Global Business Services IBM Institute for Business Value

Global Business Services IBM Institute for Business Value The Future of Banking: Innovating Beyond Today’s Barriers John White Americas Banking Leader, IBM Institute for Business Value November 2007 © Copyright IBM Corporation 2007

IBM Institute for Business Value The Institute for Business Value is IBM’s global research group focused on issues critical to business executives Mission: The IBM Institute for Business Value (IBV) creates fact-based thought leadership and tools that help clients realize business value § Part of IBM’s Global Business Services § Focuses on vertical industries and horizontal processes § Over 60 dedicated, experienced consultants § Primary offices in Boston & Amsterdam 2 Banking Specialization & Innovation | 9/10/2021 © Copyright IBM Corporation 2007

IBM Institute for Business Value Winning banks will specialize and innovate to meet the demands of savvy customers and intense competition Banking in 2015: Industry Snapshot § Customers take charge § Specialization is imperative § Innovation is the path to growth and differentiation Source: IBM Institute for Business Value 3 Banking Specialization & Innovation | 9/10/2021 © Copyright IBM Corporation 2007

IBM Institute for Business Value Banking customers will seek to optimize value from providers that meet their needs at opposite ends of the spectrum Customer demand Polarization in the Customer Marketplace Mass 4 Competitive Spectrum Banking Specialization & Innovation | 9/10/2021 Targeted © Copyright IBM Corporation 2007

IBM Institute for Business Value Competition and customer demands are driving the industry toward four business models with specialized capabilities Transformation of the Industry Marketplace Today Large Banks Credit Unions / Community Banks Mid-tier Banks Small Banks Specialist FI’s Non-bank Banks Middle Squeeze 2015 Universal Banks Community Banks Industry Specialists Non-Banks Source: IBM Institute for Business Value 5 Banking Specialization & Innovation | 9/10/2021 © Copyright IBM Corporation 2007

IBM Institute for Business Value As traditional banks specialize, they will both partner and compete with a growing number of industry specialists Specialists Participating in The Banking Ecosystem Today Representative Firms Risk & Capital Management Customer Intimacy Integrated Capital Market Firms Bear Stearns Daiwa Securities Goldman Sachs Merrill Lynch Morgan Stanley Nomura Securities Integrated Monolines Fidelity Janus Capital T. Rowe Price Exante Investors Group American Express Capital One Countrywide Risk Specialists Factors Fannie Mae Farmer Mac Freddie Mac Sallie Mae Operational Excellence Hybrid Manufacturer & Processors Federated Investors Putnam State Street CIT Group Distributors Pay. Pal Obopay e. Loan E*Trade ING Direct Prosper Zopa Lending Tree Niche Manufacturers Gabelli Asset Man. MFS Blackrock Insight Specialists Acxiom Financial Engines First Call Morningstar Dun & Bradstreet Equifax Experian Fair Isaacs Sony Bank BMW Virgin Money Ditech Nikko Cordial Processing Specialists ACE Baker Hill Bisys Certegy Non-Banks Tesco Wal*Mart Manchester United Football Club Bank of New York Mellon Financial Northern Trust Royal Trustco Fiserv First Data Resce Metavante Paychex Networks Concord EFS Deutsche Boerse Euroclear Fed check system Instinet NASDAQ Interac Mastercard, Visa Suppliers to traditional banks Source: IBM Institute for Business Value 6 Banking Specialization & Innovation | 9/10/2021 © Copyright IBM Corporation 2007

IBM Institute for Business Value Specialization is requiring banks to make strategic decisions about their business models Internal Specialization Business Component Decision Matrix Support Component Manage to meet the needs of strategic components Illustrative Component View of Hypothetical Universal Bank, 2015 Strategic Component Invest in and expand to gain advantage Service External Specialization Partner Component Use specialists to reduce costs and free up resources Develop alliances to meet critical business requirements Non-Differentiating Admini stration Sales Risk Strategy & Planning Produc Client Manufacturingt Mgmt t Mfg & Insight Comm on Governance Utility Component Distribution Trade Supp ort Processing Fin Mgmt Complia nce Specifi Sales c Data Facili IT ties Risk HR IT Infrastructure Differentiating Source: IBM Institute for Business Value 7 Banking Specialization & Innovation | 9/10/2021 © Copyright IBM Corporation 2007 Executive Summary #10

IBM Institute for Business Value Whatever a bank’s specialization, innovation is the surest path to differentiation and generating sustainable growth Different Is the New Better 1§ Differentiation is essential 2§ Innovation is already reshaping the industry 3§ Innovation doesn’t just happen Source: IBM Institute for Business Value 8 Banking Specialization & Innovation | 9/10/2021 Innovation is the use of new ideas or current thinking applied in fundamentally different ways that result in significant change © Copyright IBM Corporation 2007

IBM Institute for Business Value 1 Differentiation is essential Past performance is not about to be repeated; declining P/E ratios suggest that the market is skeptical about future returns Operating Profit Margin, 1995 -2005 Return on Assets, 1995 -2005 Percent flattening Key Small (Assets < $5 B) Medium (Assets $5 B - $70 B) Large (Assets > $70 B) Price-Earnings Ratio, 1995 -2005 Percent declining A one point drop in P/E ratio for a bank with $350 B in assets would result in $4 B in lost market value 1 Note: Graphs show trend for the global average of all banks by asset size group; 1 Based on 2005 data and assuming no change in earnings Source: Thomson One Banker; IBM Institute for Business Value analysis 9 Banking Specialization & Innovation | 9/10/2021 © Copyright IBM Corporation 2007

IBM Institute for Business Value 1 Differentiation is essential Business model innovation has been most successful in creating sustainable value but banks’ focus remains on products Innovation Priorities by Performance Profile Bank CEO’s Top Innovation Priority Operating Margin CAGR (Survey responses) Sample size: 84 Note: Under- and outperformers determined by comparing Revenue Growth, Operating Margin Growth and Average Operating Margin over the last five years for each listed participant to its ten closest peers in terms of revenue growth within its industry. Underperformers scored below the median on all three metrics, outperformers above the median on all three metrics. Source: IBM 2006 CEO Survey 10 Banking Specialization & Innovation | 9/10/2021 © Copyright IBM Corporation 2007

IBM Institute for Business Value 2 Innovation is reshaping the industry Successful innovators are already reshaping the industry Products, Services & Markets Develop new products and services, target new markets and audiences Business & Enterprise Models Refocus, restructure and extend the enterprise Operations Improve effectiveness and efficiency of core functional areas “My Spending Report” “Mobile. Money” Engine Room “Keep the Change” Global Localization Insourcing Source: Company web sites; IBM Institute for Business Value analysis 11 Banking Specialization & Innovation | 9/10/2021 © Copyright IBM Corporation 2007

IBM Institute for Business Value 2 Innovation is reshaping the industry Customers are turning to innovators that use technology to deliver new forms of convenience, community and expertise Selected Innovative Industry Specialists and New Entrants Suruga Bank Deutsche Bank ABN AMRO Caja Madrid 28% of executives interviewed mentioned online or mobile specialists as threats to their organizations Source: Company web sites; IBM Institute for Business Value interviews and analysis 12 Banking Specialization & Innovation | 9/10/2021 © Copyright IBM Corporation 2007

IBM Institute for Business Value 3 Innovation doesn’t just happen Sustained innovation requires an infrastructure that brings opportunities and capabilities together with execution requirements Requirements for Developing and Sustaining Innovation Infrastructure § Maintain an innovation portfolio § Manage and reward innovation § Expand collaboration and partnering § Integrate business and technology Opportunity Execution Capabilities § Know customer needs § Build market intelligence § Look to adjacent spaces Capabilities § Identify strategic needs § Assess current state § Harness new technologies Execution § Realign business model § Operationalize processes § Launch delivery channels Source: IBM Institute for Business Value 13 Banking Specialization & Innovation | 9/10/2021 © Copyright IBM Corporation 2007