Global bank profits are high
despite low consumer trust
Resident regulators monitor daily business
Banks earned large profits as they
refocused their operations, often
pursuing high-wealth clients on
the consumer side of the business
and serving the medium and
smaller organizations of rising
entrepreneurs on the business side.
Because of ongoing revelations of past
misdeeds, banks continued to suffer from
a massive deficit in consumer trust even as
consumers patronized banks, believing that
their money was protected, if not by the bank
then by government guarantees.
Restoring consumer trust was important to
safeguard the brand, lift internal morale and
sustain growth, at least in the case of retail
banks. In some instances, CEOs proclaimed
a higher vision aimed at both internal and
external audiences.
Not known for their innovation, banks
became even more risk averse under the in-house
scrutiny of government regulators. But
the rest of the business world did not pause
while the banks sorted themselves.
Instead, Alipay, a banking function of
Alibaba, and Apple Pay were only the most
publicized examples of how non-traditional
players nibbled at the perimeter of banking
and portended category disruption and
transformation.
Making money
The post-crash regulatory environment
raised two key questions: in what businesses
do banks want to operate, and in what
businesses can they operate? Generally,
global banks concentrated on three
businesses – commercial, investment
and retail banking – but their levels of
involvement varied by bank.
Regulations and consumer pressure
made it more difficult to be in the most
profitable business, investment banking.
Banks attempted to resolve the tension
between being a highly profitable investment
bank and strictly adhering to their social
responsibility values.
Banks divested some businesses because
they were unprofitable or because of the
regulatory burden. With exceptions like
Goldman Sachs, J.P. Morgan and Morgan
Stanley, many investment banks ceased equity
trading. Citi returned strong profits, even as
the bank streamlined many of its operations.
Many banks pursued wealth management
business. Leveraging its heritage in
international trade, HSBC cultivated
relationships with high-wealth individuals
among its commercial clients to build its
personal banking and wealth management
practice.
Businesses of small and medium size, with
an annual revenue of $50 to $500 million,
increasingly interested HSBC and many
other commercial banks, as governments
in developing markets sought to drive their
economies by financing entrepreneurial,
often family-owned operations.
Santander prospered as Spain's economy
strengthened. Economic growth in the
US helped balance the slowdown in Brazil
and elsewhere in Latin America. Spain's
economic recovery also boosted the
financial results of BBVA, the country's
second largest bank.
Following years of post-financial crisis
restructuring, the large Dutch bank ING
reported strong earnings, repaid its
government bailout early and passed the
European stress test.
Transformation
and disruption
But even as the banks prospered, they faced
potential threats as the industry transformed
faster than banks innovated. A growing
market of young people with above average
income transacted most of their financial
affairs online, and not always with banks.
As home ownership or family formation
complicates their financial needs and they
need a banking relationship, these younger
consumers may favor the Internet brands
with which they transact business everyday.
Internet brands could own the consumer
payment relationship, even if banks remain
the clearing house for all the transactions. In
that situation, the banks would gain fees and
interest revenue, but they'd perform more
like a utility.
The infiltration into banking by online
brands could quickly penetrate beyond
payment systems. Regulations that restrict
some banking activities don't apply to the
online brands, at least for now. Easy Internet
access also eliminates the viability of banks
as financial supermarkets. Any one-stop
shopping will happen online.
The impact of Internet brands on banking
is already evident in China, where online
leaders like Alibaba, Tencent and Baidu
offer mobile apps that make banking easier
and more nimble than interacting with a
large, highly regulated bank. (Please see the
regional banks story.)
Future challenges
The entry of nontraditional players could
threaten not only the key profit drivers of
banks, but also their fundamental role as the
gatherers and custodians of savings and fees
from transacting.
Banks potentially could be squeezed into
gaining just cost recovery and a small margin
– a utility business – unless they preempt
the Internet brands in forming banking
relationships with the younger generation of
customers.
Responding to changing demographics is
also critical. Aging boomers are entering a
phase of their lives when they're no longer
increasing their assets, but rather drawing
down their savings. The younger affluent
consumers will become the source of
savings deposits.
As many of these consumers for the first
time face major financial decisions, brand
and trust become important. Banks have the
requisite knowledge but the social networks
have the customer relationships.
