Banking is an industry undergoing huge change. Multiple forces are playing out simultaneously, although often at different speeds and at varying intensities across the globe. Understanding what is shaping the industry, and how to optimise your strategy in response, is crucial in crafting a sustainable competitive advantage.
Unfortunately, human beings are hard-wired to be poor at understanding the future. We hate uncertainty. To avoid it, we either pretend it doesn’t exist or we create ever-increasingly complex models and forecasts to help determine what we should do today in order to be successful tomorrow.
So how can we be more constructive and thoughtful in understanding what the future of banking may bring? Where should we focus in understanding the future of banking?
I believe there are five key uncertainties – events or forces we simply cannot predict, but will significantly shape/impact the future environment – we should pay particular attention to in order to better understand how the banking landscape will evolve over the next 10 plus years. The way they play out will shape the global banking industry, determining winners and losers, survivors and casualties.
Traditionally demographics have been closest to being predictable, but even these trends are hard to predict with the rise and dominance of globalization and connectivity. The world’s population continues to grow with rapidly growing youth demographics in significant countries needing more jobs, housing and food. With growing urbanisation, more than 50 percent of the world’s population now lives in a city and projected to reach 70 percent by 2050.
What does this mean for banking? Another one billion people will enter the consuming class by 2025. There will be increased investment in infrastructure and housing. Economic activity will intensify. Individuals and organisations will require finance, credit, risk intermediation and financial transactions. However, increasingly expensive welfare systems will need to be funded. Aging populations will have to save more for retirement. Higher taxation to meet increasing and unfunded liability gaps will dent consumers’ ability to consume.
Knowing all this, how will changing demography, migration and urbanisation impact the world economy’s ability to grow?
For more than 40 years, globalisation has driven the growth of banking. However is continued unfettered global integration still a positive? The concept of “gated globalisation” seems to be gaining currency. Trade flows have stagnated since 2008. Capital flows have collapsed by more than 60 percent since all-time highs in 2007. Furthermore, state-sponsored capitalism could dominate market-driven economies due to the growing influence of so-called state-sponsored capitalism.
The implications for banking are enormous. As financial markets re-regulate, the nature and pace at which different jurisdictions do so will have significant impact on the relative competitive position of global, regional and national players. Opportunities for regulatory arbitrage, and in particular the difficulties of managing multiple sets of rules, will hamper many if there is continued fragmentation of global governance and markets, instead of a shift towards great harmonisation.
A key question therefore remains: Is this slowdown in global connectivity cyclical (a “speed bump”) or a longer-term structural trend that may reverse many of the factors that have been responsible for the growth of global banking?
Mining big data is driving innovation across industries. There is no lack of data in the world and it is increasing at quite an alarming rate. However, obtaining genuine insights from the mass of big data is harder than one might imagine. If an organization can derive new insights, they can gain both increased market and wallet share from customer data.
For many years, the Holy Grail in banking has been the cross-sell; how many products can we sell to the same customer? The new mind-set should be, “How do we better meet our customers’ needs with the insights we can garner from our relationship, without infringing their sense of privacy or independence as a valued client?” How much will customers allow a bank to know about them? What’s the upside for them in allowing a bank into their worlds?
We know that the impact of technology and the digitisation of markets has significantly changed behaviour, and yet, in many ways we have perhaps only seen the tip of the iceberg. Power has shifted to the consumer with expectations of service and experience raised significantly. A direct comparison of experience online across multiple industries is readily available and presents deep challenges to many financial services organisations as they essentially compete in terms of customer service with built-for-the-‘net-age products and services. Customer loyalty is now an asset that is even harder to win and much easier to lose. Ironically, in consumer banking, the most valuable customers (those with investable assets over $1 million) are the least loyal. The increasing digitisation of banking will only make it easier to switch.
We have to think about what will customers want from their banks? Perhaps more importantly, what will they be willing to share with their banks? And will banks become an increasingly commoditised service with little differentiation?
Across the banking landscape, from consumer to wholesale, alternative banking business models are emerging through a confluence of stricter regulation of traditional banks and connective technologies. Peer-to-peer lending is becoming mainstream. Electronic transfers and transactions are reshaping the field of financial services. From mobile phone banking, to digital currencies and crowd funding, new service providers are challenging the incumbent banks with faster, cheaper, more accessible and more relevant services to customers. In wholesale, shadow banking continues to thrive, filling the vacuum left as the regulated banks’ activities are curtailed by Dodd-Frank, the Volcker Rule and Basel III capital ratio requirements. Arguments flow both ways in terms of the value that this group of capital providers adds, from offering vital credit and risk intermediation, filling the void left by the traditional banks, to unregulated, opportunistic entities that some believe may cause the next financial crisis.
So as we look out 10 years, which entities will be the dominant providers of banking services – the banks, or the alternatives?
What do these uncertainties mean for the future of banking?
The single largest threat to incumbent banks is that they become consumed by short-term “urgent” and operational imperatives, largely driven by regulatory requirements, while missing the seismic, structural shifts in the broader industry environment that may make their “finely tuned” business models obsolete. Creating a list of mega-trends can be intellectually interesting. However, it is not until these driving forces and uncertainties are combined into multiple narratives of the future (what we call scenarios) that the logic, dependencies and implications of the future for an organisation start to unfold.
Using scenarios to explore strategic options will create a different type of conversation amongst senior decision makers – one focused on “what if” and “so what,” rather than “I know” or “I predict.” The former will lead to more creative “outside-in” discussions and asking better questions before coming to more robust and better answers. Leveraging scenario thinking frees banking executives from the pressure to accurately predict the future (a somewhat futile notion at best), allowing them to concentrate their energy in agreeing and aligning behind a robust set of strategic options that anticipates their customers’ needs, matches their organisational ambitions and is consistent with their overall risk appetite.
Ultimately, using scenario-based thinking to develop and stress test their strategies, will allow banks to better prepare for the uncertain future to come.