Retail Banking Predictions 2017
Without the aid of a crystal ball, some might argue that predicting the future is a fool’s game. But, using Fujitsu’s industry insight, supported by conversations with senior industry participants, what are some of the key issues that may shape the year ahead?
Let’s start by looking at five key industry issues:
1. The European financial system will remain fragile
Instability within the European banking sector is likely to be a feature of 2017, just as it has been of 2016. Of immediate concern – particularly in the aftermath of the country’s referendum on constitutional reform – is the Italian banking industry, although concerns also exist in other parts of Europe too.
The key problems from which the European banking industry suffers from have been known for years. Indeed, many of them contributed to, and were highlighted by, the financial crisis which began in 2008. Banks remain too big, are undercapitalised, and many suffer from underperforming loan portfolios.
Some European banks have, for too long, delayed implementation of a change agenda. Of course, with an appropriate catalyst for change, 2017 might be the year when action is finally taken. But in the absence of meaningful reforms, expect concerns about the strength of the European banking industry to continue to be expressed.
2. Pressure on the Net Interest Margin will continue
The Net Interest Margin (NIM) is a measure of the difference between the interest income generated by lending and the amount of interest paid out to their depositors, relative to the level of interest-earning assets held by the institution.
Within the European Union, International Banker estimates that the average NIM earned by banks amounts to just 1.2%. Historically, returns have ranged between 3% and 4%, or even more for some individual financial institutions.
Why does this matter? Because the NIM typically makes up a large portion of a bank’s overall revenue. Reductions in this income stream decreases the pool of funds available to cover loan loss provisions, as well as the returns and dividends available to shareholders. Before the recession of 2008 began, US nonperforming loans amounted to about 1.5% of total loans. By 2013, this had risen to more than 5%. Even today, almost a decade since the financial crisis began, defaults by borrowers continue to drag down bank profitability.
Expect 2017 to be a year in which banks look to address the effects of a shrinking NIM. More focus will be placed on finding ways to lower costs and improve bank efficiency. Not an easy challenge, but one that few banks can now avoid.
3. Inflation will re-emerge, to the detriment of the UK housing market and some family budgets
The Bank of England’s Inflation Report of November 2016 sets out a central projection that UK inflation will rise from its current level of 1% to around 2.75% in mid-2018, before beginning to fall back.
This increase in inflation will reopen the debate about when interest rates will start to rise, given that this is the primary weapon by which inflation is controlled. When rates do start to rise in 2017, they are likely to have an adverse impact on both the UK housing market and some family budgets.
The UK’s housing market has been underpinned by an era of cheap money. As interest rates rise, and although borrowing will remain cheap in historic terms, it will have an adverse impact on the price of property.
Rising interest rates will also impact some family budgets. Should the era of cheap money start to come to an end, this is could have a significant impact on the more than 50% of borrowers who have a variable rate mortgages. Borrowers with a loan of £150,000 and paying a mortgage rate of 3.1% may see their monthly repayments increase by around £120, should interest rates increase by 1.5%.
4. Uncertainty surrounding Brexit will continue
No discussion regarding the outlook for 2017 would be complete with mentioning Brexit.
2017 will see continuing efforts being made by the financial services industry to protect its interests following Brexit. Central to these discussions will be the questions of the industry’s access to the Single Market and Passporting.
At Fujitsu, we don’t foresee the biggest banks dramatically declaring that they are existing Britain. However, there may be a “drip” effect of particular jobs being lost – perhaps Euro clearing? – to other financial centres. And we don’t expect 2017 to result in a loss of influence for the City of London. It has existed for over 400 years. It has survived depressions and world wars by adjusting to changing circumstances, something that we expect it to do once again, as it responds to the challenges of Brexit.
5. Banks will also wish to manage several key business issues during the year ahead:
Cybercrime is not going away
Cybercrime is, perhaps, the number one preoccupation for Board directors of financial institution with whom Fujitsu speaks. They know that this form of criminal activity is on the rise. They also understand the importance of always being at least one step ahead. The challenge is to manage this risk thoroughly, consistently and over time.
Whilst successful attacks occasionally make the headlines, the many cybercrimes that fail rarely get reported. Thus, the casual observer may get the impression that the criminals are winning. That isn’t true, given the significant levels of investment that the financial services industry does make, and will continue to make in 2017, in this area.
Of course, some attackers are bound to get lucky in 2017. Such events will, we believe, encourage banks around the world to collaborate, thereby heeding a call to arms already made by SWIFT. Such initiatives would also follow the example already set by eight of the largest American banks, who have agreed to share information with each other about threats, work together to develop and deploy comprehensive responses for when attacks occur and to conduct appropriate “war games”.
Increasing technology risk
While many of the services provided by a bank today would be familiar to our forefathers, the fact that they are available to everyone would be a surprise to them. Banking for the masses is only possible because of the development and deployment of technological solutions over the past half-century or so.
But now, many such systems are ageing, as indeed are staff members who maintain and service them. During 2017, we expect many organisations to look closely at their IT estates, to reassure themselves that their chosen solution can continue to do the job required of it. We also expect banks to look closely at their systems and ask whether they can still do the job required and do it economically. And we expect banks to continue to review their staffing and skill profiles, in the knowledge that some personnel, upon whom they are dependent for key IT skills, are now approaching retirement age.
Managing conflicting pressures on change capabilities
Successfully managing conflicting pressures has always been a feature of banking. However, given the large number and size of change initiatives that characterise today’s industry, this is an increasingly significant pressure.
At Fujitsu, we don’t expect that the challenges associated with staffing, funding and implementing change programmes will go away in 2017 – rather, we expect them to become ever more acute. But we do expect the industry to look for innovate ways to address such issues, particularly through greater use of partnerships and tie-ups with third parties and suppliers, and perhaps even by the increased use of shared benefits models.
Protecting and enhancing reputations
Banks have always understood the importance of maintaining, if not enhancing, the reputation of their organisations in their customers eyes. But this challenge becomes much more difficult when social media enables a negative comment or remark to go viral in minutes. It is made harder still when weaknesses in business processes (think PPI), security breaches (such as account hacking) or systems failures (for example, a breakdown in the payment infrastructure) become headline news.
During 2017, we expect banks to continue to work hard to protect and enhance their reputations. Some will succeed, others will not. But it is clear, from the conversations that we at Fujitsu have with the industry, that this is an area of growing focus for all those that form part of the financial services community.
In addition to advising numerous UK and continental European financial services organizations, Anthony has also held senior line management positions, including as Director of Strategy for a FTSE-100 bank; Deputy Managing Director of a UK commercial bank; and Managing Director of a UK asset finance company. He has also worked in central government, advising Cabinet ministers of the development and passage of company legislation.
Anthony joined Fujitsu in February 2012.