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CATEGORY DEFINITION: The bank category, which includes both retail and investment institutions, is split into two segments, with the brands classified as either global or regional. Global banks are defined as deriving at least 40 percent of revenue from business outside their home market.

Resident regulators monitor daily business

Banks earned large profits as they refocused their operations, often pursuing high-wealth clients on the consumer side of the business and serving the medium and smaller organizations of rising entrepreneurs on the business side.

Because of ongoing revelations of past misdeeds, banks continued to suffer from
a massive deficit in consumer trust even as consumers patronized banks, believing that their money was protected, if not by the bank then by government guarantees.

Restoring consumer trust was important to safeguard the brand, lift internal morale and sustain growth, at least in the case of retail banks. In some instances, CEOs proclaimed a higher vision aimed at both internal and external audiences.

Not known for their innovation, banks became even more risk averse under the in- house scrutiny of government regulators. But the rest of the business world did not pause while the banks sorted themselves.

Instead, Alipay, a banking function of Alibaba, and Apple Pay were only the most publicized examples of how non-traditional players nibbled at the perimeter of banking and portended category disruption and transformation.

Making money

The post-crash regulatory environment raised two key questions: in what businesses do banks want to operate, and in what businesses can they operate? Generally, global banks concentrated on three businesses – commercial, investment and retail banking – but their levels of involvement varied by bank.

Regulations and consumer pressure made it more difficult to be in the most profitable business, investment banking. Banks attempted to resolve the tension between being a highly profitable investment bank and strictly adhering to their social responsibility values.

Banks divested some businesses because they were unprofitable or because of the regulatory burden. With exceptions like Goldman Sachs, J.P. Morgan and Morgan Stanley, many investment banks ceased equity trading. Citi returned strong profits, even as the bank streamlined many of its operations.

Many banks pursued wealth management business. Leveraging its heritage in international trade, HSBC cultivated relationships with high-wealth individuals among its commercial clients to build its personal banking and wealth management practice. 

Businesses of small and medium size, with an annual revenue of $50 to $500 million, increasingly interested HSBC and many other commercial banks, as governments in developing markets sought to drive their economies by financing entrepreneurial, often family-owned operations.

Santander prospered as Spain’s economy strengthened. Economic growth in the US helped balance the slowdown in Brazil and elsewhere in Latin America. Spain’s economic recovery also boosted the financial results of BBVA, the country’s second largest bank.

Following years of post-financial crisis restructuring, the large Dutch bank ING reported strong earnings, repaid its government bailout early and passed the European stress test.


and disruption

But even as the banks prospered, they faced potential threats as the industry transformed faster than banks innovated. A growing market of young people with above average income transacted most of their financial affairs online, and not always with banks.

As home ownership or family formation complicates their financial needs and they need a banking relationship, these younger consumers may favor the Internet brands with which they transact business everyday.

Internet brands could own the consumer payment relationship, even if banks remain the clearing house for all the transactions. In that situation, the banks would gain fees and interest revenue, but they’d perform more like a utility.

The infiltration into banking by online brands could quickly penetrate beyond payment systems. Regulations that restrict some banking activities don’t apply to the online brands, at least for now. Easy Internet access also eliminates the viability of banks as financial supermarkets. Any one-stop shopping will happen online.

The impact of Internet brands on banking is already evident in China, where online leaders like Alibaba, Tencent and Baidu offer mobile apps that make banking easier and more nimble than interacting with a large, highly regulated bank. (Please see the regional banks story.)

Future challenges

The entry of nontraditional players could threaten not only the key profit drivers of banks, but also their fundamental role as the gatherers and custodians of savings and fees from transacting.

Banks potentially could be squeezed into gaining just cost recovery and a small margin – a utility business – unless they preempt the Internet brands in forming banking relationships with the younger generation of customers.

Responding to changing demographics is also critical. Aging boomers are entering a phase of their lives when they’re no longer increasing their assets, but rather drawing down their savings. The younger affluent consumers will become the source of savings deposits.

As many of these consumers for the first time face major financial decisions, brand and trust become important. Banks have the requisite knowledge but the social networks have the customer relationships.