The financial industry in various countries has been witnessing some interesting and surprising trends. One of these is the declining US retail banking revenues from middle-income and low-income households. Another is the inability of banks to keep up with their obligations. As a result, personal and corporate defaults are on the rise.
Global banking will move from a decade of convergent resilience (2011-20) to a period of divergent growth (2019-2025)
After a decade of convergent resilience, the global banking industry is poised to enter a period of divergent growth. This is a result of a series of factors, which include the onset of COVID-19, the effects of a diminishing global shock, and a gradual return to economic growth.
The most obvious reason for divergence is monetary policy. Some banks will need to rebuild capital to offset the effects of zero percent interest rates. Others will be forced to rethink risk-based business models to cope with rising risk-weighted assets. In the short run, this will reduce net interest margins, although it may be the catalyst for some forward thinking in the longer term.
US retail banking revenues from middle- and low-income households have shrunk considerably
During the month of May US retail banking revenues from middle and low-income households have dropped by roughly 10% compared to their pre-pandemic peak. It’s not all bad news though, as the recession is still roiling the financial industry. This has led to more innovative approaches to customer engagement, such as the customer experience gambit. A big part of this is a better understanding of the needs and wants of customers. Using these insights, lenders are able to more effectively cater to their customers’ needs and interests. Of course, this does come at a price. For example, a recent survey revealed that consumers are spending more for ad space and less for actual goods and services. To counter this, lenders have adopted new customer engagement methods that are more rewarding and less costly for all stakeholders.
Common-equity tier-1 ratios would decrease from 12.5 percent in 2019 to 12.1 percent in 2024
As the global banking industry prepares for the post-pandemic period, banks should take bold actions to thaw and restore their long-term health. But they also need to radically cut costs and invest in innovation. If they don’t do so, growth could slow in the coming years.
A critical question for banks is whether they can remain competitive in a low-price environment. Global ROE, for example, has flatlined at 10.5 percent in 2018. Banks will need to reinvent their business models to sustain returns in a slow-growth climate. Moreover, they will need to find new ways to deliver value to their customers.
The banking industry’s recovery will be shaped by macroeconomic factors, including inflation, interest rates, and government support for recovery. However, the most important driver of underperformance relative to market leaders is revenue yields.
Fintechs challenge traditional banks’ business models
Financial technology is redefining the banking industry. New competitors are challenging traditional banks and financial service providers, offering new products, services, and features. This disruption offers an opportunity to lower costs and improve the user experience. It is crucial for financial institutions to embrace financial technology.
Several legacy banks have recognized the need for innovation, and they are now entering into partnerships with fintech startups. They are also investing in the FinTech ecosystem through VC and equity investments. Some banks are even managing their own fintech accelerator programs.
Fintech companies are using technology to streamline the complex processes within banks. The new technologies are improving the customer experience and reducing the amount of errors.
Banks must embrace a ‘competitive mindset’
Having a competitive mindset is essential to the survival of financial institutions. It means being able to embrace change, and it helps future-proof organizations. However, if banks ignore the direction of the market, they will not succeed.
A key element of the bank’s competitiveness is its technology. The industry is shifting away from the manual, transaction-based processes of the past to the automation, analytics, and digital services that upstarts are offering. Technological advancements have allowed upstarts to run complex operations virtually, and banks must learn how to respond to these changes.
Banks must invest in technologies that support this transition. For example, APIs allow banks to develop disruptive new business models. Investing in these technologies will help banks stay competitive in the rapidly evolving digital world.