NEW YORK, NY, Oct. 12, 2004 -- The U.S. banking industry is in the early stages of an increasing business and profit crisis, according to new research from Capco, the global financial services and technology solutions provider. A new white paper published by the company and titled, "The Emerging Crisis in U.S. Banking Profitability," finds that compared to other industries, banking return on equity is well below average while operating costs continue to increase. Further, the tools used to manage the industry's changes, including M&A, are used improperly and are causing more harm in the long run.

The paper, authored by Adam Dener, banking industry expert and Capco partner, explores several significant impacts on the banking industry, focusing on:

-- Banking profitability is compressing and is nowhere near high enough to offset inadequate expense side management;

-- Lagging operational efficiency despite continuing, significant IT investments;

-- Revenue risk related to changing customer behavior and regulatory change, poses significant challenges to traditional revenue generation;

-- M&A is misused as a tool for managing change.

"Banking as an industry is at a significant crossroad. After decades of re-regulation and M&A, today's financial services companies are a hybrid of low growth, transaction volume, and dependent businesses across retail and wholesale services," said Adam Dener. "Further, significant changes in client behaviors, in particular, how they use financial services enabled technology, coupled with new regulations and changes to the payment networks are reducing industry revenues and increasing costs. The coming decade looks even more challenging than the past decade."

Research Highlights

The research found that tools available to bank managers, including IT leverage, M&A, re-engineering and outsourcing, must be utilized more strategically to make a positive impact. Practical focus on a number of key operational management techniques can differentiate competitors, and sustain profitability and competitiveness. Particular attention needs to be placed on better leveraging of IT and a more thoughtful approach to customers, their needs, and their behaviors, as well as creating an internal culture of accountability. Additional research highlights include:

-- Projected average profitability gains will be around 1% annually; 2007 will mark the start of a compression that we expect to occur by 2010;

-- Overall an estimated 5% increase in industry revenue growth is projected over the coming decade, nowhere near high enough to offset inadequate expense management and thereby produce sustainable profitability;

-- Banks have made large but underleveraged IT investments to generate efficiencies, meet customer demand and comply with mandatory regulations such as the Patriot Act, Sarbanes Oxley Act, Check 21, and Basel II;

-- Cash/deposits have been shifting out of the U.S. banking system into other financial instruments;

-- "Float," long used as a compensation method accounting for more than half of bank revenues, is being further pressured by migration to electronic payments and Check 21 digitization

"Turning a profit in the financial services business is increasingly difficult and the tools needed to manage it more successfully must evolve to meet the increasing challenges of the business," Dener added. "As the industry is under the continuing scrutiny of regulators, investors, politicians, customers and media, its challenges and transgressions have only grown more widespread and visible. The time has come for the industry to transform how it is managed and step up its game. The coming decade will see clear winners in financial services emerge by how proactively and quantitatively their franchise is managed."

About Capco

With offices in North America, Europe and Asia, Capco is the leading global provider of integrated consulting, processing services and products, engineered by financial services experts exclusively for the financial services industry. As pioneers of new ways of transforming operational capability and efficiency, we help clients successfully increase revenue, reduce costs and enhance control. For more information, please visit www.capco.com.

Capco
Global and U.S.
Samuel Wang, +1 212 284 8812
Email: samuel.wang@capco.com