As the calendar turns to another , one of the things I look forward to is putting together my annual Top 10 Banking Trends report. It’s a chance to connect with colleagues and clients and reflect on what the year gone by means for the year ahead in the banking industry and then capture that thinking in an interesting and thought-provoking way. Every year I wind up with more material to fit into the paper than space allows.
Which is why it was such a pleasure to be a guest on this Sibos podcast, hosted by Brett Price, to discuss the year ahead in banking. It was a welcome opportunity to dive into some of the trends (and the forces that connect them) in a more extended conversation.
On that note, here are three predictions for the banking industry drawn from my conversation with Brett.
Prediction #1: The pandemic will squeeze profits and fuel strategic convergence
COVID-19 caused a tidal wave of change in banking, but I think one of its biggest impacts will be on the underlying profitability of banking—despite the material benefits some capital markets banks have realized from the short-term volatility.
If you look at all of 2020, profits in banking were down 30-70% depending on which market you are in. Coming back will be a marathon, not a sprint. We project that banks in the US and Asia will return to pre-COVID profits by 2022. But in Europe, the rebound will take until 2023 and possibly beyond.
We see three major developments in this world of compressed profitability:
- More domestic M&A and consolidation where possible to reduce costs
- Portfolio rationalization to shed marginal businesses
- Increasing pressure to scale up and be better placed to handle industry convergence with Bigtech
Prediction #2: Big tech finance will create back-end opportunities
Many banks are increasingly concerned about digital giants like Apple, Amazon and Google moving into financial services. But while some have already launched financial products, like the Apple Card, the Googles and Amazons of the world are not interested in running regulated balance sheets. Instead they are interested in managing the customer experience and capturing the data that goes with it.
For evidence, look to Asia (especially China), where transaction banking and retail payments have disappeared into broader digital lifestyle apps run by digital giants like Alibaba and Tencent. These financial services are now digitally native and many of the ultimate balance sheet providers have faded into the background as vendors in someone else’s customer experience.
This integration is also increasingly present in developed markets, though in a different form. Many services like Uber take payment directly through their mobile apps. The Starbucks app today accounts for almost 40% of all Starbucks transactions and seamless order ahead and embedded payments has been key to their COIVD resilience.
In the year ahead, these trends will present banks with a choice: do they want to maintain a strong customer-facing presence, run their own banking app, and fight for share of wallet? Or do they want to be a partner in someone else’s digital banking experience?
The choice each bank makes will come down to its competitive strengths and the economics of its business model. But we expect to see more ‘banking as a service’ in the marketplace in 2021.
Banking Top 10 Trends for 2022: Our annual report highlights the trends that are shaping the future of the industry.LEARN MORE
Prediction #3: 2021 is the year to walk the talk on green finance
Banks have been making public commitments to green their own businesses and reduce energy consumption for years. These projects have almost all been focused within the walls of the bank.
But the harsh reality is that at the same time as launching these projects and saying the right things about the environment, banks overall have boosted loans to the fossil fuel industry every year since the Paris Climate Accord was signed.
2021 will see a dramatic shift. The global appetite for real action on climate change is rising, both among consumers and regulators. The international climate change summit in my hometown of Glasgow, slated for November, will generate global media coverage on the issue and also provide a catalyst for both new private and public sector commitments.
This will put a lot of pressure on banks to use their ability to allocate capital to green the broader economy. As we’ve seen with other changes, once the dominos begin to fall, change will be hard to resist. Fossil fuel projects will continue to be funded, but the cost of capital is likely to increase—as will the reputational risks for the banks who remain involved.
Some banks are already getting ahead in this area, like NatWest in Europe, which has committed to getting out of fossil fuel lending by 2022 and halving its environmental impact by 2030. We have also seen Australian banks addressing their financing of the coal industry. As pressure mounts this could be the year when US banks really feel the pressure to make similar changes.
If you’d like to discuss the year ahead in banking, I would love to hear from you. I can be reached here. And be sure to listen to the Sibos Insider podcast and download my Top 10 Banking Trends for 2021.