The report, The Future Shape of Banking, says that as barriers to entry for non-banks to provide formerly ‘core’ banking services continues to decline, the business models of today’s banks will be challenged.
“New Zealand’s banks remain profitable, but the industry needs to consider how long this strong performance can continue with technology, customers and regulation changing everything,” says Bruce Baillie, financial services leader PwC New Zealand. “With non-banks beginning to snap at the services offered by traditional providers, such as equity crowd funding and peer-to-peer lending, the banks’ priority must be staying on top of this changing financial market.”
“The banking industry of the future will look very different from today. New Zealand’s banks must play to their strengths and push ahead with transforming for the future or risk losing their incumbent advantage.”
With the rise of mobile banking and online platforms and people’s willingness to do their banking online, banks’ legacy infrastructure and systems could soon be a hindrance.
Yet, the report points to ‘traditional’ banks’ substantial advantages in helping prevent their positions being challenged: banks’ brands and reputations remain powerful, shored up by familiarity, experience and regulation.
“Trust matters in financial transactions and some of the resistance to alternative banking providers results from a lack of trust in their security. Brands and reputation will become central to banks’ value,” says Baillie.
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The report lists four 'must do actions' for banks:
First, they must continue to adapt to regulatory change and execute compliance at least at the pace and to the standards expected by their supervisors.
Second, they must work through the legacy of underperforming assets and misaligned cost structures, at least at the pace and to the standards expected by their shareholders.
Third, they should change the organisation’s culture and behaviours and demonstrate security, integrity, dependability and quality of their service offerings.
Fourth, they must invest in customer service and operational innovation.
“Managing a transformation programme of this scale will be a challenge – but it is one the banks cannot afford to shirk,” the report states.
The report also calls on banking regulators to adapt to the changing financial environment. Banking regulators worldwide appear to be focused on tactical responses, and their strategic objectives for the future of banks and banking are clouded by political expediency and the ‘too big to fail’ debate it states. "There is a need for greater certainty around the regulatory agenda, and for policy to focus on the role of banking as a positive contributor to economic growth."
With non-banks beginning to snap at the services offered by traditional providers, the banks’ priority must be staying on top of this changing financial market.
“In the future banking services will be more dispersed and the challenge for regulators will be to increase their remit to include areas that currently fall outside it or are only touched on at the moment. Also, who is to pay for and bear the cost of regulation, which will include monitoring many more providers? Currently it is the big financial institutions,” says Baillie.
Technology changes the game
PwC says the big changer is the speed of technology change, which can alter the cost structure of whole industries, to the point where what was once a barrier to new entrants becomes a handicap for incumbents.
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“Traditionally the cost of banks’ technology infrastructure and bespoke systems acted as a defence to new market entrants. Yet, with the rise of mobile banking and online platforms and people’s willingness to do their banking online, banks’ legacy infrastructure and systems could soon be a hindrance,” says Baillie. “Technology is also making it easier for customers to switch between banks and other service providers.”
“Banks must commit to radical change, invest heavily in customer service and operational innovation and stay ahead of the curve in terms of technology, changing customer expectations, culture and regulatory change. But this need to transform comes at a time when the task of dealing with legacy issues and regulation is consuming huge amounts of resources, such as New Zealand’s new anti-money laundering regime and restrictions on high loan-to-value mortgages,” notes Baillie.
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