IF DAYS COUNT, HOW ABOUT HOURS? 2019 BANKING INDUSTRY OUTLOOK
Last year got off to an energetic start. It’s been a year now and how memories can fade, but economic growth worldwide was intensifying in January, advancing at a steady clip, and then … clunk. China, Japan, the Eurozone economies and the United Kingdom all began to weaken. The U.S. kept it moving but despite its acceleration, world markets continued to contract and pundits are now predicting a slowdown from 3.2 percent growth in 2018 to 3.0 percent in 2019.
With that said, however, the global banking system finds itself in one of its best positions in more than a decade. While recovery from the financial crisis has not been consistent across regions, total assets (per The Banker’s Top 1,000 World Banks Ranking for 2018) ascended to $124 trillion and return on assets (ROE) posted an impressive 0.90 percent. Banks in the U.S. have returned to health much more quickly thanks to forceful policy interventions and prudent regulatory measures. Total U.S. bank assets coming into 2019 hover in the $17.5 trillion range and efficiency ratios are posting new highs.
Within the larger transportation, logistics and supply chain management arena, banks and their ancillary collaborators play a critical role in financing a complex system of moving parts and players. Innovation is critical and for 2019 the banking outlook will be defined in large part by further technological developments and closer collaboration between actors.
We’ve been hearing about blockchain for a while now, but 2019 is poised to be a breakthrough moment for blockchain in the banking sector, with a notable focus on supply-chain management. Close to every major company worldwide runs enterprise resource planning (ERP) and supply chain management software. Yet, there are still some antiquated, human elements mixed in which make it difficult for firms to take full advantage of the technology. Global supply chains are giant ecosystems, with hundreds if not thousands or tens of thousands of moving parts, all trying to work together from a financial perspective to either achieve financing, transfer funds or get paid. Efficiency is at an all-time high, which means delivery times have been shortened and are putting pressure on middlemen (banks) to process funding for all transactional entities.
Blockchain has the potential to accelerate payment processing time and reduce transaction costs. According to an Accenture survey, “nine in 10 executives said their bank is currently exploring the use of blockchain.” Instead of relying on a central intermediary that would need to be negotiated with, managed and shared around the world, blockchains synchronize transactions and data across a shared network where everything is transparent and open to those on the network.
This last point is critical, however, as blockchain and distributed ledgers are only as valuable as the shared network they sit upon. Expect more integrated collaboration across countries with not only banks but financial technology companies (FinTechs) to arrive at a backbone in 2019 with which to underpin the system.
Mentioned earlier, FinTechs have exploded due to the ever-increasing integration of trade across borders. In earlier times, certain FinTechs concentrated their collaboration with individual banks, but 2019 is opening the door to a wider, broader banking ecosystem where FinTechs are developing and bringing to the table innovative technology—such as robotics, artificial intelligence and machine learning—to the collective table.
FinTechs make sense for banks as banks desire one thing: the best ROE they can achieve. In 2016, EY reported the largest 200 global banks reported average ROE of 7.1 percent. To get to 12 percent, for example, those same banks would need to increase revenues by roughly 15 percent and reduce their costs by just under 14 percent. FinTechs help banks streamline, drive down costs and enhance customer service. This is going to be front and center in 2019 and for years to come.
At the moment, approximately 12 percent of European supply chain finance programs are managed via FinTech platforms. The statistic in North America is not much different and while this figure perhaps will not double by the end of the year, the cooperation between FinTechs and banks will become much more pronounced.
Lastly, AI. Hardly confined to the financial sector, AI is revolutionizing how nearly every sector of the economy works. From virtual assistants such as Amazon’s Alexa to chatbots, at an individual level Accenture reports that 37 percent of U.S. consumers by the end of last year will have owned a digital voice assistance device. This has been spilling over into banking in a multitude of ways.
Customer service automation, especially vital across countries, languages and within supply chains, is resolving client issues at a fraction of the price as opposed to a real person. Autonomous predicted that AI could result in $450 billion in financial sector savings by 2030. In a similar vein, machine learning is integrating and analyzing data from multiple databases to arrive at a more holistic, 360-degree view of the customer or firm, which results in highly personalized products and services uniquely tailored per group. Behavioral data, credit and savings products and goals of the organization or person (personal goals) are shared and analyzed accordingly.
While not commonly associated with AI, fraud prevention and overall security will also be big issues for the banking sector moving into 2019. In this regard, AI is proving to be of excellent assistance with its unique ability to run through hoards of data and identify patterns that would otherwise elude the human eye. McAfee notes that cybercrime costs the world economy approximately $600 billion. AI can detect fraud in real time, providing banking and FinTech entities, as well as their customers and ancillary suppliers, information on the spot that could be disastrous if not managed correctly. With AI alone, Mastercard reduced “false declines” for its customers by 80 percent.
This year will likely see more radical banking changes as compared to 2018. As the world economy continues to work through some bumps and bruises, expect the banking outlook to be rosier.