Deregulation, new technologies, changing customer needs, and more aggressive competitive behavior set the tone of the retail banking industry in the second half of the 1990s. In a time of rapid change, most players see their profits come under pressure. But for the strongest and most successful competitors, such an environment may provide opportunities to increase profitability. Many retail banks—those institutions serving individuals and small corporate customers—are thus striving to manage their business even more professionally and are keen to learn from international industry leaders. For those that aspire to be world class, there are core competencies in which it is necessary to excel, no matter whether they operate in Europe, America, or Asia.

What can European, US, and Japanese banks learn from each other? Very little, most bankers would probably have replied up to now, pointing to the varying regulatory structures in the different geographies. While European banks have always been able to offer a complete range of financial services, government regulations have limited what US banks could offer, especially in the securities business, which was largely the preserve of specialists. The broader array of products open to European banks has given them a larger share of private household assets than that held by their US counterparts (Exhibit 1).

From a global perspective, however, it is possible to see an interesting convergence in the strategic development of banks worldwide. From their various different starting points, European, US, and Japanese banks are moving toward the same retail model: an integrated financial services provider offering private individuals and small corporate customers services differentiated by segment. In moving toward this model, each bank faces a different set of tasks:

• For European banks, the main challenge is breaking down their still very monolithic structures. In retail banking, it will be vital to develop distinct business concepts. This means establishing a marketing-oriented, systems-based business with standardized product lines, a strong sales culture, and corresponding core capabilities and compensation systems. Leading banks will manage their business in a more professional manner in the future, dividing their operations into separate units serving, for instance, private, affluent, and mass market customers.
• For US and Japanese banks, on the other hand, the task is one of integration and knowledge building. Since deregulation, US banks have been able not only to operate nationwide but also to sell investments; in the medium term, they will probably be able to sell insurance as well (Exhibit 2). Given that bank deposits are declining in importance, and populations are growing older and more prosperous, developing knowhow in the investment business with mutual funds and other securities will become increasingly important.

The model of the integrated yet differentiated financial services provider of the future lies essentially mid-way between the various separate starting points of the European, US, and Japanese banks. These banks’ current strengths are different, but complementary. The value to be gained by learning from one another is greater than ever before.

This also means that the notion of "best practice" must be revisited. The search for success factors and core competencies for the retail bank of the future must adopt an international perspective and also take account of financial services providers other than banks.

What is best practice?

While international benchmarking of best practice is more or less the rule in other industries, it is still the exception in banking. Analyzing best practice should begin by establishing which banks have achieved a superior financial performance. The leading retail banks in the US and Europe have earned a return on equity of more than 20 percent before tax in the past five years, compared with an average of 14 percent for the majority of banks. The next part of the analysis consists of asking in what areas, in which core competencies, these top performers stand out. What are they better at?

Best practice observations do not produce a patent formula for success. Even so, understanding emerging requirements and opportunities helps us sketch out what it takes to be a world-class retail bank (Exhibit 3):

• Strong top management that ensures a performance-based culture. This is ultimately the most decisive factor, and where the greatest difference lies between leading banks and average performers.
• A highly professional marketing approach that translates customer information into effective sales strategies. Even the best banks need to improve in this area.
• Differentiated and efficient distribution systems. In addition to restructuring existing branch networks and adjusting personnel capacity, it will be essential to integrate new channels and coordinate the resulting array. Again, even the best banks have plenty of room for improvement here.
• Low costs as a result of lean, efficient, automated processes. In this respect, European banks will have to work hard to catch up with leading counterparts in the United States.
• Finally, a credit policy that covers risk adequately. Without the necessary decision criteria and rating capability, no bank can remain at the top; every recession or credit boom would threaten it with potentially devastating losses.

Top performance in these five core competencies makes a retail bank truly world class. Although all are critical, each bank, with its own particular starting point and strategic goals, will have a different focus and set of priorities among them.

In core competencies the gap between "top" and "average" is substantial ...

... and our analysis shows that "average" is a long way from "world class"

Most banks are naturally working to build these competencies; many might argue they are already there. But our analysis shows that in each area the difference between "top" and "average" is substantial—with average performance being a long way from "world class." As Exhibit 3 illustrates, leading banks tend to be superior in all capabilities—not only in marketing and sales skills, but in distribution as well. Given the criteria for success in the year 2000, however, even these leading banks have scope for improvement.

Management and culture

As in all industries, superior financial performance in banking generally goes hand in hand with strong top management and a performance-based culture. A world-class retail bank tolerates mediocrity neither in its aspirations and objectives nor in its everyday activities. Superior performance is both expected and reward-

ed. That means constantly striving for the best, not just the better. Top managers must be willing to initiate change and to carry through implementation, and—if necessary—to take hard decisions.

Other elements of effective corporate leadership—such as an ambitious vision and strategy, performance-oriented compensation, and meaningful management information systems—support managing for performance but cannot substitute for it. Their quality and effectiveness vary widely, and it is worth pursuing excellence here too. It will pay off.

Developing a performance-based culture counts as one of top management’s principal tasks. It is made up of several actions:

• Setting performance goals and creating the right organizational framework. Top management should lead the setting of goals and ensure that they are demanding and oriented toward action. Visible commitment and effective communication are critical. An organizational structure with clear responsibility in the form of profit centers and efficient decision and work processes provides the ideal conditions for success.
• Translating performance goals into tangible targets, for profit centers, teams, and employees. The entire planning and control process should be focused on a few key measures of success, both to allow people to concentrate on what is important and to avoid sending contradictory messages. Company-wide goals should be broken down into targets and assigned to business units, teams, and where possible individuals. Employees should know what their particular targets are and how they personally can contribute to the achievement of broader corporate goals.
• Enabling employees to perform. Traditional top-down direction is no longer enough. Instead, employees must be mobilized and given the chance to learn effective new methods and behavior.
• Measuring performance and staying on course. Progress toward targets must be regularly tracked and communicated to employees so that they can make corrections as necessary. This can only happen if there is an efficient information system. Although many European banks have complex systems, information is often produced too late. The best US banks are able to produce relevant information only a few days after the close of each month.
• Rewarding performance. Targets must count if performance is to be taken seriously. Whether or not they are reached must have a perceptible influence on the promotion and compensation of management and employees: faster career progression in the organization if targets are met, penalties if they are repeatedly missed. In some leading US banks, continued failure to meet targets means the end of a career.

"During my twenty years here, no one has ever praised me or told me to do anything better or differently"

For many European banks, recognizing this distinction between success and failure would be a definite step toward a stronger performance orientation. The comment of one manager is revealing: "During my twenty years here, no one has ever praised me or told me to do anything better or differently." Consistent personnel development according to the principle of merit is an important contribution to the right performance culture.

Compensation systems are valuable in fostering a performance culture. In the US, many leading retail banks pay a significant share of salary (10 to 50 percent) on a variable basis to both managers and many non-management employees. In Europe, however, only a few innovative banks compensate their employees in a similar way.

A meaningful management information system is an essential part of improving financial performance, but it is not enough on its own. Even when it has been designed to measure the critical values—which is not always the case—it can only help in reaching targets when the information it provides is acted upon. If the discovery that a product or service is making a loss does not prompt a change in price or costs, or result in the discontinuation of the offer, then the information system has failed to serve its purpose.

Marketing and sales

Marketing and sales capabilities are the "software" that makes the distribution system run

Marketing and sales capabilities are the "software" that makes the distribution system run. While not traditional hallmarks of banks, they have recently become a focus for some leading competitors. Strong performances in sales and marketing have played an important role in developing powerful market posi-tions for the more innovative providers. Banks aspiring to become world class will find many opportunities in sales and marketing to communicate distinctive value to the customer.

The agenda for change should include three basic elements whose relative emphasis will depend on a bank’s starting point and strategic direction: strengthening the sales culture, upgrading marketing capabilities, and improving product development and pricing.

Strengthening sales culture

The first step toward strengthening sales culture is to free the majority of sales personnel from administrative activities so that they can concentrate on sales. Relieving them of other responsibilities does not, of course, automatically make them good salespeople. To achieve this, a well-structured mobilization program and an effective sales management system are needed. The most successful programs usually include a balanced mixture of directives (top down) and empowerment (bottom up), as well as on-the-job training tailored to the bank’s specific needs.

In many countries, banks have already undergone these developments and seen their sales culture improve substantially, leading to increases in sales and profits.

To ensure continuous improvement, several powerful techniques should be learned:

• Targeted monitoring and effective coaching of sales teams and individual salespeople. In most banks, a performance-oriented coaching culture must first be developed.
• "Brains-trust" selling approaches, which ensure that a broad assortment of ideas is generated at the sales front. Account managers must be supplied with sales ideas from external and, above all, internal best practice—namely, from top performers in the bank. At some leading banks, salespeople ranked at the bottom of the sales league have to seek out the top performers to find out how they achieve their success. Other, more structured ways exist to bring best practice to bear: for example, via the support of product specialists, product development groups, and research or sales monitoring teams.
• Database marketing, which is currently carried out in a truly professional manner only by a few direct marketing firms. This approach should be actively used in support of branch-based marketing in order to achieve "hit ratios" that reduce unit acquisition costs, especially in the mass market, to a more profitable level. Here the difference between best and average practice is the difference between profit and loss.

Banks possess a unique information base that could allow them to provide more tailored products and services to their customers, but many are poor at exploiting it. Effective database marketing can create a powerful competitive advantage. It usually entails developing and refining systems and accumulating information over two to three years. No financial services provider is likely to succeed in the future without this capability.

In a number of US banks, some of the most successful branch managers are not bankers by trade, but former department store managers

How strong a sales culture a bank can achieve will also depend on the relative and absolute size of its salesforce. If sales is small in comparison with other functions, career possibilities will be limited—a definite damper on spirited selling. When banks find it necessary or desirable to add sales capacity, the source need not be other banks. In a number of US banks, some of the most successful branch managers are not bankers by trade, but former department store managers.

Upgrading marketing expertise

In the future, leading retail banks will develop better and more distinctive value propositions, concentrate their business systems directly on these offerings, and support their positioning with marketing efforts. Some leading banks spend about twice as much on advertising as do comparable competitors. Among their goals is the creation of a marketing image that can command higher prices and create a stronger bond with the customer.

Some advanced banks have started to approach their marketing more professionally, while others have yet to consider this seriously and are uncertain about the size and shape of their marketing budgets. Many still wonder whether they are throwing good money after bad. The scale and structure of marketing budgets in the consumer goods industry may be helpful in determining the right formula, although they obviously cannot be applied in retail banking without adaptation.

Improving product development and pricing

All banks need to improve their product development and pricing capabilities. Product development tends not to be regarded as a core competency, since copying is so easy in the financial services industry. Nevertheless, there are huge differences between best and average practice. While innovative providers are able to attract several hundred thousand customers with a new product, others neglect this opportunity, seemingly viewing their role as that of follower.

Hardly any bank in the world today could claim to be excellent in pricing

Financial services providers must take better advantage of price elasticities in various segments than they have in the past. Hardly any bank in the world today could claim to be excellent in pricing. Given its impact on profits, the importance of improving pricing cannot be overemphasized. Our analysis of best practice clearly showed that high profitability was connected in most countries and most banks with high pricing.

Differentiated distribution

Rising technological sophistication and the divergence of the needs of individual customer groups make differentiated distribution both feasible and crucial. The starting point is a sound segmentation of the customer base, enabling a bank both to integrate new distribution channels and to tailor the existing branch network to the needs and finances of specific customer groups. Increasing differentiation will also mean increasing complexity and cost, calling for proper coordination of the distribution channels and greater efficiency. The task is thus threefold: segmentation, integration, and restructuring.

Segmenting the customer base

Customers today no longer actually have to go to a bank for most of their banking. This "weaning" of the customer from the branch will continue. Retail banking will be available to customers almost everywhere through a multitude of channels: telephones, point-of-sale units, cards, field services, non-branch automated teller machines (ATMs), and finally the branch itself. After the year 2000, channels such as home banking via interactive television or computer and "smart" cards are likely to rise in popularity.

A differentiated distribution system of this kind can be efficient only if value to customers is tailored to their individual requirements. The key is an intelligent active and passive (that is, performed by the customer) segmentation of the existing and potential customer base. By both classifying customers in basic fixed segments and sorting them into variable market groups on the basis of behavior, a bank can tailor channels to particular target groups.

In order to get a better view of customers’ preferences, we studied the German public, where we found six clusters of opinion, as shown in Exhibit 4. The largest segment, accounting for 28 percent of the total, values personal and friendly service above all else; competency is not a decisive factor for this group. The second largest segment, at 17 percent, is made up of conservative, cost-conscious customers, who generally prefer using a branch. "Remote users," who make up 14 percent, favor direct channels and self-service, and attach no special value to a personal relationship at the bank.

For performance-oriented customers, accounting for 15 percent, the most important features are yields, and to a lesser extent skilled advice. Competency-oriented customers, conversely, value the discretion and reliability of a skilled adviser. The final segment comprises those who want it all: personal contact with an adviser, numerous channels to choose from, and, ideally, low prices.

The most affluent customers fall mainly into three segments: remote users and the groups that look for performance and competency. At the same time, these are the customers who are most mobile and therefore most likely to be attracted away to offerings from direct banks or product specialists. No matter what strategy a bank adopts, it will be critical to determine the size of these important segments within its own customer base.

The use of distribution channels already differs by customer segment. While affluent customers do much of their banking by phone, many mass market customers have never even considered using the telephone to do their banking. Over 80 percent of those customers surveyed still prefer going to a branch or specialized advisory center to buy an investment product. Direct banking will grow substantially in the future, as the traditional branch system declines. This tendency is particularly strong among high-income customers. For many banks, therefore, a central issue is how to establish new, customer-specific distribution channels and coordinate them effectively and efficiently.

Integrating new channels

The challenge for banks will be to become more entrepreneurial in their approach to new market opportunities

In a world of rapidly expanding technological possibilities, the challenge for banks will be to become more entrepreneurial in their approach to new market opportunities—that is, to be the first in the market, not simply follow in lockstep with other banks, as they did in the past. Pioneering is vital, despite the conflicts it may cause within an organization and the difficulty of assessing its likely economic benefits. This is especially true in direct banking.

Distribution channel innovators appear to derive special advantages by being the first in the market. In the United Kingdom, for example, Midland Bank established a direct bank, First Direct, targeted at dissatisfied, progressive, and affluent customers of other banks. Within four years, it had acquired 400,000 customers. Nearly a third of these were, however, former Midland Bank customers. Once the bank was up and running, it was able to achieve a cost/earnings ratio some 10-20 percentage points below the typical average ratios of most traditional banks. This is particularly impressive in light of the fact that First Direct’s prices were at first significantly and are now slightly lower than those of its branch-based competition. Overall, despite the relatively extensive cannibalization of Midland customers, First Direct is now considered a success, having announced break-even at the end of 1993.

In Germany, Bayerische Hypotheken- und Wechselbank has been an innovator among large private banks. Its setting up of the Deutsche Direktanlage Bank (DAB) was a closely watched event in May 1994. DAB offers customers securities at a 50 to 80 percent discount from the traditional broker price, depending on the size of the transaction. For the first time, customers who do not want financial advice have been able to enjoy a corresponding discount, and the new service will undoubtedly put pressure on the entire pricing system of Germany’s securities business. According to press statements, DAB expected to acquire roughly 10,000 customers by the end of 1994.

Unless followers can offer clearly differentiated value to customers, they will find themselves in a weaker competitive position

Nevertheless, not all banks offering such services will be successful. The third, fourth, or fifth competitor in the market will have to endure a greater degree of cannibalization once the majority of customers have already committed themselves to the innovator in the market. Unless followers can offer clearly differentiated value to customers, they will find themselves in a weaker competitive position.

In each case, First Direct and DAB set their sights on acquiring new customers. Both banks operate under different names from their founder companies and in competition with their existing branch channels. A certain amount of customer movement to the new channel is accepted as a necessary risk. Through its independence from its parent, the direct bank is given the freedom to manage its own business, and is also able to differentiate itself more markedly from branch banking in its product and marketing concepts.

Though it is likely that many customers will increase their use of direct banking, they will still sometimes want to visit a branch or make telephone contact with someone they know, especially if the product they seek requires some explanation. The expansion of interactive television has the potential to fill this need and give direct banks an extra boost.

Fidelity and brokers such as Merrill Lynch in the US, which have concentrated on direct marketing from the start, are possible models for retail financial services providers of 2010 and beyond. Their products are sold primarily through the direct channel or by telephone. They also have a limited number of outlets for customers and products with special advisory needs. Fidelity, for example, has 70 outlets nationwide, representing one per 3.6 million inhabitants; Merrill Lynch has 460, or one per 0.6 million inhabitants. In contrast, branch banks in Europe possess one branch per 10,000 to 50,000 inhabitants on average. The lower-density US network strategy is particularly attractive for new competitors in the market.

Restructuring the branch network

All the same, these new channel competitors will not be dominant in the year 2010. Despite the diversity of new channels, the physical branch network will remain the primary means of distribution for the foreseeable future, especially for mass market and small corporate customers.

Although some banks could realize significant gains by cutting back their branch network, this is unlikely to happen rapidly in most European countries (Exhibit 5), whether for political reasons, in the case of public banks, or because of the desire to retain market share. In countries where the branch system has been scaled down over the past five years—Sweden and the United Kingdom, for example—the pace of reduction had already slackened in the last two. We assume that in most countries, about 80 to 90 percent of the current branch system will still exist by 2010. Sometime after the year 2000, however, there may well be a major discontinuity if interactive television, multimedia, and smart cards take firm hold. This breakthrough is expected to occur in the US before it does in Europe.

What can a bank with a dense network do? At a minimum, the network will need thinning out. Often major restructuring will be necessary. Banks need fewer branches offering all services to all customers, and more centers for selling products that require advisory support, such as investments and real estate, and centers for serving the more affluent. They also typically need more self-service areas and units, and more standalone ATMs. Such a network, often called a hub-and-spoke system, will provide optimal market coverage for the bank of the future. Customers do not usually expect all possible services to be available in the branch around the corner, and they are normally willing to make a special trip to a more distant location in order to obtain advice and carry out the more unusual transactions.

The traditional branch will be standardized further. Usually it will consist of a self-service area with, in future, additional areas for standard transactions and for advice. These basic modules will be structured so as to correspond to the potential of the particular market served by the branch. In addition, deteriorating margins and increasing use of other channels will lead to selective branch closure.

With this kind of differentiated network, a bank can both offer segment-specific benefits and operate on a more cost-efficient basis through concentration of expertise. For a bank with a dense branch network, establishing such a configuration can reduce costs by up to 10 percent.

To cut costs in their remaining branches, leading banks will manage their personnel capacity with a much larger share of part-time help than they use today. This practice results from the simple realization that customer demand varies greatly depending on the hour of the day, and the day of the week (Exhibit 6). In the United States, top banks employ nearly all of their counter staff on a part-time basis. If flexible work scheduling is to succeed, branch managers must be able and willing to manage capacity in line with levels of demand in their branches. Potential savings achievable through active capacity management run to 10 percent and more.

In the whole of Europe, hardly a single bank has so far managed to develop separate business systems for distinct customer segments—standard services at low prices for the mass market and a value-oriented service for affluent customers. To do this, banks must first complete their work on market segmentation. One leader has been able to reduce costs in the mass market segment by using a differentiated approach. Double and triple revenues have been achieved in another bank by serving selected customers in specialized centers rather than branches.

To realize such revenue gains, a bank must possess strong sales and marketing capabilities. To achieve such cost reductions, it must develop highly efficient processes.

Efficient processes

In order to keep costs down over time, a bank must have highly efficient and automated processes. Though it can, of course, achieve immediate cost savings by eliminating unnecessary tasks, reaching and sustaining a truly superior cost position demands a fundamental redesign of key basic processes.

By the end of this decade, many of the activities now performed by the branch system will be centralized, automated, or rendered obsolete

Many of these processes are part of the branch system. The potential to tap savings here is great, as it also is in the interfaces between the marketing and central processing departments. By the end of this decade, many of the activities now performed by employees in the branch system will be centralized, automated, or rendered obsolete by process restructuring. Banks not wanting to let opportunity pass them by can turn this development into a competitive advantage by:

• Expanding self-service options. It is quite possible to cut costs without reducing service levels by shifting simple transactions, such as account enquiries and payments, to self-service channels. Banks that are particularly active users of technology and that have persuaded their customers to use it too are already well ahead of the average bank in terms of their share of ATM payments. Best-practice leaders have already achieved an ATM share of 70 to 80 percent of all cash transactions, whereas other banks still score below 50 percent.
• Redefining the division of labor between point-of-sale and production. A prerequisite for process improvement is the strict separation of marketing and other production back-office activities at the branch. This is certainly an old topic, but many banks in Europe have yet to do anything about it, while several of the best-practice banks have led the way in implementation. Simple, standard processes that require only a limited amount of information should be automated at the point of sale in the presence of the customer—for instance, when an account is opened, or a consumer credit scoring is performed. This not only cuts out work steps, and hence reduces cost, but also increases customer satisfaction by speeding up the process.
• Aggregating mass and specialized processing. Mass processing activities, especially payments, can be performed more rapidly and cheaply if they are aggregated in processing centers. Even complex processes that are less amenable to standardization and need a high level of judgment should be concentrated in centers staffed by expert personnel. Especially complicated credit decisions and credit management are prime candidates for such centers, since it is precisely their infrequency that makes these tasks difficult to perform well in a typical branch.
• Increasing standardization. The development of more efficient processes will by definition push back the boundaries of standardization. In construction financing, for example, where many banks still tend to work manually and case by case, Countrywide, a US specialist, has vastly extended standardization and supporting automation, enabling it to make a quantum leap in reducing processing costs while simultaneously increasing speed and quality.
• Outsourcing when possible. Outsourcing, especially on the information system front, is an option that smaller banks in particular must consider for the long term. In the United States, there is already a well-developed outsourcing market; in Europe, however, such a market is only just beginning to take form. Though European banks in the savings and cooperative sectors have been outsourcing for years to share IT capabilities and realize economies of scale, these services are not part of an open outsourcing market.

The radical standardization and automation of processing will be a major challenge for European banks in the coming years

The radical standardization and automation of processing will be a major challenge for European banks in the coming years, especially in the mass market segment of their business. The goal is to transform business systems, starting with a simpler product design to reduce process complexity, and including standardized sales approaches and greater use of electronic transfer with the customer. Efficient back-office processing is then essentially the result of improvements in earlier stages of the business system.

Credit policy and decision making

A clearly defined credit policy and strong credit judgment are fundamental to success in retail banking. The traditional method of careful, conservative examination of credit will, however, not be adequate in the future. Superior credit capability will increasingly be determined by the use of systems for decision support, credit scoring, and credit rating. Capable systems for credit analysis not only increase the efficiency of the process, but also improve the quality of the decisions, thereby reducing loan losses.

Moreover, these systems enable a bank to set prices more objectively in line with risk. They thus constitute a specific competitive advantage for participants in higher-risk market segments. Although consumer credit scoring systems exist, the degree of success in implementing them varies widely between best and average practice. In the area of small commercial credits, proper fully automated systems have yet to be developed.

A popular topic related to credit policy is the extent of decentralization in the credit decision-making process. In consumer credit, best-practice banks are split, operating with two opposing models: one where decision-making authority lies largely within decentralized units, and the other where authority is centralized. As far as risk selection is concerned, both approaches are workable, depending on a bank’s capabilities and its circumstances. In terms of process efficiency, however, the decentralized model should be superior, provided there is a high level of standardization, one-time data gathering, and solid, universally available system support in credit scoring.

Albeit from opposing directions, European, US, and Japanese banks are moving toward the same future. On their way to becoming world class, US banks often bring with them precisely the skills that European banks lack, and vice versa (Exhibit 7). Bankers in the US and Europe thus have a unique opportunity to learn from each other. The fact that their banks do not normally compete head to head in the retail market makes this prospect even more appealing.

While leading US retail banks usually have a strong performance orientation and a good sales culture, for example, European banks need to catch up in these areas. In the United States, a performance focus is often supported by incentive systems, a practice rare in Europe and Japan.

European banks, on the other hand, have clear advantages in the breadth of their total product range and in their differentiation of distribution. Both US and Japanese banks can learn much from their European counterparts here, not only about selling securities and insurance, but also about serving a diverse customer base. While US banks, concentrating on the mass market, have only rarely had to segment their customers, some European banks have done much work in market segmentation in recent years. Similarly, they have addressed the differentiation of distribution channels so as to redefine service levels for mass market and affluent customers.

Where costs are concerned, greater centralization of processing, and to some extent higher unit productivity, have put US banks in a strong position. Japanese banks have also achieved a good cost position because of relentless automation. Another advantage enjoyed by US banks is lower personnel costs, which are partly responsible for the higher contribution per employee of leading US banks compared with their European counterparts (Exhibit 8). Top-performing US retail banks also tend to operate with considerably higher capital stock per employee. Other important reasons for their advantage in profitability per employee include higher fees and higher interest margins in lending.¹

European banks, on the other hand, usually enjoy better margins on deposits. Interestingly, their total volume—as opposed to unit—productivity is essentially comparable with that of US banks. The main cause is the larger average asset base per customer in European banks.

All in all, however, European banks can learn from their US counterparts in the areas of productivity and cost position. Through productivity, the top US banks have created a mass market business system that is truly profitable. Many European banks have still to follow this lead. In areas such as credit policy and credit decision making, however, there are only minor differences.

Competition will make retail banking a more professionally managed business in the future. European bankers will break down structures that are too integrated, while their peers in the US learn to run a broader and more integrated set of businesses. Their starting points and strengths are different, but complementary. And so the answer to the question "What can European, US, and Japanese bankers learn from each other?" is "Exactly what they need to know to succeed in the future." The time is ripe.