some context with a quote from Charles Darwin, whose words are still prescient, more than a century after they were spoken "It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change."

The global financial services industry is certainly in a state of change. That's a reality we live and breathe every day at RBC, where we're actively planning for a future that we know will present bold and new challenges to all competitors.

There are three major points of the future landscape that I'd like you to consider, and each one poses unique questions for our industry and our company.

First, the future of financial services will play out in a truly global marketplace.

You can see this unfolding right now. Today.

According to IBM Global Business Services, 60 per cent of the growth in worldwide investable assets in the twenty years from 2005 to 2025 is expected to come from the so-called BRIC countries - Brazil, Russia, India, and China. Today, India is already home to more billionaires than anywhere in Asia - ahead of both Japan and China¹.

Globalization will have a powerful impact on our corporate and institutional clients. The number and potential of companies that are export-driven will increase in the next decade due to globalization, the Internet and immigration.

Those of you interested in working in investment banking should pay attention to these statistics: From 2001 to 2006, the number of IPOs in the United States fell by one-third as companies were attracted to regulatory and legal environments in other countries.²

Furthermore, 2006 was the first year that China surpassed London and New York in the number of IPO listings.

And finally, the deal value of China's three largest exchanges - Shenzhen, Shanghai and Hong Kong - was 53 billion US dollars in 2006. That's more than the 48 billion dollars of deals done in London and the 46 billion dollars produced by the New York Stock Exchange and NASDAQ combined.³

These statistics alone should help you understand why we consider it critically important that RBC Capital Markets be a global business that leverages the strengths of our Canadian operations for clients in the U.S., U.K., Europe, and Asia.

So, globalization is the first trend I want to point out to you.

The second trend is that we, and our financial services competitors, are vulnerable to consolidation, specialization and commoditization.

A quick read of the business pages proves consolidation in the financial services industry is a powerful force around the globe. The latest round involves an epic battle for control of ABN Amro between Barclays and a consortium led by Royal Bank of Scotland.

Consolidation has already changed the American competitive landscape dramatically. In 1997, the 10 largest commercial banks controlled 29 per cent of the country's banking assets - today they control almost half.⁴

The top companies are getting bigger and stronger. The combined market capitalization of the top 30 American and European banks increased by a factor of 25 from 1980 to 2005. By 2010, some financial institutions may have market capitalization of 500 billion dollars and by 2020, some may exceed one trillion dollars.

No doubt, Canadian financial institutions will also be swept into the consolidation wave in order to compete on the world stage. I fully expect RBC will be up against mega banks that will operate in 20 to 50 countries, employ hundreds of thousands of people, and build global brands with somewhere between 50 to 100 million customers.

But consolidation will also foster the development of new business models. Smaller players may find that the best way to compete with mega-banks is to focus on certain segments or businesses, but on a global or regional basis. These low-cost specialists will drive efficiencies in commodity products and services to invest in new innovations and growth of services that matter most to their clients.

The trends toward specialization and commoditization are visible today.

For example, a large part of the service we offer our clients today is simply intermediation. So, for example, when we provide deposits and loans, we're really just acting as a go-between for those with money to invest and those who need credit. Specialists, such as Zopa, are making quick headway into this market by matching lenders and borrowers online.

Another form of intermediation is the facilitation of payments between merchants and customers. Obopay and other mobile payment facilitators are finding ways to enter this market cheaply using online technology and no-frills service models.

Brokerage of stocks, mortgages or insurance is perhaps the most obvious example of intermediation between buyers and sellers. The same applies to many aspects of derivative and other structured product activity where we convert a range of securities with different risks and returns into a single structured product to meet the precise needs of an individual client.

As you can tell from the examples I've given, technology is making intermediation more transparent and that means those businesses are easier to pick off.

Companies like RBC will have to understand and seize the marketplace opportunities available while countering any potential threats from new entrants to our businesses, by providing real value to clients.

This is one reason that we have developed the RBC Innovation Lab to test and learn concepts, to take them from idea to implementation.

For example, we are currently testing and piloting an electronic safety deposit box - an Internet accessible area where clients can securely store and access digital assets, such as tax returns, passports or other documents using the web or a mobile device. This innovation was submitted by one of our finalists in our Next Great Innovator contest and is one way that RBC is looking to add value to the transactional, online client experience.

So, consolidation of players, and commoditization and specialization of products and services constitutes the second major trend affecting the future of financial services.

My third point about the future of our industry— and it may well be the most important one— is about the dramatic power shift taking place from the corporation to the client.

What does this mean?

How many of you remember the TIME magazine Person of the Year for 2006? Here's a hint: you all know the person's name.

TIME's Person of the Year in 2006 was - famously - YOU. In recognition of the mass collaboration, community-creation and general empowerment provided by the Internet, TIME named YOU as its most celebrated and noteworthy individual for that year.

In their words, "For seizing the reins of the global media, for founding and framing the new digital democracy, for working for nothing and beating the pros at their own game, TIME's Person of the Year for 2006 is you."

The management consultants at Booz Allen put it in a business context: "The consumer is not an idiot; she is your boss."

Consumers now control the information they receive, how they receive it, and whether they receive it. They can not only tune out your message, product or service - they demand that you earn their attention.

Individuals - our clients -- have become the major driver of the evolution of our business, from innovation to execution to regulation. Companies that fail to conceive of their strategy through the lens of their client will do so at their peril.

The potent combination of shifting demographics, behaviours, attitudes and ubiquitous and accessible information are giving customers the power to demand much greater responsiveness and transparency from their banks⁵. This is not just true of banking, but most industries.

At Nokia, management time and resources were once allocated 80-20 in favour of technology over marketing. Today it is 50-50. Why? According to a senior Nokia executive, the company has come around to the realization that -- if their products do not make people's lives easier or more enjoyable -- they have missed the mark... and often, their sales potential.

As clients drive change in the industry, there are opportunities for the agile and resourceful companies, and harsh realities for competitors who are slower moving or prone to anything less than excellent execution.

At RBC today, clients are driving our thinking on strategy, technology, product, service, and all other aspects of our business model. I expect this to remain a constant trend.

At RBC, we see all of these trends and we are responding. Since 2004, we have redefined our entire corporate culture, including everything from business processes to compensation, to be solely client centric. We no longer assign resources to activities and processes that do not ultimately benefit clients and improving their experiences. The idea of client benefit is defined broadly, of course, to include compliance and regulatory matters, since regulations, such as privacy and anti-money laundering rules, are purportedly for the best interests of clients.

We are not alone. Other Canadian and foreign competitors are also becoming more client centric. In this sense, the delivery of financial services is now beginning to resemble other major commoditized products, such as beer or telecom services.

And even more similar to these standardized retail producers, financial services providers are increasingly differentiating themselves solely by the quality of their customer service and the power of their brand.

At RBC, we are trying to meet our clients' needs with enough precision and efficiency to create a virtual intimacy with that client. Our challenge in the future is to understand our clients even better and provide them with more value-added service over time.

For example, we are already using our CRM framework to select clients for priority queuing in our call centre environment or call-routing to specialized agents. Based on our understanding of client value and risk, we can also automate decisions to provide services such as overdrafts, thereby avoiding expensive manual processes and, importantly, client inconvenience.

We at RBC, like other successful financial services companies, have rooted our operations in a deep understanding of our clients built on a backbone of a comprehensive CRM framework. Since products and services have become commoditized, our focus is on finding ways to deliver unique client experiences that are tailored to client segments. It is a constant work in progress, but we take heart in some of the recognition we have received recently from independent third parties, such as Synovate.

Over the next ten years, we fully expect our clients to redefine and reshape the way we do business with them. In our wholesale business, it has meant responding to new competitors by providing greater value and a higher level of service to all of our clients.

And in our retail businesses, we see changing demographics causing a divergence in client demands. Our older, boomer clients may look for more personalized and customized service and products. But today's teens - the N-Gens - are not as loyal as their parents are, and are far more sensitive to price. They want customized solutions, as well as security, immediacy and convenience.

We understand that the Internet, blogs and social networking trends will change buying behaviour, affecting consumerism even more than the advent of television advertising throughout the 1950s and 1960s. The power of websites such as YouTube and online social networking tools, such as Facebook, can be good and bad for a brand such as ours that's more than 130 years old. While these sites have transformed marketing and mass communications by allowing messages to travel globally to fragmented groups of people in minutes, they do so equally for positive and negative messages⁶. This places even greater importance for a corporation to manage its reputation well.

At RBC, we saw possibilities of the Internet early - first by becoming a leader in online banking and now, by using the web to reach out to younger clients. Recently, we announced RBC P2P, a medium that will let us interact with the N-Gen client segment and help us understand what they want from us while educating them about banking in general. RBC P2P was also an idea contributed by finalists in our Next Great Innovator contest and incubated in the RBC Innovation Lab.

Very simply, competing for and retaining our clients' business in the future will become nothing short of a contest with other providers to see who knows the client better, and who can act on that information most efficiently and most effectively. All competitors are differentiating new value propositions for each customer segment, effectively making the notion of customization a commodity in itself. As such, there is an extremely high value and importance to flawless execution.

So in this landscape of long-term change, opportunity and competition, what kind of people do we need in financial services? Who are attracted and attractive to our industry, and specifically to RBC?

RBC is, by most standards, a global company - with more than a third of our earnings coming from our banking, wealth management, capital markets and insurance businesses outside of Canada. We have people in 34 countries serving more than 15 million clients.

With such a profile, we are looking to global talent pools for our future leaders: People who come from diverse backgrounds, who bring fresh points of view and can use their skills across a variety of different areas of our business.

Future RBC employees will be client centric, knowledgeable and entrepreneurial, capable of making decisions independently, and can quickly adapt in a fluid environment.

• Very simply, at RBC, we're looking for leaders who can think creatively to help solve the challenges posed by globalization.
  
• We're looking for pragmatists to help us identify the threats and possibilities provided by consolidation, commoditization and specialization.
  
• And above all, we're looking for people who know that their ultimate boss doesn't sit in a corner office: They buy our products and services.
  

We understand well the opportunity that lies ahead. The contributions of people like the ones in this room are what will help us succeed.

I'll finish my remarks with three not-so-bold predictions:

• One, the financial services industry will be an exciting career choice.
  
• Two, RBC will continue to be among the world's leading financial organizations.
  
• And three, our employees - which I hope will include many of you— will continue to be among the best in the world.

Thanks for the opportunity to talk to you this morning. I look forward to your questions.

¹ "Get global. Get specialized. Or get out," IBM Institute for Business Value, 2007.
² "Get global. Get specialized. Or get out," IBM Institute for Business Value, 2007.
³ "New York: No Longer the IPO King," businessweek.com, http://www.businessweek.com/investor/content/dec2006/pi20061227_944762.htm, Dec. 27, 2007.
⁴ "Global Banking Industry Outlook," Deloitte, 2007.
⁵ "The paradox of Banking 2015," IBM Institute for Business Value, 2005.
⁶ "When a Black Tee Shirt Is More than a Black Tee Shirt: Why Brands Aren't Losing Their Luster," http://knowledge.wharton.upenn.edu/article.cfm?articleid=1798, Sept. 5, 2007.