A few thoughts on forces reshaping the banking industry, by Nigel Smith, National Leader, Financial Services Advisory practice.
Banks are benefiting from both an improved business climate and a friendlier political environment. Gross domestic product growth, while not overwhelming, is steady. The pace of federal interest rate hikes has picked up, producing modest margin expansion. The Trump administration has promised to rein in the Dodd-Frank Wall Street Reform and Consumer Protection Act; even if the entire law isn’t scrapped, softer regulation appears in the offing. And new proposed tax code legislation could give an additional boost to profits.
Longer-term, though, banks have a lot of work to do — especially in fully embracing new technologies. The introduction of digitalized products enables institutions to reach and serve bank-wary millennials. But there is still a tendency among many banks to see digital as a separate channel. Rather than re-engineer systems or upgrade them, some have merely tacked on digital solutions to existing ones, resulting in fragmented operations and lower productivity. And while banks are becoming more adept at social media, there is still much uncertainty on how to use it for maximum advantage.
The new technologies also lower barriers to entry in traditional bank markets, raising questions about the utility of legacy assets, including brick-and-mortar branches. Fintech rivals are often at a competitive advantage because of lower overhead; they may be additionally favored if they are subject to fewer regulations.
But fintech is a double-edged sword. Its potential to ramp up competition and overturn bank business models is considerable, yet fintech also offers new opportunities for collaboration. For example, marketplace platforms for loan origination can create a better banking experience for consumers and offer additional business opportunities for banks. Fintech will be neither the banks’ saving grace nor its death knell; but between the two extremes, what will be its impact?
Aside from technological issues, some banks simply have too many products, operated from inefficient silos that duplicate processes. Industry observers also question whether banks are missing opportunities to consolidate operations and integrate information. And although the regulatory burden may lighten, banks will still pour enormous resources into compliance processes that demand rationalization.
Some leading banks are collaborating with other institutions to establish cross-industry “utilities” to share core functions in areas like client screening and third-party risk assessment and monitoring. The benefits include lower costs, increased efficiency and improved performance. The ability to look at risk and potential fraud across the industry may also help banks collectively respond to threats.
Traditional banks maintain big advantages: long-standing reputations, well-known brand names, strong community roots and industry knowledge. But innovation necessitates that banks adopt new technologies that carry increased risks from cyberthreats. As they work toward digitalization, the question remains: Can the banks securely and effectively introduce useful solutions at the same rate as the dizzying pace of technological change? Review our full report, The future of growth and the banking industry