Prior to joining Deloitte, he was a sell-side equity research analyst and headed the research coverage on midsized banks for a large European bank. View in article, International Monetary Fund, “IMF data mapper: Real GDP growth,” accessed October 24, 2019. The search for a new identity by market infrastructure players, stable returns, and higher margins will likely prompt further consolidation worldwide, especially if the economics become more challenging. The fintech landscape is evolving rapidly. Social login not available on Microsoft Edge browser at this time. View in article, Joe Parsons, “Hedge fund performance forces prime brokers to rethink risk,” The Trade, August 20, 2019. Strategic moves such as Mastercard’s acquisition of Transfast (cross-border payments) may signify how the revenue mix could evolve in the future.85. Secured Overnight Funding Rate (SOFR), the proposed rate in the United States, has been increasingly accepted as a viable alternative. Lastly, consolidation in the exchange industry is taking on a new shade. And while banking is changing, so, too, could the purpose of banks. Czech Banking Industry Outlook 2020. Take, for instance, the perennial problem of delayed settlement in business-to-consumer payments. According to Venture Scanner data, Asia’s share of funding rose from just 9 percent in 2014 to 30 percent in 2018, even after excluding Ant Financial’s US$14 billion investment.166 That said, there appears to be no dearth of funding at a global level. This message will not be visible when page is activated. A push toward less risky investment advisory models is expected in 2020. Payments incumbents are pursuing M&A to gain complementary capabilities and expand into new markets.81 In 2019, we saw several notable M&A deals, such as Fiserv-First Data and FIS-Worldpay, in the US$1.6 trillion global payments processing business,82 attesting to the global growth ambitions of these players.83. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the "Deloitte" name in the United States and their respective affiliates. In addition, there has also been an increased focus/need for service externalization, with customers undertaking some service functions themselves. In Europe, fintechs are also making strides. While the question of a eurozone-wide deposit protection plan remains mired in controversy, the European Union (EU) has made substantial progress in other aspects of its banking union project. Recognizing the challenges ahead, some investment banks have restructured their sales and trading businesses and accelerated cost-cutting efforts.102 Of course, underwriting has not been immune to broader macro trends,103 with many banks decreasing their capital allocation and shifting emphasis to the advisory business. View in article, Ranina Sanglap and Baby Verma, “Indonesian M&A to still prove attractive for Asian banks in 2019,” S&P Global Market Intelligence, January 29, 2019. The banking industry is faced with many challenges. For instance, by 2100, rising sea levels could cost the world US$14 trillion a year,182 and the US economy could shrink by as much as 10 percent.183, Unsurprisingly, for the third consecutive year, world leaders ranked environmental threats as the biggest risk to the world.184 The banking industry is not immune: A recent Fed report found that the effects of climate change have a “pervasive effect” across all sectors of the US economy, including the banking industry.185, As such, central banks around the world, including the Fed, the ECB, and the Bank of England, are examining the implications for monetary policy and are also seeking ways to “bolster banks’ resilience amid economic disruptions caused by extreme weather.”186 They have also organized the Network for Greening the Financial System (NGFS) to boost climate risk management.187 Additionally, the Financial Stability Board (FSB) established the Task Force on Climate-related Financial Disclosures (TCFD).188, Many banks are already committed to improving the environment and combatting climate change. Their actions include reducing their carbon footprint, financing low-carbon businesses, promoting green bonds, and being transparent about their environmental practices. View in article, Erica Volini et al., Leading the social enterprise: Reinvent with a human focus, 2019 Deloitte Global Human Capital Trends, Deloitte Insights, April 11, 2019. View in article, Liz Hoffman, “Big banks reach for small deals as merger boom slows,” Wall Street Journal, April 2, 2019. Its planned relaxation (Volcker 2.0), in January 2020, would lift trading restrictions for midsize banks and ease compliance for larger banks.25 While the change should not greatly impact bank trading volumes, it will likely reduce banks’ compliance challenges.26, Numerous changes to the capital and stress testing framework are also underway. Risk functions have seen some modernization, and a few banks have begun reshaping their business processes and other middle-office functions, with some taking bold initiatives. In this report, KPMG subject matter experts offer a number of predictions for the industry which also shed light on three broader trends. But in this drive for change, leaders should also focus on the important mission of social responsibility. In this low/negative rate environment, transaction banks should increase their focus on proactively advising their corporate clients on optimizing their working capital and providing advice on mitigating potential financial risks—especially within cash management, treasury services, and trade finance. After some initial uncertainty, regulators around the world have worked fervently over the past year to find replacement rates and build out working groups that will support the transition program. View in article, Deutsche Bank, The road to real-time treasury, April 10, 2019. As technology continues to advance and new forms of data emerge, how should banks adapt their privacy practices? But the number of new startups has declined, which has been the trend for the last four years. To manage climate risk effectively, banks might need new, robust frameworks and analytical approaches. In Europe, where the banking industry is fragmented and suffering from anemic growth prospects with low to negative interest rates, the need for scale is becoming more pressing than in the United States. And while increasing the prevalence of ecosystems and data-sharing between institutions expands customer data, it also complicates data management and raises privacy concerns. Banks should continue to increase their fee-based income, as well as focus on cost management, but should not lose focus on their digitization efforts and regulatory obligations. Virtually every large wealth firm has a digital advice platform. View in article, Kat Van Hoof, “Top 1000 world banks 2019,” Banker, July 1, 2019. View in article, European Commission, “Adoption of the banking package: Revised rules on capital requirements (CRR II/CRD V) and resolution (BRRD/SRM),” April 16, 2019. Fraud and money laundering are now increasingly being conducted in cyberspace. Meanwhile, AI applications’ deployment results remain modest. View in article, David Strachan and Stephen Ley, “Open banking around the world,” Deloitte, 2018; Andy White, “Australia’s open banking journey on the right track,” Australian Payment Network, accessed October 4, 2019. The ECB’s curtailing of “back-to-back” booking models, which would otherwise enable banks to manage capital and risks from the United Kingdom, has cemented the expanded EU presence of banks.112. Banks should rethink their data architecture and get their houses in order to maximize returns from analytics initiatives. Given lower prospects for growth, transaction banks should also double down on their own cost management and get a better understanding of their economic architecture. In its most recent report, the International credit rating agency Moody’s Investor Service (Moody’s), has assigned a negative outlook for the banking industry in Asia Pacific over the next 12 months as the US-China trade war continues on to 2020. Exchange trading volumes in fixed income securities, futures, and options have also expanded, though mostly for smaller trade sizes. Global exchange revenues in 2018 reached US$33.9 billion, driven strongly by derivatives trading.135 Revenue diversification remains a strategic priority, as reflected in the market data business, which has grown at a compound rate of almost 14 percent over the past five years. Financial institutions on high alert for major cyber attack, Just how much are financial institutions spending on cybersecurity? View in article, Reuters, “JPMorgan merges commercial banking groups for fast-growing start-ups,” March 11, 2019. The center wishes to thank the following Deloitte client service professionals for their insights and contributions to the report: Bonnie Cantor, managing director, Deloitte Services LP, Peter Firth, managing director, Deloitte Touche Tohmatsu Limited, Sylvia Gentzsch, senior manager, Deloitte Touche Tohmatsu Limited, Susan Jackson, senior manager, Deloitte Services LP, Jim Tracy, senior manager, Deloitte Services LP, John Hagel III, cochairman, Center for the Edge, Deloitte Services LP, Hugh Guyler, partner, Deloitte & Touche LLP, Jeff Kottkamp, partner, Deloitte & Touche LLP, Lawrence Rosenberg, partner, Deloitte & Touche LLP. View in article, Mark Schoeff Jr., “New Jersey fiduciary rule: Pressure leads to public hearing, comment deadline extension,” InvestmentNews, June 17, 2019. Legacy systems are among the biggest barriers to bank growth.44. 4. For some time, financial institutions have had difficulty providing quality data from source through system. View in article, Irish Tax and Customs, “What is Automatic Exchange of Information (AEOI)?,” September 25, 2019. Specific expectations across seven business segments: retail banking, corporate banking, investment banking, transaction banking, payments, wealth management, and market infrastructure. The new “super jobs”59 that result from this redesign could then require a change to the workforce, especially to attract individuals who can connect the dots between technology and business. Some card incumbents are bringing solutions to shorten the settlement cycle to near real-time payments. Some of these fintechs are aiming to expand globally.74 However, the business models of the new digital banks may be challenged in a low interest rate environment because of lack of scale and high rates for deposits. Some established fintechs are also tweaking their business models, more so than in the past, by diversifying across geographies and segments. The Banking Industry Will Face A Range Of Challenges In 2021. More firms are targeting millennials, in particular, due to the size of the market, evolving wealth needs, and the impending wealth transfer. And by leveraging their technologies, exchanges can offer a market-in-a-box infrastructure. In its most recent report, the International credit rating agency Moody’s Investor Service (Moody’s), has assigned a negative outlook for the banking industry in Asia Pacific over the next 12 months as the US-China trade war continues on to 2020. Offering advice should be a differentiating factor for banks as it becomes contextual and real time. Smaller banks’ limited ability to acquire strong technical talent could be another motivation for selling. Overall, though, a good deal of the innovation in payments is happening in emerging markets, where mobile adoption and low-cost quick response (QR) technology are making digital payments the norm. The responses to US tax reform have varied. 2. View in article, Rimma Kats, “The mobile payments series: China,” eMarketer, November 7, 2018; Rimma Kats, “The mobile payments series: The UK,” eMarketer, November 6, 2018; Rimma Kats, “The mobile payments series: US,” eMarketer, November 9, 2018. View in article, “Top 1000 world banks 2018,” Banker, July 2, 2018. In 2020, we expect the UAE economy will expand at a slightly higher pace compared with 2019, thanks to Abu Dhabi's $13.6 billion stimulus package and the Dubai government's planned investments for the 2020 World Expo (Expo 2020), which should prop-up investments in the non-oil economy and increase tourism-related activities. to study effects of MiFID II research unbundling,” TabbForum, July 26, 2019. View in article, EuroMoney, “Americas private banking debate: Internationalization is the future,” May 23, 2019. The story in Asia is mixed, with Chinese banks generally continuing to get bigger. The Financial Accounting Standards Board (FASB), meanwhile, has convened a project to address accounting issues that could arise from the transition. He has more than seven years of experience in financial and market analysis. This will be compounded by the crowding out of private debt by government schemes and borrowers looking to repay debt as the economy recovers. The report provides an in depth analysis of the country’s banking sector with a particular focus on the industry’s key performance indicators and the underlying trends. Wells Fargo’s second quarter earnings report was awful. The areas that are likely to be most impacted by COVID-19 are: Profitability and credit management/cost of risk On the positive side, the state of banks globally has again become more resilient, with the tier 1 ratio edging to 6.75 percent, up from 6.66 percent in 2017. Institutions should also take a closer look at talent and equip their tax departments with the right people to best recalibrate to the latest realities. On the regulatory front, global regulatory fragmentation continues to be a reality. Initial assessments have been done, for the most part, and banks have a better understanding of their exposure to LIBOR, but many have also begun to recognize changes made to transition away from LIBOR also affect front-to-back processes and supporting systems. That didn’t change in the second quarter of 2020. View in article, Weizhen Tan, “Chinese companies are defaulting on their debts at an ‘unprecedented' level,” CNBC, March 20, 2019. In 2020, further exploration of regulator-sponsored digital currency systems, such as those in China, and deliberation on appropriate cryptocurrency regulation86 may go hand-in-hand. Another equally important aspect to consider will be culture. View in article, European Central Bank, “Euro short-term rate (€STR),” accessed October 15, 2019. View in article, Shearman & Sterling. Technology has played a significant role in risk management for a long time. Though a positive momentum is anticipated for Asia Pacific deal landscape, Europe is expected to see a setback in deal activity. The industry could see unbundling of the value chain, with players focusing on what they do best, while other parts are outsourced. Such concerns are impacting the banking industry as well, where consumer data has always been a core asset. DTTL (also referred to as "Deloitte Global") does not provide services to clients. View in article, Ryan Lichtenwald, “StreetShares is the latest fintech to launch a lending-as-a-service offering,” Lend Academy, September 19, 2019. Banks need to choose what posture they want to adopt - to lead the change, to follow fast, or to manage for the present. View in article, Andrew Ackerman and Kate Davidson, “Trump Administration aims to privatize Fannie Mae and Freddie Mac,” Wall Street Journal, September 5, 2019. Finding fresh value streams outside loans will likely become an imperative, especially as economic uncertainty weighs on loan demand and as more fintechs (such as Kabbage132 or StreetShares133) enter the lending space with alternative models. The Asia Pacific Banking Industry Outlook 2020. Global investment in banking startups has quadrupled from 2014 to 2018165 and could reach US$39 billion in 2019 if the strong investment flows of the first three quarters of 2019 continue (figure 9). As industry convergence accelerates in the broader economy, the need for cross-industry knowledge could become more important. Ability to provide real-time, tailored advice will become a key differentiator, along with the readiness to offer new products and asset classes, including digital assets. This message will not be visible when page is activated. One is technical debt, or the lack of legacy system modernization, which is a huge impediment to transformation. 2020 Banking Industry Outlook has been saved, 2020 Banking Industry Outlook has been removed, An Article Titled 2020 Banking Industry Outlook already exists in Saved items. Total assets were US$16.5 trillion, up by 3 percent from the previous year.6 Tax cuts and higher federal funds rates (until mid-2019) were significant contributors to increased profits. And machine learning, coupled with natural language processing, could convert unstructured data such as emails into structured data that can then be analyzed to predict where risks might occur.53, At the same time, banks should be mindful of the additional risks these new technologies might create. Despite what happens, banks should remain true to their core identity as financial intermediaries: matching demand with supply of capital. However, data that resides in banks’ siloed systems is just one piece of the puzzle. But one area where more may be needed is climate change. Aging populations in advanced economies as well as emerging countries such as China could stress social, political, and business systems in ways we have not seen before. Redesigning customer experience by removing friction, enhancing value through rewards and access to other financial products, and bolstering security are expected to remain top priorities for payment providers. Third-party relationships with external technology vendors, suppliers, or service providers could expose banks to information misuse and theft (insider risk), system failures, and business disruptions (operational risk), or regulatory noncompliance. Startups are choosing to stay private longer for this reason. Fullwidth SCC. Vice chairman & partner, US Banking & Capital Markets leader. The case for consolidation in the banking industry has possibly never been stronger, as the M&A playbook gets rewritten for a digital economy. Client loyalty is a product born through sturdy relationships that start by comprehending the client and their expectations. That didn’t change in the second quarter of 2020. To enable insights-driven offerings to clients, attain a leaner cost structure, and ultimately unlock future success, core modernization is key. The global banking industry shows many signs of renewed health. In the US mortgage and personal loan markets, nonbank players have captured a large market share already. View in article, Alex Harris, Paul Cohen, and Rizal Tupaz, “MetLife breaks ground with $1 billion bond based on LIBOR heir,” Bloomberg, August 30, 2018. In response, some firms are offering cash management products and/or pivoting to a hybrid human-machine servicing model.90, On the client side, changing demographics are prompting a strategic shift for some in product innovation, service experience, and adviser training. View in article, O'Reilly and Reynolds, “What does an optimal risk management operating model look like?” View in article, Kevin Nixon et al., Managing conduct risk: Assessing drivers, restoring trust, Deloitte, 2017. As part of our Global banking M&A outlook H2 2020 report, we explore the areas of the overall banking sector most likely to be impacted, including valuation and profitability. And open banking, the sharing of customer data between banks and other external parties upon a customer’s request, has taken root. View in article, Sean Allocca, “Amazon, Netflix and now Schwab: The risks in subscription models,” Financial Planning, April 3, 2019. In a similar vein, upgrading and digitizing KYC and client onboarding processes, as well as AML transaction monitoring is critical. 2018-16—derivatives and hedging (topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR), Overnight Index Swap (OIS) Rate as a benchmark interest rate for hedge accounting purposes,” accessed October 29, 2019. While fintechs are driving much of the disruption, incumbents are not far behind. The increasing pressure from a low-yield environment and the potential for an economic slowdown could negatively impact earnings, especially for smaller, less diversified, and consumer lending-focused banks. Though many firms feel they have a handle on more traditional financial risks,156 financial crime is entering a new age. View in article, Pymnts.com, “Mastercard: Why Nordic countries could fuel RTP push,” July 2, 2019. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. This situation may not change for the foreseeable future. The industry will likely be bifurcated, with a few large, global investment banks—mostly in the United States—and another group focused on local markets and specialized segments. We urge the banking industry to go back to basics: Fix the data problem before undertaking radical technology transformation and slowly chip away at technical debt via core modernization. However, ROC for China was strong at 14.4 percent14, though below last year’s 15.6 percent15. A new wave of disruption more forceful and more pervasive than what we have seen in recent years will likely unfold in the next decade. Moreover, banks should reassess how they deploy their cybersecurity budgets because higher spending does not always yield better outcomes.154 Some of the most mature programs in the industry attribute their success to improving governance by involving senior leadership in the journey, raising cybersecurity’s profile to an enterprisewide responsibility, putting cybersecurity at the center of digital transformation efforts, and aligning cybersecurity efforts with strategy.155. Once some of the uncertainty dissolves, last year’s message urging strategic recalibration will continue to hold true. Marketing offers a powerful and effective way to tell our story, connect with customers, and provide solutions to answer concerns and fuel their goals. View in article, Philip Stafford and Hannah Murphy, “MiFID II starts to weave its influence through markets,” Financial Times, September 30, 2019. Additionally, cyber threats have begun to blur the lines between financial and nonfinancial risks. As a result, the nature and degree of competition will likely change; the surviving fintechs should become mainstream players and traditional incumbents will recalibrate their strategies. Data as of July 8, 2020. Many banks, however, have begun to recognize that their risk controls are inadequate to address the shifts toward the cloud, APIs, more open architectures, and the reliance on other third parties. View in article, Behnam Tabrizi et al., “Digital transformation is not about technology,” Harvard Business Review, March 13, 2019. He leads the development of our thought leadership initiatives in the industry, coordinating our various research efforts and helping to differentiate Deloitte in the marketplace. View in article, Julie Bernard, Ed Powers, Emily Mossburg, “Just how much are financial institutions spending on cybersecurity? View in article, S&P Global Market Intelligence analysis. In North America, payments providers should be mindful of actions by the Fed and Payments Canada to determine potential strategies and learn from initial adoption. What is Automatic Exchange of Information (AEOI)? But these initiatives are typically implemented from a corporate social responsibility perspective rather than a risk management agenda.189. In the United States, total deal value reached US$16.5 billion as of August 2019, excluding the US$28.3 billion megamerger between BB&T and SunTrust announced in February.158 The number of deals year over year is roughly in line with the 259 deals reported in 2018.159 However, median price-to-tangible book value has declined over the year as expectations from both sellers and buyers have adjusted to reality (figure 8).160. Large corporates and buy-side firms could become more self-sufficient in standard capital market activities, but they will likely rely on bank expertise for more complex, global needs. 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