With the momentum that has lifted the banking sector’s performance over the first half of the decade slowing in major markets — perhaps even auto financing — Boston Consulting Group (BCG) says banks must leverage digital technology to battle disruption and stem the threat of disintermediation brought on by fast-moving, newer entrants.

If banks stand pat on the technology front, BCG cautioned that institutions might pay the price with regard to staying power and profitability, according to a new report titled, Global Risk 2019: Creating a More Digital, Resilient Bank.                                                                

This ninth annual survey of the health and performance of the banking industry by BCG examined global and regional profitability levels and how institutions can raise them, exploring ongoing regulatory trends and how banks can navigate them. Experts also examined how core risk and treasury functions must adapt both their operating models and their roles in the wider banking organization to be more efficient and effective.

“As digitization opens the financial services ecosystem to new and niche players, we ex­pect to see fewer full-stack banks,” said Gerold Grasshoff, the global leader of BCG’s risk management segment and a coauthor of the report.

“As the banking value chain breaks up, banks will get the opportunity to reposition themselves. They will likely pursue a mix of strategies, such as becoming platform leaders, being specialist providers and promoting infra­structure-as-a-service offerings,” Grasshoff continued.

“The cost basis will also change, and banks will need to be leaner and more efficient if they are to compete ef­fectively against digitally mature peers and fintechs,” he went on to say in the report that can be downloaded here.

A three-speed world for economic profitability

According to the report, while banking remains profitable on an absolute basis, BCG found that total economic profit (EP) — which adjusts for risk and capital costs — softened again in 2017 (the last year for which year-end statistics are available). It was a second straight year of decline.

Since reaching a global-average high of 16 basis points in 2015, experts noticed that EP has slumped, falling to just 8 basis points in 2017. With that slide, BCG surmised that average banking performance is now on a par with that of 2013, when the banking industry started to regain its footing after the global recession.

In Europe, BCG pointed out that banks have remained mired in negative growth, hemmed in by low inter­est rates and nonperforming loans. By contrast, banks in North America have benefited from increasing interest rates, although rising costs edged total EP down for the second straight year.

In Asia-Pacific, the report showed banks experienced the third consecutive year of declining EP.

“Overall, banking remains a three-speed world in which European banks continue to struggle, North American and Asia-Pacific banks strive to stay the course, and the developing markets of South America and the Middle East and Africa continue to show high profitability. Yet systemic issues hound each region,” BCG said.

Setting the regulatory stage for the future of banking 

The report explained that for regulators, instilling trust in the strength and resiliency of financial markets has become a dominant focus.

“Banks must improve the quality and efficiency of regulatory compliance to meet their ongoing financial stability, prudent-operations and resolution obligations,” report authors said. “Achieving this will require finding leaner and smarter ways to manage the high volume of regulatory revisions, as well as experimenting with new technologies and partnerships to drive down the cost of know-your-customer documentation and to improve anti-money-laundering processes.

“Keen to protect financial markets from future shocks, regulators are trying to anticipate the ways that technology will reshape the banking ecosystem and, with it, their own role in establishing guidance and ensuring consistent standards,” authors added.

Since 2009, BCG tallied that banks worldwide have paid $372 billion in penalties. The firm tabulated that regulators assessed $27 billion in penalties on European and North American banks in 2018, an increase of $5 billion year-over-year.

Mortgage-related misconduct in the U.S., money laundering and interbank-offered-rate-related market manipulation across regions are among the factors sparking regulatory ire, according to the report.

As banks digitize, so must risk and treasury

The report went on to mention that banks’ risk and treasury functions will change in profound ways during the coming years.

Experts projected both functions face a broader mandate with a larger slate of risks to manage, a growing need for integrated steering to protect banks’ interests and an equally growing need to make the most strategic use of banks’ balance sheet resources.

“Delivering on this mandate will require risk and treasury to operate faster and more incisively, backed by real-time data, predictive analytics and end-to-end automation,” report authors said.

“Risk and treasury functions that commit to ‘going digital’ in these ways will become not only more efficient operators but also more effective strategic partners in delivering value to banks,” they added.