Letter from the Editor
A pivotal question facing the U.S. banking industry is how to fully restore profitability and investor returns in a post-recession marketplace where so many fundamentals have changed. With revenue growth still flat or rising only slightly, pressure is mounting for radical revision of banking’s infrastructure and cost base, most notably the traditional branch distribution system.
As detailed in our cover story, “Banking’s Limited Recovery and the Challenges Ahead,” returns on equity and assets have been shaved by roughly a third. The causes are many. New regulations have crimped fee revenues and liquidity options while raising capital requirements and compliance costs. Lending spreads face fierce competitive headwinds, and the industry’s net interest margin has been in long-term contraction. Meanwhile consumers are accelerating their transition to digital banking, which is changing the ground rules in customer acquisition and eviscerating the branch.
As industry leaders consider big-picture structural questions, there are many emerging issues that require immediate attention. Chief among them is dealing with a changing rate environment. To thrive as rates wobble upward, banks will need to sharpen key abilities that cut across both deposit-gathering and lending franchises. These include segment optimization, analytic pricing, and relationship optimization, as discussed in “Rising Rates and NIM: Myths, Realities, Winners, Losers.”
Drilling deeper into analytic pricing, big changes are in store with promotional deposit pricing. In an emerging era of web-enabled shopping, new deposit campaigns face increased exposure to “promotional fatigue,” or diminishing returns. This phenomenon reflects increased cannibalization of the current book of business, plus increased consumer knowledge of out-of-market offers. Responses are presented in “Promotional Deposit Strategies: Getting Ahead of Diminishing Returns.”
On the lending side, mortgage pricing also is in need of refinement. As discussed in “Demand Side Mortgage Pricing: A Way out of the Expense Squeeze,” an analytic understanding of customer demand differences can unlock competitive advantage at a time when refinancing is on the wane and purchase volume may not take up the slack.
Rounding out the issue are articles on product innovation in small-dollar liquidity; the customer journey as critical context for monetizing big data; thin-network market entry; and the banking perspective on marketplace lenders.
—Steve Klinkerman, Novantas Review Editor
Via digital convenience and strong marketing, challengers are penetrating select local deposit markets with just a few branches. Are branch-heavy incumbents prepared?
Looking beyond overdraft, the general direction of product development for small dollar liquidity will center on new forms of unsecured credit. Are banks ready?
As marketplace lenders gain steam with their online model for marketing and originating installment loans, banks need to take a close look at required skills and strategic options.
Via the systematic study of competitive pricing position and price elasticity of customer demand, margins and revenues can be optimized in challenging circumstances.
To achieve real results that materially exceed the cost of implementing a big data platform, banks need to set a specific agenda for developing high-value applications.
Banks need to clarify their deposit needs over the next few years and overhaul the metrics, skills and strategies used to drive deposit gathering.
While rising rates may provide a lift, urgent effort on multiple fronts is needed to rebuild or replace longstanding pillars of the banking business model.