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In service of keeping you informed about trends in the banking industry, Caremiles gathered key insights from a white paper published by Boston Consulting Group (BCG) on global retail banking in September 2022. As we delve into the key findings of the report, we hope to provide you with valuable information that can help you navigate the rapidly evolving world of banking. The following are direct excerpts from the paper. The full text can be downloaded here.
"Why Sustainability Matters
Sustainability is not just about complying with a new set of rules and expectations. We believe it will become the next frontier of competitive advantage for retail banks—and a pillar of future growth. Leaders have already taken note and developed aggressive environmental, social, and governance (ESG) goals and agendas. Those who have been slower to act will feel pressure, perhaps from multiple quarters, to follow suit.
Retail banks have long been responsive to evolving customer needs. Interest in sustainability has been rising for several years. Concerns over climate change in particular have become decision drivers not only for customers, but also for investors, policymakers, and others. Indeed, regulatory authorities such as the European Central Bank are integrating climate and environmental risks into their supervisory methodologies and banks’ capital requirements. More banks are responding by building sustainability into their digital transformation programs.
This raises a question: What does a “sustainable” bank look like? Many factors will likely distinguish winning banks of the future from others. (See Exhibit 1.) There’s likely no single or universal combination that makes for a sustainable bank. But for each institution, customers and other stakeholders can be counted on to have strong opinions.
Sustainability has long been part of good business—but in today’s marketplace, engaging with customers and other stakeholders on ESG issues is a matter of rising urgency. This is one reason, as we shall see, that leading retail banks make ESG one of the primary focus areas for their digital transformation programs. Another third of all retail banks cite ESG as a key criterion in selecting and prioritizing digital transformation initiatives.
This report examines the fast-rising importance of sustainability for retail banks today, starting with what consumers are looking for in banking relationships and what leaders are already doing. We then set out an agenda that all retail banks can follow to raise their ESG games—and enhance their competitive positions at the same time.
Almost half of the retail banks are focused first on environmental sustainability initiatives, such as reducing energy consumption in offices and buildings. More than two-thirds (69%) want to ensure the protection of employee and customer data and improve employee collaboration through digital platforms. About 60% are prioritizing governance initiatives—this includes managing critical risk incidents, building cyber-resilience, and developing predictive risk analytics to ensure improved preparedness and mitigation..
Promoting Sustainable Behaviors
Banks have many opportunities to innovate sustainable practices and products along the customer lifecycle—and to practice good business in the process.
We wrote last November that as consumers recognize their carbon footprints, retail banks can help address climate change while seizing a fast-growing business opportunity if they devise new loan options and other products to help customers achieve their sustainability ambitions. Our colleagues in Canada recently described a $2 trillion opportunity for banks in that country to help consumers and small businesses finance their energy transitions. An October 2021 BCG-HSBC white paper observed that small and medium-sized enterprises (SMEs) will need some $25 trillion to $50 trillion of financial assistance to bring their greenhouse gas emissions to net-zero levels.
Such opportunities are only the beginning. The push to limit global temperature increases to 1.5°C above pre-industrial levels will drive a massive transformation of the global economy and require investments totaling an estimated $100 trillion to $150 trillion by 2050. Companies, including banks, have a major opportunity to unlock new sources of growth, particularly in relation to the trillions of dollars that the public and private sectors will be investing every year to achieve global net-zero carbon emissions.
Innovative banks are at work on at least two fronts: adapting existing products and promoting sustainable investment strategies and tools. Long-standing products, such as checking accounts, loans, and credit cards, can be modified to help customers enhance their own sustainability. For example, DBS in Asia is developing an app that helps customers offset their carbon footprints by purchasing carbon credits. Aspiration in the US offers two types of hybrid checking-savings accounts—one for which customers pay a monthly fee that they consider “fair” (it can be zero if the customer chooses) and another with a set monthly fee and attractive benefits. Features include:
- A personal impact score for spending
- Cash-back on purchases with a stable of sustainable brands
- “Plant your change” program, which rounds up spending to plant trees
- A planet protection option: automatic offsetting of carbon emissions for each gallon of gas purchased
- Donations of 10% of every $1 in fees to sustainability causes
Among banks that are promoting sustainable investment strategies and tools, DBS in Asia provides access to funds that invest in renewable energy and other eco-friendly initiatives. Triodos Bank in Europe and the UK offers a crowdfunding platform so customers can invest directly in organizations pioneering climate-change solutions. Robo-advisor platforms such as those offered by Betterment in the US and Nutmeg in the UK are making socially responsible investment funds accessible to the mass-market retail investor.
In addition to offering green financial products, we expect that leading banks will also build platforms of offers that help consumers move to sustainable ways of living and encourage small businesses to adopt good ESG practices. Banks have the potential to serve both customer segments as green ecosystem orchestrators, bringing together clusters of providers that can comprehensively meet customer needs in value streams such as reducing home and building or supply chain emissions.
Banks are well positioned to provide a “one-stop green shop” that offers customers and platform participants products and services that include a knowledge hub and a range of useful tools (including tools for assessing carbon footprints), a marketplace made up of qualified and pre- screened vendors, cost estimations and simplified information request processes, financing support options, and marketing and sales facilitation.
ESG Business Potential
A strong ESG focus is increasingly rewarded by customers, investors, and others. Research by BCG and the World Economic Forum shows that corporate climate leaders can attract and retain better talent, realize higher growth, reduce costs, avoid regulatory risk, access cheaper capital and achieve higher shareholder returns.
BCG’s most recent analysis of evolving retail banking profit pools indicates that ESG-related products in core business lines (e.g., mortgages for improving energy efficiency or loans for electric vehicles) could generate substantial revenue streams over time. It is hard to predict how quickly ESG-related revenues will rise since growth in many product lines will follow underlying market trends. For example, the ESG-related share of investment products is rising as funds change their policies to meet new sustainability standards. Consequently, the ESG share of revenues for banks offering investment products increases without consumers taking action. In financing, the share of green retail banking revenues can be expected to track the rising share of electric vehicles in new and (in time) used car sales or the share of energy-efficient new construction or building renovation work.”