What were the major banking trends and themes in 2015? Here’s a top 10 selection of what emerged as the main developments over the past 12 months.
1. The regulatory nightmare: Massive penalties were imposed on the industry for its past misconduct, whether it was for manipulating the benchmark London Interbank Offered Rate (Libor); foreign exchange (FX) rigging; dealing with blacklisted entities; or mis-selling mortgage-backed securities (MBS) and payment protection insurance (PPI). Banks were punished with huge fines and in certain cases entered into deferred prosecution agreements as a promise of improved behaviour in future.
It was estimated that the combined amount paid out in penalties represents 10 years’ worth of IT spending by banks in North America and Europe, setting back system upgrades and the replacement of legacy systems. This reallocation of funds could come back to haunt the industry, as cybercrime and data breaches become more frequent and banks increasingly look more like IT companies.
On the other hand, there was also regulatory forbearance in the agreed delay in implementing the Markets in Financial Instruments Directive (MiFID II) across the Eurozone, to enable banks to get their IT systems and staff up to speed.
2. The rise of fintech: Fintech made deep inroads into banks’ core revenue streams by poaching some of their most profitable business. Digital disruptions, aka the ‘uberisation’ of banking, by these outfits and the US and European fintech ‘unicorns’ (those whose valuation has exceeded US$1bn) challenged banks intermediation role by offering peer-to-peer (P2P) services (the San Francisco-based Lending Club); launching digital-only banks (the UK’s Atom Bank); providing cheaper currency exchange (London-based TransferWise); and personal finance advisory (online robo-advisors).
At SIBOS 2015 in Singapore, Piyush Gupta, chief of DBS, warned his audience: “If you don’t get the digital transformation right in the next five years, you will be history.”
One response from banks was to invest in fintech start-ups, or in the case of Citi and JP Morgan to ramp up their in-house innovation labs. Challenger banks built on the fintech model while China’s social media giants such as Alibaba and Tencent launched their own. All these changes begged the question of whether tech firms providing banking services should be regulated like banks.
3. The decline of universal banking: The year saw major global banks withdraw from non-core business areas. Credit Suisse pared down its investment banking unit to focus on wealth management and Asia; Citi reduced its international presence – having announced in October 2014 that it would pull out of consumer banking in 11 markets; and UBS downsized its investment banking unit in favour of strengthening its private banking. These moves were also driven by higher capital requirements and shareholder pressure for returns as well as the ‘ring-fencing’ plans to separate bans’ retail activities from the riskier investment arms.
4. Changes at the top: To signal a break from past models and reposition themselves as nimble players in an app-driven mobile banking world, several banks named new chiefs who took over the top spot with high expectations. They included Barclays (Jes Staley); Standard Chartered (Bill Winters); Deutsche Bank (John Cryan); and Credit Suisse (Tidjane Thiam).
5. Massive layoffs: As banks rejig their business models and close branches on a large scale to sync with delivery model shifts, while technology continues to replace, more redundancies were announced. As many as 100,000 banking jobs went during 2015 in North America and Europe.
6. Blockchain gets serious: The brilliance of the blockchain technology underlying the digital currency Bitcoin found takers: both the Bank of England and the US Federal Reserve acknowledged its potential for facilitating payments in future. Blockchain’s attraction lies in transaction-wise encryption doing away with a central ledger keeper through a distributed database with full visibility.
This month saw Goldman Sachs filing a patent application for the new SETLcoin cryptocurrency for instant execution and settlement of trade. While Bitcoin could ultimately prove too volatile for widespread use as a currency, the technology it has spawned holds huge promise.
7. Renminbi internationalisation: The Chinese currency officially got the nod from the International Monetary Fund IMF to be included in its special drawing rights (SDR) valuation basket; symbolising its arrival on the world stage as a settlement currency and its use in global trading floors. The RMB will also be partly market determined with the People’s Bank of China (PBOC) now letting the exchange rate be based on the previous day’s closing rather than being arbitrarily determined. China also launched a cross border payment system (CIPS) that aims to rival SWIFT and proposed its own oil contract benchmark besides Bent and West Texas Intermediate (WTI).
8. Financial inclusion in developing countries: Countries across Asia and Africa are banking on mobile wallets and electronic cash (e-cash) as the platforms to bring large swathes of their populations into the financial fold. The Reserve Bank of India (RBI) dispensed licences for fully networked and tech-driven payment and small finance banks to reach out to the unbanked and underserved.
9. Increased banking buffers: In addition to Basel III’s common equity tier (CET 1) requirement that must be achieved by 2019, last month saw the G20 Financial Stability Board (FSB) propose the total loss absorbing capital (TLAC) principles. TLAC will be a debt-based reserve that serves as a fallback in the event of future bank failures requiring costly bailouts by taxpayers.
10. High frequency trading: Increasing automation of treasury deals is now a reality and algorithms are replacing proprietary traders on bank trading floors. Over a third (35%) of spot currency volumes are now on electronic trading platforms, which use lightning fast computers to book profits. The trend has only accelerated in the past two years, since the so-called ‘Volcker rule’ of the Dodd-Frank Act banning banks from trading on their own account.
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Europe’s opening banking regulation is finally here. After months of preparation across the continent, the Revised Payment Services Directive comes into effect on January 13.
The revised Payment Services Directive regulation, regarded as one of the most disruptive in Europe’s financial services sector, will begin to make an impact on January 13, 2018.