Banking industry at crossroads

Captains of the banking industry in South Africa around the world have a tough decision to make in negotiating the new era of banking that is setting in.

“I think banks have to decide, is this trend cyclical or is it structural. If they think that it is structural based on their unique business mix, then they must act like it. Do something, be more dramatic,”  says Deloitte global banking and securities leader, Jim Reichbach.

Reflecting on the release of the Deloitte 2013 Banking Industry Outlook, Roger Verster Financial Services Industry country leader at Deloitte Technology says data will play an increasingly pivotal role in maintaining a competitive edge.  If data is in fact the “new oil”, banks sit on a well of information that can enable them to drive innovation and not only keep up with change, but lead it.”

Verster notes that international banks, beset by a myriad of new regulations and the negative impacts of the financial crisis, are finding it increasingly challenging to provide improved returns for shareholders. What is of concern is that this scenario is having a similar effect on South Africa’s banks, says Deloitte.

noted that banks were presently coping with the introduction of the most comprehensive set of regulations that the global financial services industry has seen in 70 years.

“Even though our banks were not responsible for, nor directly involved in the challenges that enveloped the global economy, they are caught by the fact that they are active players in a regulated global market. They therefore have to contend with the regulatory and economic aftermath that has resulted,” says Verster, adding that current trends in the banking industry have implications for South Africa.

“A common element that comes across in trying to achieve the quest of meeting regulatory demand, providing a better customer experience and uncovering growth opportunities is that of data says Verster. It is now essential that the long-held goal of structuring and putting to use the huge amounts of data generated by South African banking is effectively resolved,” he says.

“The financial services industry has become a technology business and the effective and creative utilisation and analysis of the massive amounts of data they have access to, will be one of the key characteristics that will differentiate the future winners from the losers in banking. Although cost containment will continue to be an area of focus, especially given the relatively high cost to income ratios in South African banks, there is a point at which it becomes difficult to drive costs down sustainably.”

“In common with their global counterparts local banks must continue to focus on driving differentiation and excellence in serving their customers. These initiatives will support them as they move to comply with existing and impending consumer protection regulations while at the same time helping to retain and grow their customer base, in an increasingly well-informed and demand-driven market,” says Verster.

There is a need, he says, to limit the spiralling cost of compliance by creating opportunities for efficiencies and alignment within the business. He adds, however, that given the prevailing regulatory climate, it is unrealistic to expect the cost of compliance to significantly reduce any time soon – if ever.

“The focus must therefore move from cost reduction to better management of compliance risk without further increasing the spend. Compliance therefore must be embedded as a ‘business as usual’ activity throughout the bank, rather than being a series of reactive regulatory responses. We are, for example, starting to see compliance being used as an opportunity to gather more direct customer feedback and using that to redesign processes to improve the customer experience,” says Verster.

There will be continued disruption in the payments business with new products and players entering the market. Even if only for defensive reasons, banks need to actively seek alliances and possibly forge partnerships with a new kind of third party. This is something quite different from the traditional outsourcers banks have become used to dealing with.

“Banks should identify links with mobile network operators, innovators and technology companies. Each bank providing its own unique solution is not feasible. We should not forget the technological impact of trying to meet this particular challenge – existing systems in use simply do not easily support the kind of front office digital solutions bank’s customers are going to be increasingly demanding of them.”

Banks should also begin effectively leveraging alliances and intelligently rationalising technology and therefore the costs associated with it. “The objective should be on progressively building the bank of the future, while maintaining a viable bank for today. The institutional response to these issues requires new thinking and innovation. This is simply not the time for banks to be re-visiting old strategies that they have turned to in previous economic downturns,” Verster warns.

The market appears to reward and put a market premium on innovation. “We recently saw one of South Africa’s banks being voted the world’s most innovative bank.

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