A breakup of the industry's value chain creates a chance for players to reposition themselves
Shortly after the Canadian Bankers Association confirmed a rising adoption of digital banking among Canadian consumers, a new industry analysis reveals the critical need for banks around the world to adapt to new technology — or lose their staying power and profitability.
“As digitization opens the financial services ecosystem to new and niche players, we expect to see fewer full-stack banks,” said Gerold Grasshoff, the global leader of Boston Consulting Group's (BCG) risk management segment and a co-author of the report. “As the banking value chain breaks up, banks will get the opportunity to reposition themselves.”
The report, titled Global Risk 2019: Creating a More Digital, Resilient Bank, was BCG’s ninth annual survey of the health and performance of the banking industry across different geographies. It also touched on ongoing regulatory trends that banks must navigate, as well as how core risk and treasury functions must adapt their roles and operating models to be more efficient and effective.
European banks have been mired in negative growth owing to low interest rates and non-performing loans. In contrast, rising interest rates have lifted North American banks, though rising costs have offset the gains, resulting in a second straight year of decline in total economic profit (EP). Those in Asia-Pacific, meanwhile, saw their third consecutive year of declining EP.
“Since reaching a global-average high of 16 basis points in 2015, EP has slumped, falling to just 8 basis points in 2017,” the firm said. “With that slide, average banking performance is now on a par with that of 2013, when the banking industry started to regain its footing after the global recession.”
The report also noted the high volume of regulatory penalties and revisions flowing in, driven by mortgage-related misconduct in the US, money laundering, and interbank-offered-rate-related market manipulation, to name a few factors. With the regulatory spotlight shining brighter than ever, banks have to enhance the quality and efficiency of compliance to satisfy their obligations toward financial stability, prudent operations, and resolutions.
“Achieving this will require finding leaner and smarter ways to manage the high volume of regulatory revisions, as well as experimenting with new technologies and partnerships to drive down the cost of know-your-customer documentation and to improve anti-money-laundering processes,” BCG said.
The report also predicted profound changes in banks’ risk and treasury functions over the coming years. Among the burdens faced by both functions are a broader mandate with a larger slate of risks to manage, a growing need for integrated steering to protect banks’ interests, and a simultaneously growing need to find the most strategic way to use banks’ balance sheet resources.
“Delivering on this mandate will require risk and treasury to operate faster and more incisively, backed by real-time data, predictive analytics, and end-to-end automation,” the firm said, adding that going digital in such a fashion will help risk and treasury functions become more efficient operators and more effective partners in delivering value to banks.
