Over the past decade central banks have unleashed waves of monetary easing unprecedented in scope and scale. For example, in August 2015 China devalued the yuan to ensure the growth trajectory from the past two decades sustains. In contrast, the U.S. dollar and U.S. treasury bonds are viewed as safe havens. As a result the U.S. dollar has strengthened and U.S. bond yields are at historic lows.
This begs the question: Is all the easy money circulating in the financial markets and economy fuel for innovation or fool’s gold?
Adapt or perish: From bust to boom
Banking in general, and Wall Street in particular, have been on a roll since the 2008 financial crisis. Banks have leveraged the unprecedented monetary easing to shore up their balance sheets. They are on much stronger footing, despite the burdens of regulation. According to JP Morgan Chase CFO Marianne Lake, legal and compliance costs have added up to an estimated $35 billion since 2010.
Leading banks have systematically spun off businesses that are not deemed to be strategic. Instead, leading banks have focused on segments where they can best serve their customers. For example, Morgan Stanley has focused on high net worth and ultra-high net worth clients. Morgan Stanley grew total assets under management as well as predictable revenue streams. Morgan Stanley did this by focusing on high net worth clients with complex investing requirements. Morgan Stanley’s aims to achieve 2015 target pre-tax margins of 22% to 25%. Additionally, the bank seeks less dependency on more volatile fixed income and commodities businesses (source: Morgan Stanley Q4 2014 Operational Update). Banks that have failed to adapt to the new environment have lost customers and market share.
Role of technology
According to Bain, banking customers now handle more of their banking interactions, on average, via smartphones and tablets than any other channel. Banks must rethink how they best serve their customers. Both emerging fin tech players (e.g. Social Finance) and established fin tech players (e.g. PayPal) have forced this trend. These providers’ business models center around the customer. Additionally, these providers simplified the delivery of financial services.
The banking industry has taken notice. Executives at leading financial institutions are responding by evolving their strategy and business models. One example is the Commonwealth Bank of Australia (CBA), which has chosen to go on the offensive against fin tech players. CBA leverages technology as a competitive differentiator. Using technology, CBA can better understand their customers’ needs. Additionally, technology allows CBA to deliver personalized services aimed at building customer loyalty. Another example, Adarsh Credit Co-Operative Society in India, also embraces technology. Adarsh Credit Co-Operative Society delivers mobile banking solutions when and where its customers choose. As a result, Adarsh customers no longer need to queue up at a branch.
We are human, after all
How will this cycle of innovation fueled by easy money worldwide unfold over the future? The jury is still out. New money raised Social Finance is valued at USD $4 billion, increasing its ranking to that of a top 30 U.S. Bank in August 2015. This has raised a few eyebrows. Those within the industry are asking, “Have we learned from the boom and bust cycles of the past two decades to ensure wise capital deployment? Or are we back to chasing fool’s gold?” …Time will tell.
I look forward to hearing your thoughts on this topic. SAP helps financial services institutions transform their business models and deliver innovative and tailored services to their customers. To learn more, visit SAP for Banking.