IMPACT OF EMERGING TRENDS AND ADVANCEMENTS IN THE GLOBAL BANKING AND FINANCIAL SERVICES INDUSTRY

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IMPACT OF EMERGING TRENDS AND ADVANCEMENTS IN THE
GLOBAL BANKING AND FINANCIAL SERVICES INDUSTRY

• Terrence W. Farrell
• Presentation to Caribbean Association of
  Indigenous Banks
• Conference
• St Lucia, November 14-16, 2004

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Banking has traditionally involved three (3)
functions or activities
Custody
Credit
Payments
Bank Vault
Bank Draft
Direct Lending
Cheques and Clearing

• Multiple Forms of Indirect Lending and Risk
  Mitigation
• Syndication
• Securitisation

Technology
Electronic Funds Transfer
3
There has been a decisive shift in market power
in favour of the bank client owing to the
commoditisation of banking products and services

• Alternatives to Bank Deposits-
• Insurance Products
• Mutual Funds (money market funds)

• Alternative Cash, Foreign Exchange and Payment
  Options-
• Remittance Services
• Credit Unions
• Money Market Funds

• Alternative Credit Options-
• Retailers (e.g. Courts)
• Insurance Policy Loans
• Credit Unions/Building Societies

4
The growth of Indirect Lending has led to the
diffusion of market power among banks, issuers,
underwriters and credit rating agencies

• The combination of
• Tighter Regulation of Risk-taking
• More complex credits in the newer industries
  e.g Internet-based business models
• has led to the emergence of
• Specialised instruments such as derivatives
• New financial institutions which work with
  traditional banks in managing those credit risks
• Rating agencies

5
Technology has empowered clients with
Information
ICT
Banking Industry
Technology has transformed Payments
Competitors have emerged outside the banking
industry
Regulators
Regulation has reduced risk taking capabilities
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IMPACT OF THE CHANGES IN THE BANKING INDUSTRY
ON COMMERCE

• Transactions are now instantaneous float has
  been largely eliminated cash can be swept and
  managed much more efficiently.
• Households and firms can effect many
  transactions Anywhere, Anytime, and increasingly
  ANYHOW (Voice, Wireless, Call Centre, Internet,
  Cellphone)
• Scope for fraud (identity theft, interception
  of transactions, etc) has grown significantly

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IMPACT OF THE CHANGES IN THE BANKING INDUSTRY
ON THE BANKING INDUSTRY ITSELF

• Erosion of margins supernormal profits in
  banking have disappeared incremental earnings
  growth is achieved through consolidation
• Scale is crucial to bank profitability banks
  have had to become regional, national or global
  in scope and reach
• Continual investment in technology is a
  business imperative, even though much of that
  investment is defensive and confers no long term
  sustainable competitive advantage
• Yet, banks have to strive to achieve and
  maintain customer intimacy and loyalty

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Some predictions made in 1995/6 about the future
of Financial Services P. Gosling, Financial
Services in the Digital Age

• On the Bank Branch-
• The traditional bank branch is on death row
  along with some of the traditional banks
• The proportion of transactions conducted by
  branches will fall from 40 per cent in 1993 to
  less than 20 per cent in 2000
• electronic banking is going to handle 80 per
  cent of all transactions in perhaps five years
  (1996)
• Four alternative visions of the bank branch-
• General retail centre with kiosks operating as
  electronic brokers but still owned by bank
• Branch as a franchised operation
• Freelance branch
• Electronic bank

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Summary and Conclusion

• The banking industry today is vastly different
  from just 20 years ago
• Banks have less market power and the industry has
  maintained profitability because on restrictions
  on entry and because of consolidation
• Banks will struggle to maintain margins in the
  Payments business
• The Credit business has become more specialised
  and banks are playing a less important role
• Bank consolidation will continue as will other
  means of controlling and reducing costs such as-
• Business Process Outsourcing
• Franchising
• Use of Information and Communications
  Technologies to shift work on to the customer
• Streamlining and rationalising branch locations
• Banks will become an element of Integrated
  Financial Services organisations, which will
  incorporate a range of services around payments,
  credit, securities, insurance and mutual funds.

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CARIBBEAN IMPLICATIONS

• The process of consolidation in the region is
  well advanced
• Banks in the region will have to move more
  quickly to deploy information and communications
  technologies
• The experience of banks owning insurers or vice
  versa in the region has perhaps prejudiced
  regulators, but the move toward IFS is inevitable

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THANK YOU
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Support Slides
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• Imaging
• Web-based transactions
• Security

• Basel II
• Gramm-Leach-Bliley (eliminated restrictions of
  Glass-Steagall)
• Riegle-Neal (inter-state banking)

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• Cheques used in retail transactions declined in
  the USA from 49.5 billion in 1995 to 42.5 billion
  in 2000
• Over the same period the number of electroic
  transaction doubled from 14.6 billion to 28.9
  billion
• At the end of 2003, the 10 largest banks held 44
  in total industry assets up from 19 in 1984.

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• Eight Largest Banks in USA _at_ Jan 2004
• Citigroup
• JP Morgan Chase
• Bank of America
• Wells Fargo
• Wachovia
• Bank One
• Washington Mutual
• Fleet-Boston

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US National BanksKey Statistics 2001-2003
Source FDIC