Reinventing business model
By Kim Jae-kyoung
For financial CEOs, now is probably the most challenging time to run a business. It is not because there are many challenges to address but because there is an urgency to rethink their strategies and reinvent business models to ensure business sustainability.
The 2008-2009 global financial crisis has changed the landscape for the global financial market and consumers’ attitude toward financial services. First of all, the crisis has exposed hidden flaws of financial companies, which has called for them to reform their corporate governance structures and to play a bigger role as a corporate citizen.
Secondly, with the pace of change getting faster, consumers are looking for new things all the time. With growing popularity of smartphones and consumers getting more educated, they have been more selective about financial services.
Finally, the barrier between financial industries has been blurring as customers want to get all-in-one services at one place no matter where they visit. For example, they want to buy insurance and securities products at banks, which implies that competition is coming from everywhere.
Against this backdrop, many companies feel growing pressure to change how they do business but only a few of them have been engaged in overhauling their business models as reinvention is more complicated than it looks.
Shinhan Financial Group, the nation’s third-largest financial holding company by assets, is one of the few local financial firms that are now rethinking their strategies and reinventing their business models.
Shinhan Chairman Han Dong-woo has spearheaded the group’s move to revamp its organization and business model since he took office in March. Han took the helm of the financial group after three former chief executives bowed out last year following the group’s internal strife.
“Before I applied for the chairmanship early this year, I came up with things-to-do list for upgrading our organization. The first thing is reforming governance structure, the second adopting a matrix scheme, and the last revamping our cold-hearted image,” Han said in an exclusive interview with Business Focus held at his office in Seoul, on Dec. 9.
“Since the internal conflict was caused by the governance structure, I thought that the priority should be placed on ensuring transparency in management. Also, in order to offer comprehensive financial services, the group needs to borrow some aspects of the so-called matrix structure.”
Hybrid matrix structure
To that end, the 63-year-old chief executive launched a group management committee meeting to prevent an autocratic, one-man leadership and ensure transparency and rationality in the management’s decision-making process. The committee consists of CEOs of the group’s main subsidiaries, including bank, card, securities, insurance and asset management. The group also decided to cap the age limit at 70 for new chairmanship.
At the same time, Han has decided to introduce a “hybrid matrix structure” to establish a CIB (Corporate & Investment Banking) & PWM (Private Wealth Management) system for maximizing synergy and providing differentiated services.
“In order to become a leader in the industry, you have to lead customers in terms of services. However, financial firms are now led by smart customers. To address this issue, I have pushed ahead with introduction of the matrix scheme to our system,” Han said.
Han believes that the matrix structure, an organizational design that groups employees by both function and product, will help his organization respond more quickly to changes in the business environment and achieve a higher degree of readiness and market adaptation.
The cross functional teams of a matrix structure reduce the functional barriers between departments, and increase the integration of functions, thus making it possible for the firm to offer more comprehensive, customer-tailored services.
But the veteran banker is fully aware of the weakness of the matrix scheme under the Korea’s corporate culture. What’s in his mind, therefore, is to create a unique Korean model combining Shinhan’s model with the matrix, a hybrid structure or introduction of the matrix scheme to some business units where interaction with customers mostly takes place, namely CIB and PWM.
“One of the most representative traits among Koreans at workplace is that they put great stress on equality and they hate being annoyed by interference. For this reason, I think that complete introduction of the matrix structure won’t work,” he said.
“I think that the matrix structure is needed in the area of CIB and PWM as part of strategies to provide comprehensive financial services. We plan to expand the matrix scheme if it works well with our own system for the next one year.”
In order to address the weakness of the matrix or the flat hierarchy, which can cause conflict between matrix managers, heads of CIB and PWM will be under the CEO of Shinhan Bank, according to Han. Under this model, Han believes that there will be meaningful integration between banking and securities without conflict.
Thanks to the strenuous efforts to reinvent business models and adapt to new changes, the group has never swung into red even since its inception in 1982. The group has continued to improve its business performance over the past few years while its peers have been struggling in the wake of the global crisis.
Shinhan posted a net income of 2.6 trillion won for the first three quarters of this year, up 23.5 percent from the same period last year. Its profitability also improved during the same period, with return on assets and return on equity rising to 1.29 percent and 14.28 percent, respectively, from 1.12 percent and 12.59 percent.
Creating shared value
Another important aspect of Han’s attempts to jettison its old business model and reinvent a new one comes from the more fundamental side. He believes that in order to attract customers’ hearts in this rapidly-changing environment, a bank should redefine its purpose as not only creating profits for shareholders but also creating values for all stakeholders in society.
He believes that a financial services provider should create the so-called shared value. Creating shared value (CSV), the term coined by Harvard University professor Michael Porter, is not about sharing the value already created by firms ― a redistribution approach ― but about expanding the total pool of economic and social value.
In Han’s view, local companies’ corporate social responsibility (CSR) programs mostly on reputation and have only a limited connection to the business. Therefore, he stresses the importance of going beyond donation-oriented CSR programs.
Shinhan’s new initiative, dubbed “warm-hearted financing,” is its unique way of creating shared value, according to Han. He points out that Porter’s CSV concept is fundamentally the same with that of the new initiative in that both are seeking to create values for society while doing business.
“Over the past three decades, Shinhan has been successful as a profitable lender. But over time, our image has been fixed as a cold-hearted bank (among customers). I think we need to change this image,” Han said.
``The first priority of warm-hearted financing is to help customers when they are in trouble. The next priority is to develop financial products tailored for customers.”
No M&A at this moment
The former vice chairman of Shinhan Life, the group’s insurance arm, ruled out any possibility of mergers and acquisitions (M&As) with other major banking groups up for sale, such as Woori and KDB.
“We have established a balanced business portfolio by taking over Chohung Bank and LG Card. Given lingering economic uncertainties, we are not considering any M&A opportunity. Besides, we don’t have enough capital,” Han said.
Shinhan Bank, the flagship of the group, shifted to a holding company in 2001 to become a comprehensive financial services provider, and grew scale with a number of acquisitions, including Chohung and LG Card, from 2002 to 2010. It is now the nation’s third-largest lender and the biggest card issuer.
“There is speculation that we are mulling an M&A in the insurance sector but we don’t see any necessity at this moment as Shinhan Life is sustaining robust growth,” he added.
With the domestic market reaching the saturation point, local financial groups have run out of room to grow here. Shinhan is also upping its efforts to expand its overseas territory to find new growth engines. Currently, the group has 63 overseas outlets in 14 countries abroad.
“Our strategy is seeking to establish an Asian financial belt by focusing on Japan, China, Vietnam and India while looking for an opportunity to pursue M&A in untapped emerging markets, such as Indonesia, Malaysia and Thailand,” Han said.
The group is also seeking to strengthen its smartphone-based banking services for customers. It aims to take a lead in this lucrative but fast-evolving business segment by developing and introducing differentiated mobile products and services.
For the first time in the local banking industry, the group developed UX (User eXperience) Guide, which can be a standard for introduction of smart device applications.
“It is just the beginning of our efforts. We have introduced 19 apps to meet various customers’ needs this year. We focused on quantity this year but plans to shift the focust to quality next year,” he said.