A survey of finance leaders anywhere in the world would probably show that increasingly complex regulation and growing competition are the two main issues that they have to contend with at present.
In the past 20 years, the financial services industry has undergone great change, including deregulation, a host of technological innovations and the growing impact of globalisation. In response, the regulatory framework has also changed.
Reform continues apace and that is having a profound impact on the banking industry’s structure, efficiency and profitability.
Pace of change
Citi believes that change is accelerating and that the forces behind it are both fundamental and universal. While those challenges are here and now, and bring with them far-reaching implications, they also provide real business opportunities for those willing to take the initiative and embrace change.
In Europe, that process has brought with it consolidation within and across markets, increased cross-border financial service provision, the emergence of new and increasingly sophisticated products and services together with alternative trading markets and systems. Technology is influencing innovation as providers seek to offer faster systems, enhanced real-time information, greater control and improved levels of accessibility.
Finance is, by its nature, a technologically intensive business and the advances of the past 10 years have had a far-reaching impact on financial institutions. Regulatory changes, driven in part by a response to technical innovation, are affecting the world’s financial systems and nowhere more so than in Europe.
Cost of correction
The purpose of regulation is to correct market inefficiencies and to promote greater stability, but it comes at a price, the most obvious being the expense of compliance. The implementation of detailed provisions is not only costly but also time consuming; IT systems need to be overhauled, and internal procedures and often well-established business practices amended.
The EU’s efforts to create a single financial services market will require banks and businesses to change fundamentally the way they work. Deregulation and technology have led to greater complexity and new risks. As a result, different forms of oversight have been required, and the tools and interventions of regulators have had to change.
Initiatives such as the Single Euro Payments Area (Sepa), the Markets in Financial Instruments Directive (MiFID) and TARGET2-Securities (T2S), which will bring changes to the payments, securities and clearing and settlement infrastructure, will completely alter the competitive landscape. If they are successfully introduced and work in the way that has been anticipated, a reformed financial services market will offer more opportunities and choice, enhanced transparency and greater diversity for all participants.
Bringing change
The successful implementation of MiFID, the aim of which is to make Europe’s investment services industry more efficient and competitive, will provide opportunities to gain a commercial advantage in the European marketplace, while T2S is paving the way for increased efficiency and better pricing for clearing and settlement.
Alongside MiFID, Sepa has been designed to standardise and harmonise processes and payments instruments across Europe. For example, it will help to accelerate cost reductions, drive greater automation and increase centralisation. Companies will benefit from the faster transfer of funds and the centralising of their payment processes.
Paradigm shift
The financial services industry is facing a paradigm shift that will require banks to operate in a totally different way. The shifting global regulatory climate, the globalisation of commerce and the impact of technological innovation are combining to intensify competitive pressures. Banks are being forced to challenge historical business models as they confront multiple demands with limited resources, whether that is infrastructure maintenance, developing new products and services, or running a branch network. A shift in emphasis is taking place, from a focus on cost reduction to value generation, as companies seek to transform the way they operate.
Across the value chain, innovative ways of delivering solutions to clients are being created. The convergence of technology, distribution and communication will help to accelerate the pace of evolution, while breakthrough applications will rapidly transfer across borders as interoperability of market infrastructures and common standards become the order of the day.
Client demands
The demand is increasingly for convenience, mobility, control and transparency. At the same time, we need to ensure we are being responsible business partners and supporting sustainable business practices to meet our clients’ and employees’ broadening demands. Service is paramount, delighting the client imperative.
The client is at the centre of everything we do. At the end of the day, it is their evolving needs we need to meet if we want to succeed. Companies should not be entrenched in where they have come from, but rather focus on where they are going and, more importantly, where their clients are taking them. We need to give our clients what they want, how they want it, where they want it.
Global economic, financial and regulatory integration presents huge challenges but also tremendous opportunities; we need to embrace change. It is those that revisit their business models and create opportunities in the evolving EU landscape that will succeed in the globally integrated financial market.
Francesco Vanni d’Archirafi is head of Transaction Services and Global Commercial Bank, Europe, Middle East and Africa (EMEA), at Citi.
