Will banks take up the transformation challenge in 2019? Find out more from our Head of Banking in this latest article.
Will banks take up the transformation challenge in 2019? In an environment for the sector that remains tough, many banks are struggling with limited capacity for managing change - but an embrace of new technologies and digitalisation may represent the key to survival, growth and prosperity.
Certainly, the New Year has begun with more of the difficulties that characterised much of 2018. Market volatility remains heightened following the sell-offs at the end of last year, while the low interest rate environment continues to depress margins. In the UK, the Brexit turmoil continues, but political and economic uncertainty is a global theme, from the political showdown between President Trump and the Democrats in the US to the slowing growth rates of China.
What lies ahead for regulation?
Other pressures also command banks’ attention. While the rate of regulatory change may finally be slowing, more than a decade after the financial crisis, the reforms continue.
The transition away from Libor towards the use of alternative risk-free rates (RFRs) is a substantial project, given that Libor currently underpins contracts worth $350 trillion globally. The Basel Committee’s new Fundamental Review of the Trading Book (FRTB) rules also looms on the horizon as part of a broader package of reforms that effectively amount to a Basel IV. On regulation already introduced, meanwhile, the implementation process still demands considerable resource.
In any case, we are only just beginning to understand the effects of some elements of the reforms. For example, the UK has led the way on ringfencing, with large banks now required to have split their wholesale and retail businesses; that appears to be underpinning heightened competition in the domestic marketplace as banks seek returns from their standalone retail operations. Other markets watch with interest.
No time to lose
Against this backdrop, banks will feel their bandwidth for transformation is limited. But while resources may be finite, time is running out to pursue technological renewal. The barriers to entry in banking, including regulation and elevated business risk, are high but not insurmountable. Fintechs, challenger brands and cross-sector competitors are circling, encouraged by innovation such as the UK’s open banking regime, which provides opportunity for a more connected and collaborative approach to the customer value proposition.
Moreover, banks themselves cannot continue as they have done before. Even without the threat posed by disruptors, their business model looks increasingly unsustainable, with a cost to serve that is not sufficiently profitable to return above the cost of equity – and becoming less so as customer service expectations ramp up.
The transformation agenda, in other words, is a defensive play as well as an offensive strategy. The opportunities of digitalisation – above all to exploit the power of data to reconnect with customers – are exciting, particular for a sector that lost significant trust with its audience following the crisis. But even if they were not, transformation is now crucial to protect profitably.
Squaring the circle
This can be the year in which banks make real progress in seizing the initiative. To date, many banks have made significant improvements in customer-facing areas, digitalising services as their clients have increasingly looked to products such as mobile banking as a basic requirement. Inside the bank, however, legacy back and middle office systems remain disconnected, overly manual and siloed.
There was a time when banks could justifiably hold back on the grounds that new technologies remained experimental or unproven; those days have now passed – in areas ranging from payments and settlements to customer onboarding, the business case for new tools is clearly established, with early adopters looking to make significant returns on their investments.
Similarly, the move to cloud can substantially reduced cost, but also provides increased opportunity. With cloud solutions, banks are now able to maintain data stores of the size required to generate actionable insight and to harness the computation power needed for such analytics.
For all these reasons, transformation is now an imperative. The outlook for banking in 2019 is undoubtedly challenging – but to regard renewal as too onerous a task in these circumstances is the wrong response. Rather, digitalisation offers a means to confront the challenges of the market – and to move on to the front foot.