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Fusing the ART, SCIENCE, and TECHNOLOGY of Business. Globally, The Banking Industry Is Undergoing A...
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Transcript of Fusing the ART, SCIENCE, and TECHNOLOGY of Business. Globally, The Banking Industry Is Undergoing A...
Fusing the ART, SCIENCE, and TECHNOLOGY of Business.
Globally, The Banking Industry Is Undergoing A Massive Change
Past, Current & the Future TrendsMark T. Williams
Fusing the ART, SCIENCE, and TECHNOLOGY of Business.
Banking Trends – The Basics While substantial industry changes have
occurred, the goal of bankers remains the same
1. Provide products that meet customer’s needs
2. Obtain a profitable return
Fusing the ART, SCIENCE, and TECHNOLOGY of Business.
Banking Trends – The Basics The true challenge for bankers, globally, then
is meeting customer’s increasing demands for:
1. Wide variety of products & services
2. Competitively priced products
3. Strong product support
4. Keeping customers happy
Fusing the ART, SCIENCE, and TECHNOLOGY of Business.
Banking Trends Dramatic changes have occurred over
the last 2 decades. Importantly, these changes point to
what is in store for the future. What are examples of the significant
global banking trends since the 1980’s? Past Current Future
Fusing the ART, SCIENCE, and TECHNOLOGY of Business.
15 Major Trends
1. The declining role physical branches play in product sales and delivery
Branches were more like community centers and were the primary customer contact point used by banks to sell and deliver products and services
Banks served the role as the primary intermediary between lenders and borrowers
Fusing the ART, SCIENCE, and TECHNOLOGY of Business.
Risk Management Questions Challenge - How do you sell products and
services to your customers if they are no longer walking into your branches?
Response – targeting of high-traffic zones1. Physical -In many countries, banks are putting
offices in grocery stores, pharmacies and other high traffic zones
2. Virtual - Internet
Fusing the ART, SCIENCE, and TECHNOLOGY of Business.
Major Trends – Branch Decline
Risks – Fraud creates monetary loss and undermines bank credibility
Manage Risk – Designate Chief Security Officer, a cyber cop
Banks are also offering free Anti-Virus software to all customers to give added protection to their online banking services
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Major Trends2. The level and type of technology used to
deliver products and services has changed dramatically.
Technology in banking is the motor that drives the car forward.
Technology supports Rapid and accurate internal decision making Operational efficiency Cost reduction Product creation Finding and keep clients
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Major Trends – Technology Technology as the bank’s “Motor” is a critical
core competency How is your company’s engine running?
Banks can not be competitive without investing to support existing and improving upon future technology
Fusing the ART, SCIENCE, and TECHNOLOGY of Business.
Major Trends - Advances
Technology evolution
1980s Since 1990s 2010
ATMs Automated Services ?
Telephone Banking
Debit Cards
Internet Banking
Smart Cards
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Technology Dependency
Risks – Monetary losses and/or loss of customers due to system crashes, fraud and loss of confidential information
Manage Risk – Through strong risk management practices
Project Management Ongoing investment and management Training
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Major Trends
3. Customers will be smart, informed and more sophisticated about what they want and less likely to remain loyal to one bank
They will only be interested in banks that can provided the many products & services “they want” to meet their needs
Customer power will continue to grow as they price-shop products and services
Fusing the ART, SCIENCE, and TECHNOLOGY of Business.
Major Trends Customer pouching will be increasingly
common If it costs $50 euros to find and attract new
customers through traditional methods…why not just pay customers $25 euros for setting up a new account
Fusing the ART, SCIENCE, and TECHNOLOGY of Business.
Major Trends – More for Less
Risk – Loss of existing and potential customers if unable to meet their needs and expectations
Manage Risk – Provide a wide array of competitively prices products and services
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Major Trends
4. Regulatory changes significantly impact the forward thrust of the banking industry
Need to comply with globally enforced standards of accountability and transparency
Remember the Big Bang (1987), G30, Basel II etc Regulation can be both a threat or an opportunity The challenge is whether to just comply with these
minimum requirements or to use this as an opportunity to truly improve and
enhance product delivery, risk controls and competitiveness
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Major Trends Risk - Industry is restricted from growth
markets or product areas and or increased compliance cost in doing business
Manage Risk – Requires proactive planning, commitment to change and investment in
People Money Infrastructure
Fusing the ART, SCIENCE, and TECHNOLOGY of Business.
Major Trends
5. Stiff competition from bank and non-bank banks
Nimble competition with lower cost structures will focus on taking business
Put pressure on profit margins Selling of concept products at lost-leader
prices
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Major Trends – Stiff Competition
Risk - Underwriting standards can become relaxed and credit loss levels increased. Also new products introduced without proper review can expose a bank to a great chance of losses
Manage Risk – Put adequate controls in place to monitor compliance with stated policies and procedures
Fusing the ART, SCIENCE, and TECHNOLOGY of Business.
Major Trends
6. Industry Consolidation Mega banks will grow larger – opportunity or
danger Bigger is not always better
Merger Rationale Merge or be merged Economies of scale Economies of scope X Efficiencies Ego
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Major Trends - Consolidation
Risks – Bank’s being left behind, credit concentration risk and the broader implications if such mega banks collapse.
Manage Risk –Long-term Planning and openness to changing strategic direction
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Major Trends
7. Real threat of disintermediation Banks loss of relevance – the buggy whip
example Non-bank banks filling the needs of former
bank customers and they don’t come back
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Major Trends
Risk – Loss of existing and future customers
Manage Risk – Innovation is the engine that will help retain and attract new customers
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Major Trends
8. Industry Globalization
Increased need for banks to meet client global corporate needs
Impact on bank1. Product required
2. Infrastructure
3. Correspondent Banking
4. Level of corporate commitment
5. Ability to grow and keep customers
6. Manage new and growing risks
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Major Trends - Globalization
Risk - Greater than expected losses as measured in dollars and/or customers as a bank is unable to capture, measure, monitor and control all relevant risks
Manage Risk – Adequate systems, technology and infrastructure
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Major Trends
9. Movement into Fee Driven Business lines & Services
How do banks make money interest income or fees?
Products - Insurance/Asset management Movement to asset management and
alternative investment products (hedge funds) $1.1 trillion market - Risk or Opportunity
Driven by stronger financial performance e.g., ROE and ROA
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Major Trends –Fee Pushing
Risk - Fees received are not commensurate to the level of risk taken. Giving services away for free while still assuming some risk.
Manage Risk – Clear focus on what line of business and services to focus on
Fusing the ART, SCIENCE, and TECHNOLOGY of Business.
Major Trends
10.Euro-ization and continued adoption by the previously Euro-unfriendly countries
Links a larger customer base with a single currency
Links a larger customer base with exposure to movements in interest rates and inflation
Stress case scenarios1. More countries adopt euro
2. Existing euro countries pull out e.g., Italy
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Major Trends – Euro-ization
Risk – linking to one common currency and monetary policy or missed opportunity
Manage Risk – Broad trends need to be incorporated into strategic business plans and resources allocated
Fusing the ART, SCIENCE, and TECHNOLOGY of Business.
Major Trends
11.Performance based incentive schemes
Directly influence employee behavior which can have negative implications
Upfront risk assessment by various stakeholders of possible implications are important
Risk management needs to be a key signoff before such schemes are implemented
HR Departments are also an important upfront filter to evaluate industry standards
Fusing the ART, SCIENCE, and TECHNOLOGY of Business.
Major Trends – Incentive Pay
Risk – New incentive schemes can create misalignment in employee behavior increasing a bank’s overall profile and potential for losses
Manage Risk – Ensure that incentive systems used do not create undesirable outcomes
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Major Trends
12.Emphasis on employing stronger Corporate Governance practices
Executive hiring, communication and segregation of duties
Stronger boards and active roles Internal audits Enhanced overall checks and balances Strong corporate governance practices assist
in minimizing operational risk
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Corporate Governance
Corporate governance is more than risk management
It is the framework to make sure that any actions taken (owners, management, staff) are in the best interest of the bank and shareholders
Fusing the ART, SCIENCE, and TECHNOLOGY of Business.
Major Trends-Corp Governance
Risk – Failure to focus on the most critical risk areas and a loss occurs. Undue emphasis on compliance with Basil II requirements without focusing on actual critical day-to-day workings of your specific banking structure and needs
Manage Risk – Put in place strong risk management structure that will address the day to day issues and also meet compliance concerns
Fusing the ART, SCIENCE, and TECHNOLOGY of Business.
Major Trends
13. Level and sophistication of risk taken by banks has increased.
Drivers include increased competition and customer demands
Strategy to specialize in certain products Strategy to provide a broad array of products Aggressive sales efforts New hybrid loan products e.g., interest only mortgages
and alternative investments such as hedge funds Selling of low to no margin concepts instead of products
Fusing the ART, SCIENCE, and TECHNOLOGY of Business.
Major Trends – Increased Risk
Risk Risk measurement methods and
techniques used are not adequate for the level of risk being taken.
Also, product related risk not being well understood and returns are not commensurate to level of risk taken
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Major Trends – Increased Risk
Manage Risk Strong Risk Personnel Systems Technology
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Major Trends
14.Global event risk has increased Geopolitical events Single commodity price movements of oil
remaining at $60 a barrel or higher for extended periods of time
Correlations fall apart reducing assumed diversification
Example - LTCM Risk
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Major Trends - Risk – Unanticipated events would
impact global economies and push bank customers into credit default
Primary credit exposure Secondary credit exposure
Manage Risk – Implement stress testing in monthly risk management evaluation and reporting
Fusing the ART, SCIENCE, and TECHNOLOGY of Business.
Major Trends
15. Operational Risk will continue to escalate in the next 5 to 10 years
As bank competition for customers intensifies and profit margins are increasingly linked to the volume of products sold
Banks tend to not quantify or report operational risk which results in a understatement of the level of risk
Technology can be a strength and a weakness Systemic risk
Fusing the ART, SCIENCE, and TECHNOLOGY of Business.
Major Trends
15. Operational Risk will continue to escalate in the next 5 to 10 years (continued)
Outsourcing risk - Use of third-parties and outside vendors Technology is a core competency, should it be outsourced? While outsourcing of services a bank can never eliminate
associated risk Mergers and acquisitions test weakness of existing systems Terrorism - risk of damage to assets or loss of life Are back-up systems in place, have they been tested and
maintained for dependability?
Fusing the ART, SCIENCE, and TECHNOLOGY of Business.
Major Trends – Op Risk
Risk - Operational risk not caught in time turns into a operational loss $$$$$$
Manage Risk – Put in place key operational risk measurements and control points
People Process Technology