IMPACT OF EMERGING

TRENDS AND ADVANCEMENTS

IN THE GLOBAL BANKING
AND FINANCIAL SERVICES
INDUSTRY

Terrence W. Farrell

Presentation to Caribbean Association of Indigenous Banks

Conference
St Lucia, November 14-16, 2004
Banking has traditionally involved three (3) functions or activities

Custody

Credit
Payments

Bank Vault Direct Lending Bank Draft

Technology

Cheques and
Multiple Forms of Clearing
Indirect Lending and
Risk Mitigation
Electronic
• Syndication Funds Transfer
• Securitisation
There has been a decisive shift in market power in favour of the bank client
owing to the commoditisation of banking products and services

Alternatives to Bank Deposits:-

• Insurance Products
• Mutual Funds (money market funds)

Alternative Cash, Foreign Exchange and Payment Options:-

• Remittance Services
• Credit Unions
• Money Market Funds

Alternative Credit Options:-

• Retailers (e.g. Courts)
• Insurance Policy Loans
• Credit Unions/Building Societies
The growth of Indirect Lending has led to the diffusion of market power among
banks, issuers, underwriters and credit rating agencies

The combination of:

• Tighter Regulation of Risk-taking

• More complex credits in the newer industries e.g Internet-based business
models
… has led to the emergence of
• Specialised instruments such as derivatives
• New financial institutions which work with traditional banks in managing
those credit risks
• Rating agencies
 Technology has
T empowered clients
IC with Information

Technology has
Competitors have
transformed
Payments Banking Industry emerged outside
the banking industry

to rs
gula
Re
Regulation has
reduced risk taking
capabilities
IMPACT OF THE CHANGES IN THE BANKING INDUSTRY

ON COMMERCE

• Transactions are now instantaneous; float has been largely eliminated;

cash can be swept and managed much more efficiently.

• Households and firms can effect many transactions Anywhere, Anytime,

and increasingly ANYHOW (Voice, Wireless, Call Centre, Internet, Cellphone)

• Scope for fraud (identity theft, interception of transactions, etc) has grown
significantly
IMPACT OF THE CHANGES IN THE BANKING INDUSTRY

ON THE BANKING INDUSTRY ITSELF

• Erosion of margins – supernormal profits in banking have disappeared;

incremental earnings growth is achieved through consolidation
• Scale is crucial to bank profitability; banks have had to become regional,
national or global in scope and reach
• Continual investment in technology is a business imperative, even though
much of that investment is defensive and confers no long term sustainable
competitive advantage
• Yet, banks have to strive to achieve and maintain customer intimacy and
loyalty
Some predictions made in 1995/6 about the future of Financial Services
P. Gosling, Financial Services in the Digital Age

On the Bank Branch:-

• The traditional bank branch is on death row – along with some of the
traditional banks
• The proportion of transactions conducted by branches will fall from
40 per cent in 1993 to less than 20 per cent in 2000
• “…electronic banking is going to handle 80 per cent of all
transactions in perhaps five years” (1996)
• Four alternative visions of the bank branch:-
• General retail centre with kiosks operating as electronic brokers
but still owned by bank
• Branch as a franchised operation
• Freelance branch
• Electronic bank
 Summary and Conclusion
• The banking industry today is vastly different from just 20 years
ago
• Banks have less market power and the industry has maintained
profitability because on restrictions on entry and because of
consolidation
• Banks will struggle to maintain margins in the Payments business
• The Credit business has become more specialised and banks are
playing a less important role
• Bank consolidation will continue as will other means of controlling
and reducing costs such as:-
– Business Process Outsourcing
– Franchising
– Use of Information and Communications Technologies to shift ‘work’ on
to the customer
– Streamlining and rationalising branch locations
• Banks will become an element of Integrated Financial Services
organisations, which will incorporate a range of services around
payments, credit, securities, insurance and mutual funds.
 CARIBBEAN IMPLICATIONS
• The process of consolidation in the region is
well advanced
• Banks in the region will have to move more
quickly to deploy information and
communications technologies
• The experience of banks owning insurers or
vice versa in the region has perhaps
prejudiced regulators, but the move toward
IFS is inevitable
THANK YOU
Support Slides
• Imaging • Basel II
• Web-based • Gramm-Leach-
transactions Bliley (eliminated
• Security restrictions of
Glass-Steagall)
• Riegle-Neal (inter-
state banking)
• Cheques used in retail transactions
declined in the USA from 49.5 billion
in 1995 to 42.5 billion in 2000
• Over the same period the number of
electroic transaction doubled from
14.6 billion to 28.9 billion
• At the end of 2003, the 10 largest
banks held 44% in total industry
assets up from 19% in 1984.
• Eight Largest Banks in USA @ Jan 2004
– Citigroup
– JP Morgan Chase
– Bank of America
– Wells Fargo
– Wachovia
– Bank One
– Washington Mutual
– Fleet-Boston
 US National Banks
Key Statistics 2001-2003
2001 2002 2003

Net Interest Margin 3.90 4.09 3.83

Return on Assets 1.15 1.33 1.40

Return on Equity 13.09 14.47 15.31

Tier 1 Capital 9.87 10.00 10.06

Institutions Reporting 8080 7888 7770

Source: FDIC