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Banks must commit to radical change


by Angela Faherty | Jul 15, 2014

The future of banking may not lie in the traditional bricks-and-mortar model with which we are all familiar, according to a new report from PwC New Zealand.

The report, entitled The Future Shape of Banking, says that as barriers to entry for non-banks to provide formerly core banking services continue to decline, the business models of today’s banks will be challenged. This could happen as soon as 2025 to 2030, it said.

Although New Zealand’s banks remain profitable, the report found that the industry needs to consider how long this strong performance can continue as technology, customers and regulation continues to change the business landscape.

Of particular concern is the fact that non-banks are beginning to snap up the services offered by traditional providers, such as equity crowd funding and peer-to-peer lending. This means that banks’ priority must be staying on top of this changing financial market.

“The banking industry of the future will look very different from today. New Zealand’s banks must play to their strengths and push ahead with transforming for the future or risk losing their incumbent advantage,” said Bruce Baillie, financial services leader at PwC.

These advantages mean that traditional banks’ brands and reputations remain powerful and are shored up by familiarity, experience and regulation.

“Trust matters in financial transactions and some of the resistance to alternative banking providers results from a lack of trust in their security. Brands and reputation will become central to banks’ value,” said Baillie.

Legacy infrastructure a hindrance

However, one of the biggest changes on the horizon is the speed of technological change, which can alter the cost structure of whole industries. This means that what was once a barrier to new entrants could become a handicap for incumbents, the report said.

“Traditionally the cost of banks’ technology infrastructure and bespoke systems acted as a defence to new market entrants. Yet, with the rise of mobile banking and online platforms and people’s willingness to do their banking online, banks’ legacy infrastructure and systems could soon be a hindrance. Technology is also making it easier for customers to switch between banks and other service providers,” Baillie added.

In order to stay relevant, it is critical for banks to commit to radical change and invest heavily in customer service and operational innovation to stay ahead of the curve in terms of technology, changing customer expectations, culture and regulatory change.

However, Baillie added that this need to transform comes at a time when the task of dealing with legacy issues and regulation is consuming huge amounts of resources, such as New Zealand’s new anti-money laundering regime and restrictions on high loan-to-value mortgages.

Stronger, more innovative and agile

Ironically, the report states that New Zealand’s banking industry could be vulnerable to challenges from Europe’s banking industry because it suffered more severely during the global financial crisis.

“Europe’s banks faced close scrutiny, and a raft of regulatory reform well beyond what we’ve seen in Australasia following the financial crisis, with some institutions brought to their knees,” Baillie said.

“Those that survived have emerged stronger, more innovative and agile than their counterparts around the world. Ongoing stress tests and a far more challenging market than New Zealand positions Europe’s banks well and poses a threat to New Zealand’s industry.”

He added that New Zealand’s approach to regulation will also need to change as the industry changes. He said that banking regulators focus on a smaller number of ‘too big to fail’ institutions that dominate the financial market. This will change in the future.

“In the future banking services will be more dispersed and the challenge for regulators will be to increase their remit to include areas that currently fall outside it or are only touched on at the moment. Also, who is to pay for and bear the cost of regulation, which will include monitoring many more providers? Currently it is the big financial institutions,” Baillie added.


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