New Banking Landscape

It's not easy to make a buck in the banking business nowadays. Remember the old days when banks just took in deposits and used that money to make loans? The future of banking might not look like that anymore. Weary of their abysmal results, attacks from shareholders and the watchful eye of regulators, banks are now thinking long and hard about how they do business.

Here, I share few of my thoughts of what might hold and reshape banking industry over the next few years.

Firstly, era for big banking is over. Low cost direct and integrated banking propositions will take over. Citigroup unveiled plans to split into two distinct entities, effectively bringing an end to its financial services "supermarket" model. Most successful banks will gravitate to a retail/commercial banking business model and this new model will rely on pulling customers in rather than pushing products out. More tailored-servicing, target segments and get to know their customers better in a much simplified model, focusing more on an integrated multi-channel distribution network rather than on branch locations. I believe only few players will be able to operate with truly simplified operating models pursuing economies of scale and become specialists, after all.

Secondly, non-traditional competition to drive innovations. It would not be surprise to see the entrance of non-banking entities such as retailers, telecommunication operators, energy companies etc to become niche players in some markets. The United Kingdom's biggest retailer Tesco said its personal finance unit would open a customer centre in Scotland, creating 800 jobs and bringing the group nearer to providing full banking services.

Thirdly, cost restructuring will drive higher return on equity. Banks will continue to remain highly regulated and renewed appreciation of risk will drive profit margins thinner. Either ones work on high leverage model and off-balance sheet earnings, otherwise, cost restructuring will be one and only one key factor that will jack up return on equity. Malaysian banks certainly will have much scope for cost reduction from current average cost-to-income ratio of 49.9% and it has the potential to be bought down to level of 30-35% and that essentially will translate of +30-40% rise in return of equity easily. That is only possible through alliances, shared services and sourcing models.

Fourthly, leapfrogging the competition with customer intelligence. Soon, risk analytics, customer analytics, pricing optimization and pro-active management of NPLs will become standard operating procedure for all banking players. With these new set of tools, this allows players to venture into low-cost and aggressively priced products, like retirement, life, health and home insurance and will also help to open doors for Islamic finance, microfinance and other products that focusing on sustainability like wealth management products.