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Fusing the ART, SCIENCE, and TECHNOLOGY of Business. Globally, The Banking Industry Is Undergoing A Massive Change Past, Current & the Future Trends Mark T. Williams williams@bu.edu
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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
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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
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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
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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
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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 zones 1. Physical -In many countries, banks are putting offices in grocery stores, pharmacies and other high traffic zones 2. Virtual - Internet
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Fusing the ART, SCIENCE, and TECHNOLOGY of Business. Major Trends: #1
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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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Fusing the ART, SCIENCE, and TECHNOLOGY of Business. Major Trends 2.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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Fusing the ART, SCIENCE, and TECHNOLOGY of Business. 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
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Fusing the ART, SCIENCE, and TECHNOLOGY of Business. Major Trends - Advances Technology evolution 1980sSince 1990s2010 ATMs Automated Services ? Telephone Banking Debit Cards Internet Banking Smart Cards
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Fusing the ART, SCIENCE, and TECHNOLOGY of Business. 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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Fusing the ART, SCIENCE, and TECHNOLOGY of Business. 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
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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
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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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Fusing the ART, SCIENCE, and TECHNOLOGY of Business. 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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Fusing the ART, SCIENCE, and TECHNOLOGY of Business. 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
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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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Fusing the ART, SCIENCE, and TECHNOLOGY of Business. 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
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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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Fusing the ART, SCIENCE, and TECHNOLOGY of Business. 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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Fusing the ART, SCIENCE, and TECHNOLOGY of Business. 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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Fusing the ART, SCIENCE, and TECHNOLOGY of Business. 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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Fusing the ART, SCIENCE, and TECHNOLOGY of Business. Major Trends 8.Industry Globalization Increased need for banks to meet client global corporate needs Impact on bank 1.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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Fusing the ART, SCIENCE, and TECHNOLOGY of Business. 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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Fusing the ART, SCIENCE, and TECHNOLOGY of Business. 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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Fusing the ART, SCIENCE, and TECHNOLOGY of Business. 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
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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 scenarios 1. More countries adopt euro 2. Existing euro countries pull out e.g., Italy
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Fusing the ART, SCIENCE, and TECHNOLOGY of Business. 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
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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
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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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Fusing the ART, SCIENCE, and TECHNOLOGY of Business. 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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Fusing the ART, SCIENCE, and TECHNOLOGY of Business. 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
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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
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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
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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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Fusing the ART, SCIENCE, and TECHNOLOGY of Business. Major Trends – Increased Risk Manage Risk Strong Risk Personnel Systems Technology
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Fusing the ART, SCIENCE, and TECHNOLOGY of Business. 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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Fusing the ART, SCIENCE, and TECHNOLOGY of Business. 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
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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
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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?
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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
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Fusing the ART, SCIENCE, and TECHNOLOGY of Business. Banking - Survival Under Massive Industry Change In the future, the common element of successful banks will be the ones that can effectively manage and anticipate these 15 significant Risk Trends
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