Turmoil in the financial markets has shifted the focus of banks from growth and innovation to risk management. But with non-banks diversifying across the banking business, now more than ever it is essential that banks look for new ways to differentiate themselves from the competition and prove the value of the traditional banking outlet
In March 2011, a bank's focus was on growth strategies and innovation. But events in Europe and a poor second quarter have increased uncertainty in the market and as a result, risk management has returned as the central platform.
This, coupled with the arrival of new regulatory reforms, has meant that a bank's focus has shifted onto how best to manage growth in a period of regulatory, business and financial uncertainty. But a question that should be asked is: why are banks not collaborating more on areas such as risk and client onboarding?
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Working together
Take the process of opening an account, for example. Every time a client has to deliver identity proofs to the bank, the bank has to ensure that 'anti-money laundering' and 'know your customer' procedures are followed. Why is it that banks do this every time for a client or a company? Surely a company or individual should be identified once – when they first open a financial account – and then that identity can be used for any future account openings with that institution, or any other thereafter.
This would make sense, as after all, a bank would never outsource its risk management function but would happily outsource risk administration in terms of data collation and document management. Then banks would be able to concentrate on the value-added areas of client differentiation.
Standing out from the crowd
Client differentiation is becoming increasingly important for banks, as so many parts of the banking business are being eroded by new players and innovative start-ups. This is something that the banks have always known; back in the 1980s, for example, it was hard to think of any bank product that could not be offered by a non-bank. However, it was harder then for them to offer them. Now it has become easy, and this is why there are so many small firms starting up and taking bits of the banking business. In many cases those small firms are becoming big firms, such as PayPal.
Any part of the banking business can now be chipped away by a firm using simple, low-cost, greenfield technologies
Any part of the banking business can now be chipped away by a firm using simple, low-cost, greenfield technologies. This presents a real concern for banks and a real opportunity for newcomers in the market.
Technological threat
Another area that is changing the face of banking is technology itself, and procedures such as real-time payments. Real-time payments are a potential game changer for correspondent banks, particularly if they can move into real-time cross-border transactions. They are not so key for corporates as they are more concerned with trade and cash forecasting rather than immediate funds transfers. In fact, some corporates are wary of real-time as they see it as a way for the bank to charge them more as real-time overdrafts come into play.
There is both a threat and an opportunity in real-time for the corporate sphere; but there is definitely the potential for a good service to be offered by global transaction banks to their correspondent banks.
Another concern is what is happening in the trade and financial settlement space. The regulators seem to want to consolidate these, and some correspondent banks and corporates would like to do the same. The trouble is that the more you consolidate financial flows into fewer platforms, the more risk you create. Risk implies you should diversify and hedge your operations, not centralise and consolidate them.
These are challenging times for banks and a time to focus on all areas not just regulation and risk.
