Commercial banking outlook: Views from bankers, disruptors and innovators. A five forces analysis on the banking industry and the top challenges facing commercial banking executives.

1. COMMERCIAL & PRIVATE BANKING OUTLOOK
Views from Bankers, Disruptors and Innovators
Presented by Mike Horrocks, Vice President
September 7, 2017

2. Confidential & Privileged Document
Five forces analysis
Competition LandscapeThreat of New Entrants (Power of Supplier) Regulatory & Market
(Power of Buyer) BorrowersThreat of Substitutes/Changes
• FinTech Marketplace lenders and financial
service providers
• Transfer of AI firms from other industries
will change banking capabilities
• Technology and mobile expansion is
rapidly changing the ability for new
entrants to provide alternatives without
huge infrastructure barriers.
• Fed is most likely to adjust interest rates
up over the coming year
• Regulations will most likely loosen,
providing opportunity for all market
participants
• Mobile first driven consumers
• Millennials will have a huge transfer of
assets that will have to be addressed
• Bank to couch/office is becoming channel
of choice
• Continue to see a
consolidation of FI’s,
creating market
pressure among
traditional players
• Partnerships forming
between FinTech
players and traditional
banks change
operational value

3. Confidential & Privileged Document
Industry outlook: Change in C&I loans
45
48
12
43
34
50
4
38
69
19
12
-6
26
Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17
In $ billions
Source: FDIC, 2017

4. Confidential & Privileged Document
Industry outlook: Quality of C&I loans
0
5
10
15
20
25
30
Noncurrent Loans Quarterly Net Charge-offs
In $ billions
Source: FDIC, 2017

5. Confidential & Privileged Document
FinTech unicorns
0 4 8
Stripe
SoFi
Greensky
Credit Karma
Oscar Health
Mozido
Zenefits
Avant
Prosper
Kabbage
Gusto
Billions
Most valuable venture-backed FinTech companies
• Competitors in your market:
– Credit Karma
– Avant
– Greensky
– SoFi
– Prosper
– Kabbage
Source: Business Insider, 2016

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Synergies among the alternatives
Source: Bank Innovation, 2016

7. Confidential & Privileged Document
New competitors and the raid on clients
Percent of market share that full-service banks in North America
could lose to new digital competitors by 2020
35%
Source: Accenture, 2016

8. Confidential & Privileged Document
2017 trends
The U.S. Presidential Administration
impacts on regulation and the
Fed changes on interest rates
Customers get new tools, solidifying
the “mobile first” approach to banking
FinTech companies continue to
drive user experience
Digital transformation continues
Connectivity between systems
begin to open
Onboarding commercial clients
remains a pain point
Obtaining ROI remains a challenge
on some technology projections

9. Confidential & Privileged Document
Top strategic priorities
71%
50%
41%
26%
22%
22%
20%
18%
14%
10%
Redesign/enhance the digital experience
Enhance analytics capabilities to identify customer needs
Find ways to reduce operating costs
Increase investments in innovation
Meet regulatory and compliance specifications
Update/replace components of a legacy operating system
Recruit/retrain talent to meet changing needs
Changing core business processes
Improve components of security and authentication
Invest in and/or partner with alternative fintech providers
What are your organization’s top three strategic priorities in 2017?
Source: Financial Brands, 2017

10. Confidential & Privileged Document
Future investments in commercial solutions
818
855
885
920
955
985
2015 2016 2017P 2018P 2019P 2020P
Regional
Spend in
Millions USD
North America
2015 818
2016 855
2017P 885
2018P 920
2019P 955
2020P 985
CAGR 3.8%
Source: CEB TowerGroup, 2016

11. Confidential & Privileged Document
Top challenges in commercial banking
1. Escaping the commodity sale
2. Operational excellence in the digital age
3. Disrupting within the bank
4. Business growth through actionable insights
5. Changes in customer expectations

12. Confidential & Privileged Document
1. Escaping the commodity sale
Features
Local Expertise Years of
Experience
“The right financing
tools can streamline
your cash flow.”
“Our decisions are made
locally and are tailored
to the needs of your
business.”
“[Our bank] offers local
expertise in all aspects
of…solutions…”
“[Our bank] is a
community-focused
regional bank.”
“A small business checking
account that offers more
control and access.”
“…in addition to
traditional credit and
financing solutions.”
“For the last 165 years,
our customers come
first.”
“First more than 100
years…”
“Why bank with us? We
have over 135 years of
experience.”
“Why [our bank]? Our
Experience, Strength
and Stability.”
“Substantial experience,
with many team members
averaging 15 to 20 years.”

13. Confidential & Privileged Document
Avoid being a commodity
93 YEARS TO BUILD
610,000 ROOMS, 88 COUNTRIES
4 YEARS TO AMASS
650,000 ROOMS, 192 COUNTRIES
Source: Hilton and Airbnb, 2017

14. Confidential & Privileged Document
Replaced value: tech & convenience
$20
Billion Market
Capitalization
$31
Billion Venture
Capital Funding
Source: Google Finance, Hilton and Airbnb, 2017

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Uberization of banking
• The commodization
of lending and
deposit products
creates a threat for
your bank.
In your industry, how many companies will lose their place in the top 10
due to digital disruption (over next five years?
More companies at risk
Fewer companies at risk
3.7
average
2.5
4.3
Oil & Gas
Utilities
Pharmaceuticals
Media & Entertainment
Healthcare
CPG & Manufacturing
Telecommunications
Technology Products & Services
Education
Retail
Financial Services
Hospitality/Travel
Source: Knowledge@Wharton, 2017

16. Confidential & Privileged Document
Outlook on FinTech
39%
31%
30%
Yes
No
Not Sure
Q. Do you and your bank
colleagues consider FinTechs a
significant threat to your
industry in the next few years?
Source: KPMG, 2016

17. Confidential & Privileged Document
FinTech disruptors

18. Confidential & Privileged Document
2. Digital operational excellence
• Customer experience
• Technology push
• Economic benefits

19. Confidential & Privileged Document
Achieving operational excellence
Digitize end-to-end
the customer
experience
Digitize products and
services as part of the
value ecosystem
Create trusted
analytics
Source enhanced
operational
capabilities in the
dynamic ecosystem
Drive rapid customer
centric innovation
Digitize for agility over
efficiency
Commercial &
Private Banking
Customers
Financial
Institution

20. Confidential & Privileged Document
Silos, disconnects & misunderstanding
Client
Client
Services
Treasury
Corporate
Finance

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Collaboration, workflows & conversations

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3. Disrupting within the bank
• An obsession with the customer experience
• They are unreasonably aspirational
• They ring-fence and cultivate digital talent
• They acquire new capabilities
• They are quick and data-driven
• They follow the money
• They challenge everything

23. Confidential & Privileged Document
Acceptance of innovation
32%
44%
20%
4%
Always embraced
Often embraced
Sometimes embraced
Never embraced
Q. Acceptance of innovation
and change in my institution is:
Source: KPMG, 2016

24. Confidential & Privileged Document
More with less in commercial banking
0
400
800
1,200
1,600
2,000
2,400
0
3,000
6,000
9,000
12,000
15,000
18,000
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Commercial Banking Assets & FTE
Assets FTE
Source: FDIC, 2016
$(Billions)
#(Thousands)

25. Confidential & Privileged Document
Outlook on FinTech
51%
33%
16%
Yes
No
Not Sure
Q. Has your bank already
created a strategic alignment or
joint venture with a peer-to-
peer lender or marketplace
lender for the purpose of
creating consumer or business
loans?
Source: KPMG, 2016

26. Confidential & Privileged Document
Collaborating with FinTech
59.3% Banking executives agree that FinTechs are setting the bar higher
Approaches to build FinTech Capabilities and Drive Innovation
Partnership / Collaboration
Setting up Accelerators
Acquire Non-traditional/
FinTech Firms
Develop In-house Capabilities
Funding /
Investment in FinTechs
Source: Cap Gemini, 2017

27. Confidential & Privileged Document
Collaborating with FinTech
Increased customer experience
Environment for innovation
Reduced cost of operations
Deriving better insights from data
Delivering personalized services
Benefits from collaboration with FinTechs
77.8% Banking executives say that FinTechs provide opportunity for partnerships
Source: Cap Gemini, 2017

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4. Growth through actionable insights
Trusted advice from the bank
Holistic Relevant Insightful Actionable

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What is a cognitive bank?
Cognitive systems are helping banks
become more agile so they can manage
the ever-growing demands of customers,
compliance and the competition.
What is a cognitive bank?

30. Confidential & Privileged Document
Cognitive banking
Front Office (Branches and
call centers)
Customer-Facing AI – Chatbots,
Cognitive Agents
Support
AI and Cognitive
Enabled Analytics
Bank Office (Data
Entry, Processing)
Cognitive Advisors, Robotic
Process Automation
Compliance, Policies
and Regulations
AI-Enabled Expert
Systems

31. Confidential & Privileged Document
5. Changes in customer expectations
• End-to-end solutions
• Industry specific solutions
• Faster and simpler solutions
Source: American Banker, 2015

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Enabling anytime access to client information
Cloud Storage
MobileServers
Desktop
iPad
Banker / Advisor Client
Achieve by integrating
information systems
across lines of business
and multiple channels
• Commercial
• Private banking
• Trust
Integration of
Firm-Wide
Information
Systems and
Tablet
Applications into
Client Interactions Bank
Client





33. Confidential & Privileged Document
“Data first” leverages “mobile first”
Demographic
Product
Transaction
Communication
Customer
Information Systems
Enterprise Data
Warehouse
• Collects and maintains
customer information
across all product
lines, businesses, and
channels
• Aggregated customer
information is pushed
to data end users.
Customer
Relationship
Management
System
Branch Sales
and Service
System
Marketing
Associate
Banker
Representative
Branch Teller
Customer Information
End Users

35. APPENDIX

36. Confidential & Privileged Document
Process automation
Onshore Labor
Improved Quality:
• 100% accuracy
Scalability:
• Training of robots can be done at
the same time
Higher Efficiency:
• Ability of working 24x7
Cumulative
productivity
improvement
Offshore Labor Digital Labor
Improved Service Delivery:
• Improved process quality, speed,
and continuity
Operations Optimization:
• Improved data gathering and
optimized operations
Regulatory Compliance:
• 100% compliance with stated
regulatory requirement
Decrease in
cycle time and effort
Cost Savings:
• Cost reduction of 35-65% in
onshore and 10-30% in offshore
delivery
Quick Breakeven:
• Investment recovery period of 6-
9 months
Costs fraction of Human Equivalent:
• Cost 1/3 of an offshore FTE and
1/5 of an onshore FTE
Increase in
efficiencies in running
the business costs

37. Confidential & Privileged Document
Bring the bank to the customer
Tablet application capabilities enable consistent, high-quality advisory conversation.
Client: Willis Household
& Willis Inc.
 Personal
Information
 Business
Information
 Goals
 Product Holdings
 Meeting Notes
 KYC Information
Information Update
Client: Willis Inc.
Account: 294829
 Inventory of Assets
 Beneficiary Forms
 Electronic Signature
Market Summary
25 Aug 2017
News Highlights
Key Planning Topics
Retirement
Estate Planning
Help Guides
Internal
Communication
Client Information Market Updates
Digital Real-Time
Information and Straight-
Through Processing
Advisory Topic Talking
Points and Training Clips