By David Hamilton,
president of SunGard’s banking business
Introduction: an internal focus
The impact of the financial crisis has been well documented and most are aware of government buy-outs, investor dismay at the industry’s mismanagement of finances, and the resulting loss of credibility and mistrust from the wider consumer world. However, a lesser focal point was the impact on banking strategy immediately following the crisis whereby many banks took an internally focused view of how to move beyond crisis mode. This internal view formed the foundation of SunGard’s Well Managed Bank study, which concluded that banks should shift their strategy from one of growth to a directed approach of ensuring strong management of a bank’s core assets: its customers, staff and capital.
Three years on, many would argue that the industry is emerging from the crisis, albeit with a number of European markets and the US still in the throes of determining their new banking landscape. What is common, however, is that the world today is much changed. Consumers no longer assume the banking industry is stable, regulation is increasing both in terms of volume and reach, the composition of banking investors has changed considerably and lobby groups have a renewed vigour. Couple this with an environment that is fast embracing new technologies such as tablet devices and an always connected, always on mobility ethos, and it would be fair to say that banking strategy can no longer simply focus on its internal competencies.
One thing has started to become clear as the banking landscape has changed – that many aspects shaping the future will, in fact, be out of the hands of banks themselves.
First, in terms of regulation, we have identified a number of distinct personas that will begin influencing the landscape in new ways. These are:
• Macroprudential regulators – organisations that regulate the industry as a whole, such as central banks, the Federal Deposit Insurance Organisation (FDIC) and the International Monetary Fund (IMF).
• Microprudential regulators – organisations, such as the Financial Services Authority (FSA), that regulate institutions.
• Investor protection agencies, such as the Security Exchange Commission (SEC).
• Consumer protection agencies, including fair trade and watchdog groups.
Beyond regulation, we have identified three additional stakeholder groups that will also begin pulling against the traditional fabric of the banking landscape, namely:
• Special Interest Groups.
Each of these personas and groups has its own particular, and often conflicting, agendas, which influence their decision-making, attitudes and behaviour – and ultimately the future of the banking market.
As an example, conflicting interests create potential friction between two groups of investor personas. First are equity holders, who are driven by near-term returns and who possess different values and objectives from the second group; longer-term capital investors such as bond holders.
More often than not banks themselves are involved with both these sets of investor personas. The overall composition of a bank’s investor mix has a direct impact on the bank’s strategy and specifically its risk appetite setting, which will ultimately guide and determine day-to-day lending decisions.
Sovereign entities, namely governments, have been another group wielding increasing influence on the sector. Government bailouts, in the form of loans and common stock, formed a major part of the news during the financial crisis. The US government’s TARP (Toxic Asset Relief Programme) bailout, enacted at the end of the Bush Administration, authorised the Treasury Department to use up to $700 billion of taxpayer money to stabilize financial markets (1). For European banks collectively, the total was closer to €3 trillion ($4.25 trillion) (2).
This last point has added a completely different dimension to a bank’s risk appetite. As the main shareholders in a bailout scenario, sovereign entities are significantly risk averse, diluting the interests of both equity and capital investors and therefore changing and challenging the natural tensions between the traditional personas (equity holders and bond holders) and creating a new climate for the market.
Defining the customer
Perhaps the most important stakeholder group of all remains the customer – and here lies additional complexity in the changing face of banking.
Previously, banks and other organisations could split the demographic of their customer base into a few basic categories, such as age, race, gender or income bracket. At the start of the digital age came a new dynamic – ‘generation Y’ – a young tech-savvy consumer that wanted to read their news online instead of in print, demanded that information be presented to them instantly at the click of a mouse, and that services such as banking or shopping should be offered to them online.
Today, the pure demographic notion of baby boomers, generation X and generation Y, is largely outmoded. We are entering the period of the ‘non-existence of the typical customer’, where age has very little to do with demographics. Of Facebook’s 700 million users, 12.6 per cent are over the age of 45 (3).
To illustrate this, the music channel MTV recently identified no less than 13 different audiences (4) within the generation Y demographic, based on their different values, personas and driving forces. The organisation used a wide range of often-interconnecting preferences, including aspects such as the value of friends and family, importance of technology, distinction between virtual and physical communication, and attitudes towards money.
There are two more crucial points here. It is universally agreed that one of the outcomes from the crisis has been that consumers now clearly understand that their bank is just like any other organisation, it can be mismanaged and it can collapse. The notion that banks are realiable and stable stewards of the community is a sentiment of the past . This erosion of trust has created a heightened level of sensitivity, causing customers to scrutinise every interaction they have with their bank, resulting in many now banking with more than one institution. According to a study by Ernst & Young 38 per cent of customers in Europe, 33 per cent in the US and 46 per cent in India now bank with two banking institutions (5). And according to a separate study by Deloitte, 42 per cent of generation Y and 27 per cent of baby boomers rank social networking forums in their top three sources when researching banking products and services. As a result, banks no longer have control over their brand. It would be wise to conclude that today’s consumer has increasing influence in how they want banks to be run. All this means that the industry has entered into a new phase of consumer empowerment.
Rise of special interest groups
One of the most interesting areas is the way that agendas of different special interest groups are creating a new voice for their respective cause.
Unlike other industries, in banking there has historically been no real counter side to corporate lobbying. A prime example of this was in 2010, when four Californian banks collectively spent $100 million on just three industry reform bills. Yet here also we are seeing a change. Counteracting the power of lobby groups to shape regulation, state-sponsored committees in countries such as the UK and US are now being given a broad remit by their governments to analyse the ethics of the banking industry as a whole.
Likewise, in June 2010, 23 European Union members of Parliament gathered to create Finance Watch – an NGO consumer group, which it claims is “capable of developing a counter-expertise on activities carried out on financial markets by the major operators (banks, insurance operators, hedge funds, etc) … 2010 was the year of the call. 2011 will be the birth of the Finance Watch” (6).
The main message here is that while lobbying has been historically asymmetrical and very much funded by the industry itself, it will be less so in the future. With continuing momentum, perhaps we could see the balance of power falling increasingly into non-corporate hands.
Shaping the future
In summary, we’ve identified five predominant trends in our Well-Managed Bank study:
1. First is the age of consumer empowerment. Overall, the volume of deposits is growing while bank margins are shrinking. Equally, consumers have more information and choice on where they bank. Hence customer loyalty and retention will be a huge priority for banks to prevent customers from shifting their allegiances to a competitor offering better terms. There is little doubt as to the degree the financial crisis has damaged consumer trust.
2. We have discussed the tension between different investor groups. SunGard also foresees an increasing amount of tension between regulators and investors. While the financial crisis has suggested the need for more regulation, and therefore greater transparency, investors will argue that money is made in opaque, not transparent, markets.
3. The rise of special interest groups will create an increasing counterbalance to the current power of corporate lobbying.
4. The fourth challenge consists of structural changes to the historical model of financial intermediation. New alternative models of banking will emerge, driven by aspects such as financial inclusion programmes for the unbanked/marginally-banked and due to social impact investing. The marginally-banked group is by no means restricted to regions such as Africa. One example is Latvia, part of the European Union but significantly under-banked all the same.
5. Linking into all of the points above, technological innovation and adoption rates will continue to influence the landscape considerably. Technology will act as a catalyst for all stakeholder groups and drive change that will determine the future of money management. As a result of the information age, people may need to rely on banks less and less. Historically, banks have been a primary if not exclusive vehicle for intermediation of basic financial services. We are now seeing more and more alternative business models in the market. A prime example is the M-PESA scheme (‘pesa’ being the Swahili for money), run by Safaricom, Kenya’s largest telecommunications firm. Essentially one can transfer money in the form of credit via a mobile telephone to any Safaricom agent within Kenya, where the recipient can collect it at any of the 23,000 M-PESA outlets around the country. This compares to the country’s largest bank with just 119 outlets. M-PESA moves money worth more than 40 per cent of Kenya’s GDP.
In essence, the age of complacency for banks has passed. With financial institutions more accountable to consumers, investors, special interest groups and regulators, and with more ways to circumvent the traditional banking system, one thing is clear: this is the age for banking organisations to truly understand the environment in which they operate, what their key stakeholders value and what is driving their behaviour. It is only by examining the outside world that an effective money management strategy can be implemented. It is now the era of Well Managed Money.
1. Credit Crisis — Bailout Plan (TARP) (New York Times article)
2. European Bank Bailout Total: $4 Trillion (Bloomberg report)
3. Inside Facebook gold stats
4. MTV Research Youth 2010
5. A New Era of Customer Expectation, 2011 Ernst & Young
6. Finance Watch PDF