Fusing the ART, SCIENCE, and TECHNOLOGY of Business. Globally, The Banking Industry Is Undergoing A Massive Change Past, Current & the Future Trends Mark.

Fusing the ART, SCIENCE, and TECHNOLOGY of Business.

Globally, The Banking Industry Is Undergoing A Massive Change

Past, Current & the Future TrendsMark T. Williams

[email protected]


Banking Trends – The Basics While substantial industry changes have

occurred, the goal of bankers remains the same

1. Provide products that meet customer’s needs

2. Obtain a profitable return


Banking Trends – The Basics The true challenge for bankers, globally, then

is meeting customer’s increasing demands for:

1. Wide variety of products & services

2. Competitively priced products

3. Strong product support

4. Keeping customers happy


Banking Trends Dramatic changes have occurred over

the last 2 decades. Importantly, these changes point to

what is in store for the future. What are examples of the significant

global banking trends since the 1980’s? Past Current Future


15 Major Trends

1. The declining role physical branches play in product sales and delivery

Branches were more like community centers and were the primary customer contact point used by banks to sell and deliver products and services

Banks served the role as the primary intermediary between lenders and borrowers


Risk Management Questions Challenge - How do you sell products and

services to your customers if they are no longer walking into your branches?

Response – targeting of high-traffic zones1. Physical -In many countries, banks are putting

offices in grocery stores, pharmacies and other high traffic zones

2. Virtual - Internet


Major Trends: #1


Major Trends – Branch Decline

Risks – Fraud creates monetary loss and undermines bank credibility

Manage Risk – Designate Chief Security Officer, a cyber cop

Banks are also offering free Anti-Virus software to all customers to give added protection to their online banking services


Major Trends2. The level and type of technology used to

deliver products and services has changed dramatically.

Technology in banking is the motor that drives the car forward.

Technology supports Rapid and accurate internal decision making Operational efficiency Cost reduction Product creation Finding and keep clients


Major Trends – Technology Technology as the bank’s “Motor” is a critical

core competency How is your company’s engine running?

Banks can not be competitive without investing to support existing and improving upon future technology


Major Trends - Advances

Technology evolution

1980s Since 1990s 2010

ATMs Automated Services ?

Telephone Banking

Debit Cards

Internet Banking

Smart Cards


Technology Dependency

Risks – Monetary losses and/or loss of customers due to system crashes, fraud and loss of confidential information

Manage Risk – Through strong risk management practices

Project Management Ongoing investment and management Training


Major Trends

3. Customers will be smart, informed and more sophisticated about what they want and less likely to remain loyal to one bank

They will only be interested in banks that can provided the many products & services “they want” to meet their needs

Customer power will continue to grow as they price-shop products and services


Major Trends Customer pouching will be increasingly

common If it costs $50 euros to find and attract new

customers through traditional methods…why not just pay customers $25 euros for setting up a new account


Major Trends – More for Less

Risk – Loss of existing and potential customers if unable to meet their needs and expectations

Manage Risk – Provide a wide array of competitively prices products and services


Major Trends

4. Regulatory changes significantly impact the forward thrust of the banking industry

Need to comply with globally enforced standards of accountability and transparency

Remember the Big Bang (1987), G30, Basel II etc Regulation can be both a threat or an opportunity The challenge is whether to just comply with these

minimum requirements or to use this as an opportunity to truly improve and

enhance product delivery, risk controls and competitiveness


Major Trends Risk - Industry is restricted from growth

markets or product areas and or increased compliance cost in doing business

Manage Risk – Requires proactive planning, commitment to change and investment in

People Money Infrastructure


Major Trends

5. Stiff competition from bank and non-bank banks

Nimble competition with lower cost structures will focus on taking business

Put pressure on profit margins Selling of concept products at lost-leader

prices


Major Trends – Stiff Competition

Risk - Underwriting standards can become relaxed and credit loss levels increased. Also new products introduced without proper review can expose a bank to a great chance of losses

Manage Risk – Put adequate controls in place to monitor compliance with stated policies and procedures


Major Trends

6. Industry Consolidation Mega banks will grow larger – opportunity or

danger Bigger is not always better

Merger Rationale Merge or be merged Economies of scale Economies of scope X Efficiencies Ego


Major Trends - Consolidation

Risks – Bank’s being left behind, credit concentration risk and the broader implications if such mega banks collapse.

Manage Risk –Long-term Planning and openness to changing strategic direction


Major Trends

7. Real threat of disintermediation Banks loss of relevance – the buggy whip

example Non-bank banks filling the needs of former

bank customers and they don’t come back


Major Trends

Risk – Loss of existing and future customers

Manage Risk – Innovation is the engine that will help retain and attract new customers


Major Trends

8. Industry Globalization

Increased need for banks to meet client global corporate needs

Impact on bank1. Product required

2. Infrastructure

3. Correspondent Banking

4. Level of corporate commitment

5. Ability to grow and keep customers

6. Manage new and growing risks


Major Trends - Globalization

Risk - Greater than expected losses as measured in dollars and/or customers as a bank is unable to capture, measure, monitor and control all relevant risks

Manage Risk – Adequate systems, technology and infrastructure


Major Trends

9. Movement into Fee Driven Business lines & Services

How do banks make money interest income or fees?

Products - Insurance/Asset management Movement to asset management and

alternative investment products (hedge funds) $1.1 trillion market - Risk or Opportunity

Driven by stronger financial performance e.g., ROE and ROA


Major Trends –Fee Pushing

Risk - Fees received are not commensurate to the level of risk taken. Giving services away for free while still assuming some risk.

Manage Risk – Clear focus on what line of business and services to focus on


Major Trends

10.Euro-ization and continued adoption by the previously Euro-unfriendly countries

Links a larger customer base with a single currency

Links a larger customer base with exposure to movements in interest rates and inflation

Stress case scenarios1. More countries adopt euro

2. Existing euro countries pull out e.g., Italy


Major Trends – Euro-ization

Risk – linking to one common currency and monetary policy or missed opportunity

Manage Risk – Broad trends need to be incorporated into strategic business plans and resources allocated


Major Trends

11.Performance based incentive schemes

Directly influence employee behavior which can have negative implications

Upfront risk assessment by various stakeholders of possible implications are important

Risk management needs to be a key signoff before such schemes are implemented

HR Departments are also an important upfront filter to evaluate industry standards


Major Trends – Incentive Pay

Risk – New incentive schemes can create misalignment in employee behavior increasing a bank’s overall profile and potential for losses

Manage Risk – Ensure that incentive systems used do not create undesirable outcomes


Major Trends

12.Emphasis on employing stronger Corporate Governance practices

Executive hiring, communication and segregation of duties

Stronger boards and active roles Internal audits Enhanced overall checks and balances Strong corporate governance practices assist

in minimizing operational risk


Corporate Governance

Corporate governance is more than risk management

It is the framework to make sure that any actions taken (owners, management, staff) are in the best interest of the bank and shareholders


Major Trends-Corp Governance

Risk – Failure to focus on the most critical risk areas and a loss occurs. Undue emphasis on compliance with Basil II requirements without focusing on actual critical day-to-day workings of your specific banking structure and needs

Manage Risk – Put in place strong risk management structure that will address the day to day issues and also meet compliance concerns


Major Trends

13. Level and sophistication of risk taken by banks has increased.

Drivers include increased competition and customer demands

Strategy to specialize in certain products Strategy to provide a broad array of products Aggressive sales efforts New hybrid loan products e.g., interest only mortgages

and alternative investments such as hedge funds Selling of low to no margin concepts instead of products


Major Trends – Increased Risk

Risk Risk measurement methods and

techniques used are not adequate for the level of risk being taken.

Also, product related risk not being well understood and returns are not commensurate to level of risk taken


Major Trends – Increased Risk

Manage Risk Strong Risk Personnel Systems Technology


Major Trends

14.Global event risk has increased Geopolitical events Single commodity price movements of oil

remaining at $60 a barrel or higher for extended periods of time

Correlations fall apart reducing assumed diversification

Example - LTCM Risk


Major Trends - Risk – Unanticipated events would

impact global economies and push bank customers into credit default

Primary credit exposure Secondary credit exposure

Manage Risk – Implement stress testing in monthly risk management evaluation and reporting


Major Trends

15. Operational Risk will continue to escalate in the next 5 to 10 years

As bank competition for customers intensifies and profit margins are increasingly linked to the volume of products sold

Banks tend to not quantify or report operational risk which results in a understatement of the level of risk

Technology can be a strength and a weakness Systemic risk


Major Trends

15. Operational Risk will continue to escalate in the next 5 to 10 years (continued)

Outsourcing risk - Use of third-parties and outside vendors Technology is a core competency, should it be outsourced? While outsourcing of services a bank can never eliminate

associated risk Mergers and acquisitions test weakness of existing systems Terrorism - risk of damage to assets or loss of life Are back-up systems in place, have they been tested and

maintained for dependability?


Major Trends – Op Risk

Risk - Operational risk not caught in time turns into a operational loss $$$$$$

Manage Risk – Put in place key operational risk measurements and control points

People Process Technology


Banking - Survival Under Massive Industry Change

In the future, the common element of successful banks will be the ones that can effectively manage and anticipate these 15 significant Risk Trends

Fusing the ART, SCIENCE, and TECHNOLOGY of Business. Globally, The Banking Industry Is Undergoing A Massive Change Past, Current & the Future Trends Mark.

Documents

technology of business

future technology slide

type of technology

services banks

customers happy slide

banking industry

future trends mark

online banking services