Banking Industry Insights: Going back to the Roots Part 1
In 1472 the first known surviving Bank was established in Italy. The Monte di Pietà (also known as MPS) provided loans to the poor and needy from Charity monies at lower rates than what other Lenders offer and also at better repays conditions. The Bank was authorized by the local government and it helped the local society with its financial needs
and at the same time was profitable. The Bank still exists and has approximately 3000 branches, 33000 employees and 4.5 million customers in Italy only.
Why do Banks exist?
Banks exist because of Trust, lenders and borrowers need a safe medium to exchange the main product “money”. Banks also exist because of the bridges they build “relationships”. These relationships trigger expectations “Services” and “Products” that can only thrive and survive in a secured and well regulated environment. The performance of all these factors creates a level of Confidence that Banks and Rating Agencies monitor carefully.
What do Customers need?
A recent study on Global Banks done by Ernst & Young, indicates that retail banks are entering a new era. Setting out a clear strategy is becoming more difficult as regulatory and political intervention changes the market structure, and banks are under enormous pressure to restore public confidence in the role that they play in society. As banks respond to these structural pressures across markets and strive to obtain a competitive advantage, the challenge remains to keep the customer experience and wider brand perceptions central to all strategic thinking. Since then many Banks were established and many have disappeared but all managed to make the Bank experience of the simple user (basic customer) very complicated. The majority of Bank customers around the world have basic needs such as deposits, loans, payments and collections while Banks spend a huge amount of investments on marketing other products where the marginal profit for the Bank is high and the level of customer understanding of these products is very humble. By not listening to what the audience needed and by creating fictive products around mortgages and other complex derivatives, the world witnessed the 2008 Financial Crisis that started a new era in the Banking sector and changed the results of all previous studies and prognosis around the Future of Banks in the next decades.
The lost Confidence in Banks
The impact of the latest Banks and Brokers bankruptcies is massive. The effects were not limited to the local markets, customers and shareholders were generally Global and in one way or another remote economies were affected too. Even other Banks that were not involved in the crisis suffered a loss of customer confidence. According to Ernst & Young’s report on customer confidence, 44% of customers (globally) say that their confidence in the Banking Industry has decreased in 2010. Within Europe, the UK (63%) Germany (61%) and Spain 58% have seen the largest falls in customer confidence. However emerging markets trust has risen, with 75% of respondents in India.
The next challenge is to rebuild trust and try to gain back the confidence of the customers. This needs more than a sound management and a tight risk management process. Banks need to come closer to their customers and provide the service the customer needs instead of selling the product the Bank needs to sell. Customers in 2012 and onwards are generally updated on the spot with all local and global events. With the spread of Internet even in remote areas and the rapid spread of smart phones, Banks need to invest more in interactive and social media, branding and mobile phones applications that keep the customer at a closer contact with their Bank. Fortunately the competition between Banks will push this process forward and we will allow the customer to have access to the needed services on demand.
Who will lead the Banking Industry in the next 40 years?
According to a study published by PWC in 2011, Emerging Markets Economies (EM) Banking sectors are expected to outgrow those in the developed economies. Based on PWC’s model, by 2050 the leading E7 emerging economies could have domestic banking assets and profits that exceed those in the G7 by around 50%.
Source: PWC Projections of domestic banking assets in the E7 and G7
Emerging Economies are expected to overtake the leadership of the Banking Sector in the next decades. Ranking and names can change but the basic reasons why Banks exist will always remain the same in principle; providing the service that the customer needs in a secure and suitable environment. Going back to the roots might help the industry in rebuilding confidence. Simple, safe and less complicated products will dominate the future customers’ demands and an ultra-transparent Bank commissions, fees and charges will be a must for a confidence rebuild process.