A new report from Ernst & Young Global Limited titled “Transforming banks, redefining banking” was published this week. The report argues that “five forces for change” are already disrupting banks’ traditional ways of doing business, and that these forces will result in an almost complete transformation of the global banking industry over the next few years.
Increasing regulation at all levels for banking industry
As an overview, EY’s report focuses on the fact that national banking regulations are increasingly threatening the current global banking model. The legislative fallout from the financial crisis of 2008-2009 is finally beginning to hit home, as regulators are reining in the breadth of activities undertaken by large financial institutions. Furthermore, it’s not just the U.S. and Europe that are demanding increased regulation and transparency from its banks; similar trends toward increased regulation can be seen in Japan, Latin America and elsewhere across the globe. EY describes the situation as “regulators prioritizing stability over growth.”
Banking industry changing customer expectations
Another major force shaping the ongoing transformation of the global banking industry is changing customer expectations. Twenty-first century bank customers demand greater transparency, personalized products and seamless transition between channels, and the banks that can meet these expectations will end up on top. The report also emphasizes that business customers expect banks to have the latest in IT equipment and processes, and expect financial institutions to deliver solutions to real-world problems instead of just “product push.”
Technology and ongoing innovation
Banks today have to step up to meet the challenge of replacing legacy IT systems that are inadequate to deal with the scale of regulatory change and the modern digital business environment. The key IT-related issues facing banks today are the exponential increase in the data collection, analysis and storage requirements for financial institutions and the new disruptive technologies that challenge old models and offer customers more choice of services and providers.
The EY report points to intensifying competition from two fronts. First, new entrants into the financial services industry are bringing innovation to many common banking, payment and lending products, increasingly threatening the traditional banking relationship. EY also mentions increased product competition from “shadow banks” as they take advantage of new technologies and evolving banking regulations.
The complicity of many major banks in the fraud that was at the heart of the recent financial crisis has given the industry a major black eye that is not easily healed. Banks have to literally change their workplace culture in order to overcome the negative bias against them. The report also mentions that the industry’s bad rep has led to demise of “caveat emptor,” as consumer protection legislation now transfers almost full responsibility for product suitability onto the banks. Last but not east, banks are also facing shareholder pressure to implement business models that deliver long-term returns and minimize asset volatility.