The reality is, banking is slow to change. Branches are still being opened in the United States, whilst ROA has remained in a fairly predictable pattern for European banks for a decade. Customers have not migrated wholesale to new banks. Other nonbank lenders are only just beginning to show up in lending statistics, especially for consumer real estate borrowings. Crowdsourcing has not overtaken conventional funding either for private equity or real estate funding.
Banking technology using new technology such as chatbots, digital API and the blockchain, though now under serious consideration for a range of banking applications, from syndicated lending to trade finance, is at the closest two years away from mass implementation, so banks have been reluctant to retire tired but still performing legacy IT systems and.
None of this, however, should persuade bankers to sit back, ignore what they have learned on banking training courses, forget the competition and fail to respond to the changes that are in store. Five areas of especial concern stand out.
Market implications on banking
First, bankers will always need to understand the market implications of an imminent Brexit and the state of the global economy.
The most recent UK Treasury survey of independent forecasts suggests economic growth of 1.5% in 2018, unemployment hovering below 5%, housing markets subdued, and inflation picking up to around 2.4% (CPI), most probably inciting a slight rate rise towards the end of next year.
The picture in powerhouse economies such as Germany and the USA is slightly better, with the OECD currently projecting 2.1% and 2.4% growth respectively, significantly greater than modest population growth in ageing economies.
But if Europe and the UK have to deal with each other on WTO rules after a hard Brexit, no one will benefit. Toyota has modelled a post-Brexit 10% percent duties on UK built cars: the Boston Consulting Group points out that if demand is thoroughly elastic, a tariff change of the same magnitude as profit margin can potentially wipe out profits, not just cut them.
Soft or hard, Brexit is likely to create deep structural changes in the way the UK economy functions, the strength of particular sectors of the economy, wages and jobs: bankers have had no experience of this kind of relatively rapid structural change and it will, undoubtedly, be a challenge.
Specific bank clients, such as those heavily exposed to the London real estate market, those already suffering from lower sterling such as importers of machinery and transport equipment or household goods, or those heavily involved in trading relations with Europe such as insurers and banks themselves, are already facing declining share prices, as Goldman Sachs predicted they would back in May last year. Banks face tough questions about future credit and what to do about defaults. There is nothing permanent about business location, even for manufacturing, or performance, even for banks.
Second, the international regulatory environment continues to evolve, never to the advantage of doing banking business easily. Two examples for 2018 aside from the regular drumbeat of AML regulation. First, the EU will bring in Priips: Mifid II standards on consumer protection will then apply to insurance-based investment products issued by banks, insurers, and investment managers. Second, from May, the EU General Data Protection Regulation regime will come into force. Brexit itself will bring regulatory changes, not least in the EU itself where the possibility of harmonising business and individual taxes is now real, the UK having long been an obstacle to its consideration – but the decline in EU revenues that its leaving will create may precipitate it. Regulatory change is also in the pipeline for technology-driven issues, such as the introduction of AI into fund management. Banking training provides the detail and the implications of these multiple regulatory changes, but it is up to the banks themselves to prepare detailed change management plans for implementation, including the risks for cybersecurity and reputation generally.
Third, some banking units and divisions are not generating returns that exceed the cost of capital. Heavy investment over the past decade in facilities, IT, and distribution channels has left individual units stranded. Tough decisions, although perhaps aided by more flexible working practices, may well emerge next year over the fate of e.g. senior debt investment products and where to de-risk as European and UK banks respond to the need to managing capital intensity across the whole gamut of their operations. This will be further reinforced by the competitive pressure imposed by online only challenger banks, such as Atom, Monzo, Starling and Tandem, with their low operating costs and attractive fee levels.
Fourth, the management of net interest margins across the board will become critical as interest rates gradually rise. Bankers will be expected to manage the issues associated with rising retail deposit costs, at the same time as liquidity coverage ratio requirements and the net stable funding ratio mandate high-quality stable funding. Banks in developing countries have faced this constricting environment for many years, but the problem may now resurface in development countries as well. The only consolation is that this may well be delayed until 2019 if as expected interest rates are slow to rise.
Fifth, and of greatest long-term significance but with perhaps the least short-term impact, is to plot the bank’s engagement with FinTech most effectively. The use of robotics for client screening and credit approvals, automated trade capture, transaction monitoring and reconciliation, ledger management, customer and internal reporting and performance analysis is gradually impacting both investment and the HR function at banks. Banking training now places a firm emphasis on the practical issues of automation and mobile applications, such as biometrics, passed through both central servicing organisations and cloud-based subscription services, aimed at faster payments with reduced risks and lower costs.
Frequent Digital Banking Reports and White Papers are ample proof that consultancies are most excited about the last of these five major issues, as that is where the potential spend by banks lies, but bankers themselves must as always learn how to balance risk and opportunity as another New Year beckons.