Lorem ipsum dolor set amit B Behind the Scenes
Much of this banking evolution can be driven through technology-enabled innovation, which is identified among the four key themes outlined by professional services firm Grant Thornton in its 2017 survey, The Future of Growth and the Banking Industry. The others included simplifying the business and operating model, leveraging information to build a customer-focused business model and balancing risk and opportunity.
“We’re all moving to digital,” stressed Tom Joseph, MD of Chicago-based Grant Thornton LLP, in a webcast discussion of the results, during which Tariq Bokhari, CEO of financial technology start-up Aggressant, sought to put the current shifts into context. “There’ve been four industrial revolutions… The first one, in 1794, was all about steam and water power, 1820 was about electricity and 1970 about IT and electronics. All of those were manufacturing and mass production [focused]. The fourth one, which we’re in the middle of, is about the convergence of physical and virtual ecosystems. This is a first-of-its-kind, digitised revolution. And for the first time, that revolution’s changing the banking model itself,” said Bokhari.
“So we’re in the middle of something that’s going to be looked back on in history as incredibly significant.”
The bank of tomorrow
Bokhari expects a fundamental disruption in simplifying the business and operating model of banks. “The core banking systems are expensive and the opposite of nimble, [and] many were built in the ’80s, so a lot of start-ups are focusing on creating alternatives and lighter-weight things.” This while the established players in the industry “have this anchor tied around their necks”.
Unlocking the “treasure trove of data” to which banks have access is one area of tremendous interest to Bokhari, not least because using this relatively untapped resource will enable banks to fine-tune their personal engagement. This, for consumers, could bring banking back to the more intimate relationships which made community banks so special in the 20th
century, he says.
“Now there’s… the ability [for start-ups to] partner with banks and know me digitally and make me feel like I’m part of a community. That, to me, is something Millennials [those born after 1980] care a great deal about.”
By this assessment, the bank of tomorrow is projected to be more client-centric and more user- friendly, but the key question is whether – if yields are under pressure – this will be enough to satisfy clients; be they in advanced or emerging markets. What’s clear, believes Richard Herring, professor of finance at The Wharton School in the United States, is that a transformed financial services sector will
always have a place in the global economy. “It’s easy to get too gloomy about the future of the financial services business, but the one thing we do know from economics is that it’s a luxury good,” he told Knowledge@Wharton.
For banks, this point is as important for future strategy as the prioritising of financial inclusion. With middle classes in Africa, Asia, Latin America and other emerging markets on the rise, this is a market worthy of attention. According to the Brookings Institution think-tank: “In two or three years [2018-2019], there might be a tipping point where the majority of the world’s population, for the first time ever, live in middle-class or rich households.” Already about 140 million are joining the middle class annually and this number could rise to 170 million in five years’ time, noted Brookings.
This is good news for the sector, says Herring.
“[Financial services are] something people want more of as they get wealthier. And if the economy stays in the doldrums, that’s a major problem for more than just banks. But as people become wealthier, they still want transaction services [and] savings products that will protect them from downside risks. I think that’s where a number of innovations will come from – and they’re going to want exchange services and all kinds of opportunities to borrow and hedge risks. So, in some sense, I think the demand is there. It’s just going to be a challenge to figure out a more efficient way to deliver those services.”
“This is a first-of-its-kind, digitised revolution. And for the first time, that revolution’s changing the banking model itself.”
Smarter services
Servicing these clients in a new world of low growth and low returns will present a challenge for the sector, not least in managing investor expectations. Recently experts from American investment consortium Vanguard Group offered their views on the subject, starting with the belief that this is a long-term trend. “We’ve thought for some time that this low-growth world is going to persist,” says Global Chief Economist Joe Davis.
“We’re still of the strong opinion that this low-rate environment is secular, which means it’s very long- term in nature. Why that matters is that we have the lowest expected returns on portfolios – equity, fixed income, or some balance in between – that we’ve had since 2006. We’re not bearish, but we’re being guarded.”
For both investors and advisors, Maria Bruno, Vanguard’s Senior Retirement Strategist, believes there needs to be a keen awareness of balancing market risk with inflation risk. Sitting on the sidelines may be tempting, she says, but “going to cash, or holding more cash than needed while waiting for the market to rebound, comes with trade-offs. Because advisors and investors don’t know when or how the market will turn around, they’re exposed to the cost of missed opportunities.”
Which brings us full circle to the banking strategy reboot advocated by Bain’s Nielsen. As he co-wrote in a 2017 briefing document: “Banks need to manage for the long game, through the cycles, even as they adapt in the short term through test-and- learn experimentation. Given the technological and market changes roiling the industry, the coming decade may well bring even greater transformation to banking.”
The secret will be to pay attention and embrace the difficult discussions now, so that banks are prepared for a connected, customer-centric future where strategy trumps quick wins.
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Absa Investment Publication
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