A new year always brings a plan for the future. But if 2019 is to serve as a guide, many of today’s expectations for 2020 will be turned upside down in coming months. Still, bank leaders can enter the year with strategies that will withstand any climate.
The events of 2019 certainly took most bankers by surprise. In the U.S., few expected the Fed to start cutting rates in July, not to mention the two additional reductions that followed the first one. The U.S. economy showed numerous contradictions through the year, baffling many. While consumers continued to drive economic growth, companies were far more cautious as tariffs, global instability and political uncertainty weighed heavily on the minds of bankers and businesses alike.
Through it all, U.S. banking operations have held up fairly well, partly due to strong credit trends.
But even the best performers can’t rest easy. Net interest margins will be pinched at banks around the world, forcing the need for smarter spending in order to maintain profit levels. Business lending will likely stay tepid. The direction of U.S. regulation will be uncertain all year as the 2020 presidential election looms.
And with Google poised to offer checking accounts in the U.S., it is anyone’s guess which non-bank will be next to jump into financial services.
With that in mind, Novantas is posing five questions that senior bank executives should consider in 2020.
Canadian banks saw less disruption in 2019 than did banks in other parts of the world. But high infrastructure costs, including digital investment, continued to weigh on banks of all sizes.
Although the Bank of Canada kept rates steady in 2019, the biggest near-term concern in Canada is the debt load of consumers, which stands nearly 66% higher than in the U.S. Delinquencies have remained in safe limits and the mortgage market has cooled somewhat due to regulatory changes. There is some concern, however, that low rates may encourage further piling on of debt, making future “soft landings” harder to achieve.
Canadian banks also are still juggling incremental expansion, either in the U.S. or overseas.
In Australia, slower consumer spending and drought have combined to create downward pressure on growth, prompting the Reserve Bank to cut rates three times in mid-to-late 2019. Profits were battered by credit deterioration and low rates, while banks also tried to recover from a series of scandals.
Continued regulatory focus on data protection and open banking in both Canada and Australia threatens to raise costs and reduce scale advantages of the largest players, similar to trends in the U.K. Regardless of the geographic differences, banks in these regions should consider the same strategies that will be critical in the U.S. in 2020.
DO YOU HAVE A WINNING STRATEGY?
It sounds simple, but this is the time to review the bank from top to bottom. Too many banks still try to be all things to all people. That’s one reason why many consumers surveyed by Novantas see few distinctions between financial-services providers:
One of the most important measures of success for banks of all sizes is customer acquisition and, in particular, digital acquisition. Does the bank have a value proposition and brand that attracts both corporate and retail customers? And can they be reached digitally? Fundamentally, is the bank gaining share in valuable markets?
It’s increasingly clear that national and digital players hold strategic advantages that fuel customer acquisition when compared with regional and mid-sized banks.
For nationals, it’s a simple matter of scale that gives them the luxury to make big bets and big investments in order to acquire customers. Although large branch networks are less important for daily banking than in the past, they are still valuable billboards for the national brands. Snappy apps and comprehensive product offerings attract customers who are willing to forego higher deposit rates that can be found elsewhere.
Digital providers, meanwhile, aren’t handcuffed to clunky infrastructures and the old way of doing things. As a result, they have the flexibility to test and learn quickly, appealing to potential customers in fresh and fun ways.
That leaves regional and midsize banks lodged in the middle, fretting about the future. Too many are locked in the old way of serving customers — from inefficient branch staffing to treating all customers the same. That said, mid-tier players show signs of experimentation that may provide a way out — from branchless national plays to new thinner-network propositions.
But who is the bank’s ideal customer? Can you really afford to be a utility player or should you narrow your focus? Is there a niche customer base or product that can make the bank distinctive?
HOW WILL YOU TACKLE TECHNOLOGY?
Technology can seem like a bottomless pit for investment dollars. Whether it’s new digital features or cybersecurity protection, costs are only likely to keep rising. Yet, you can also consider the demand for technology spending as an opportunity to assess the bank’s broader structure. Shed businesses that aren’t core and focus on the ones that are most profitable. Assess the benefits of building in-house solutions versus outsourcing some technology functions. Take advantage of technology that can make the bank more efficient and reduce costs, from appointment-setting in the branch to online onboarding of new accounts.
WHAT IS YOUR PLAN TO MANAGE THE BANK’S DIGITAL TRANSFORMATION?
Chances are that your digital transformation is already well under way, but there’s no rest for the weary. New entrants are taking aim at the old guard, backed by the deep pockets of private equity and venture capital investors. Consider breaking out of the current trap by forming a successor bank that can dip into new products and regions. A simplified and nimble infrastructure could ultimately replace the bulky, traditional behemoth. What customers do you want to serve and what is the best way for them to interact with the bank? Does a thin-branch focus or ultra-thin network make sense to woo new customers? What about a digital-only unit that can attract Gen Z consumers who may not be profitable today, but will be valuable down the road?
SHOULD YOU PURSUE M&A?
It wasn’t that long ago when CEOs pursued M&A to stoke their egos. The most recent round of deal-making in North America reflects the changing nature of the industry. U.S. banks have pursued larger mergers-of-equals deals that are predicated on the need to create scale in distribution and balance sheets to compete. Although joining forces to become stronger in the face of more competition makes sense and a bigger bank can better support necessary technology and branding investments, there are new pitfalls.
All banks need to reduce branch expenses, but buying a bank that has a poorly-performing core deposit growth franchise simply doubles the transformation challenge the combined bank may need to make. Indeed, recent Canadian acquisitions in the U.S. have raised staffing costs without creating significant returns to scale yet. Make sure there is good organic growth in a merger partner.
Furthermore, the union of two banks can provide scale, but also delay the progress needed to transform digitally. Mergers are disruptive. If the attention of the two banks is focused on rationalizing the combined bank, it might be detrimental to the change that is otherwise needed to keep up with the industry.
IS THE BOARD ENGAGED?
Is it the right composition and are members engaged in the right set of issues? When is the last time you assessed the composition of your board? You may have a technology expert or even a cybersecurity whiz in place, but is that enough? Are they engaged sufficiently in the changes in the marketplace and competitors? Do they know what younger customers want and older customers need? Do they reflect the bank’s changing demographics?
Co-CEO, New York
Kevin S. Travis
EVP, Toronto/New York