2011: The Banking Year Ahead

The Banking Year Ahead.

Sounds like some sort of swear word but no, it’s all to do with predictions time.

What are the big events of 2011 going to be?

• Barack Obama begins the campaign trail for election 2012.
• North Korea ignites a battle with South Korea that sees a distance divide between China and America, only resolved when Russia throws their weight behind South Korea and tension defuses.
• Another natural disaster in somewhere you’ve never been occurs, and you donate a little bit of cash to make yourself feel better about it.
• And Tottenham Hotspurs surprisingly win the European Championship football tournament final by beating Manchester United 3-2.

OK, we can dream ... but there will be the same old, same old, and some new stuff.

In banking, the biggest news story will be about reforms and regulations.

You thought 2010 was bad, with Basel III, Dodd-Frank and such like, well it’s not a patch on 2011.

2011 is the year that will see massive divide across the G20 in their views over the major thorny issues of banking: risk, derivatives, OTC trading, bonuses, bank taxation and more.

These chasms were showing in 2010, but 2011 will see a major canyon appear between those nations least affected by this crisis – such as Argentina, Brazil, Canada, China, India, Indonesia, Mexico, Saudi Arabia – and those that are most affected – UK, USA, the European Union.

Even within these areas there is little agreement, as evidenced by the interpretations and disagreements over these fundamentals not only between the EU and USA, but even between the UK and the EU.

It’s all about turf wars and ensuring that regulators appear to be putting corks in the holes of their leaky financial markets ... whilst ensuring the financial markets stay on their shores.

What this means is that there will be even more confusion over what can and cannot be done, what governance and structure is required, which way to do things and how to implement regulatory change and reform.

The evidence is already there:

Banks plead for guidance on bonuses 

The Committee of European Banking Supervisors' new guidelines, which state that only 20pc to 30pc of bonuses can be paid in cash, are the subject of consultation until February 25.

Layered on top of those, however, the Financial Services Authority came out with its own new compensation rules in the middle of December, while the Bank of International Settlements' Basel III rules demand banks provide an individual "scorecard" for every banker to prove they deserve a bonus.

Layered on top of that, UK banks have had to cope with Mr Cable's pre-Christmas warning that he could change the rules on bonuses and could even force bankers to reveal their own bonuses.

At the same time, David Cameron, the Prime Minister, said that banks must remember the "political context" in which bonuses are being allocated, given he is asking taxpayers to take the strain in order to reduce the government deficit.

Those bankers who attended the pre-Christmas Downing Street summit with Messrs Osborne and Cable are believed to have felt that no conclusions were reached on the subject of compensation ...

In spite of the push for guidance, a number of people involved with the push for greater relations between the Government and the banking sector – dubbed Project Merlin – acknowledge that a full and final denouement on pay may not be reached.

The recognition an agreement may never be reached is not concerning so much as illuminating, as it really says that banks will structure themselves to work in whichever markets are most benign in allowing them to run free.

Even if the regulators did crack down, they would have a challenge regardless. For example:

'Bonus buyouts' signal return of banks' confidence – and wealth

In another sign of the City returning to business as usual, banks have begun poaching key staff from rivals by offering to buy them out of their promised bonuses, according to research published today ...

Typically, up to 40% of performance-related bonuses are paid in cash and the remainder in shares, which usually pay out over a period of three to five years. A banker is not entitled to any of these shares if they leave before this period.

But increasing competition for top City talent means many prospective employers are now offering to pay out these bonuses ahead of time, or grant new share options worth the same amount.

This means that governments are generally powerless to reign in banking behaviour that is undesirable without shooting themselves and their economies in the foot. After all, the people who structure the debt of nations are the same people the nations are trying to regulate.

This is why the UK raises taxes with one arm – for example by implementing a levy on banks that will raise £2.5 billion per year - whilst reducing taxes with the other - corporation tax has been reduced by four percent, ensuring the banks pay significantly less tax overall.

This schizophrenic and frictionful activity between banks and regulators will be a theme for several years to come.

Meanwhile, in 2011 banks will also be focusing upon cost.

Cost control is a continual refrain, and 2011 is no exception.  In fact, in 2011, cost control is even more critical as the industry becomes more competitive again, after three years of reflection and retraction.

From a technology perspective, we could therefore talk about sexy innovations around tablet PCs for in-branch advisory services, mobile-to-mobile P2P payments, the maturing of the social lending markets, the emergence of a moral compass in investment banking, the launch of real-time clearing and settlement services and more ... but these things will all be peripheral to a core focus on cost of operations.

Transaction cost analysis, operational efficiency, LEAN and other management techniques to ensure operations are running smoothly and effectively at the lowest cost will be the priority focus for most banks.

From a technology viewpoint, this means that the number one trend for 2011 will be Cloud Computing for Financial Transaction Servicing, because Cloud Services can move banks from fixed costs from capital expenditure to variable costs through an on-demand and as-needed infrastructure.

Banks have been suspicious of such services through the last few years, due to the risk of operational failure, but the cost focus of 2011 will ensure that Cloud has its day this year.

With that as a backdrop, each area of the market will then have different priorities.

For example, investment firms will focus upon building their portfolios, with high frequency trading pushing boundaries further in capital markets, as evidenced by this super little story in December’s Wired Magazine:

Algorithms Take Control of Wall Street

Dow Jones launched a new service called Lexicon, which sends real-time financial news to professional investors. This in itself is not surprising. The company behind The Wall Street Journal and Dow Jones Newswires made its name by publishing the kind of news that moves the stock market. But many of the professional investors subscribing to Lexicon aren’t human—they’re algorithms, the lines of code that govern an increasing amount of global trading activity—and they don’t read news the way humans do. They don’t need their information delivered in the form of a story or even in sentences. They just want data—the hard, actionable information that those words represent.

Lexicon packages the news in a way that its robo-clients can understand. It scans every Dow Jones story in real time, looking for textual clues that might indicate how investors should feel about a stock. It then sends that information in machine-readable form to its algorithmic subscribers, which can parse it further, using the resulting data to inform their own investing decisions. Lexicon has helped automate the process of reading the news, drawing insight from it, and using that information to buy or sell a stock. The machines aren’t there just to crunch numbers anymore; they’re now making the decisions.

My old joke about the man and dog is coming to fruition (the man’s there to feed the dog and the dog’s there to stop the man touching the computers).

In payments, the priority will be about real-time information services along with mobile magic, whilst retail and commercial banking will be all about cool apps for smart mobiles.

I’ve said so much about this during 2010 that I don’t want to repeat it all again here and now, but the review of 2010’s payments and retail developments will continue with even more focus upon getting the banks’ capabilities, infrastructure, organisation and focus aligned more closely with those of the commercial and high net worth customer.

That means big investments in mobile everything for real-time access and analysis of financial matters from budgets to forecasts, payments to billing, accounts to invoices. You name it, and every bank will deliver an app for it.

Don’t believe it?

Take a look at BBVA’s Compass iPad app:

The BBVA Compass application allows iPad users to access all of the usual account information, from balances to credit card charges. It is also full of details much prized by some folks, such as the blue ribbon running down the middle of a virtual on-screen accounting ledger, complete with staples and bound pages. "Little things like that make a big difference," Carriles said.

The app is specifically written for the iPad and not a port of online banking to the mobile or an iPhone app to the iPad.

That’s going to be the big focus this year: device specific interactivity and access that is intuitive, friendly, simple and easy.

Those banks that gear up their infrastructure to deliver such device friendly access will begin to differentiate from the pack that do not.

And by ‘differentiate’, I mean win customers and gain business, both retail and commercial, high net worth and private banking wealth management.

All the things banks believe make their real money!

Finally, over-riding all of the above, will be a big focus upon security as more and more banks were exposed through 2010 as not understanding these mobile devices as 7 out of 10 apps allow user’s personal information to be compromised.

No wonder Bank Of America, Chase, TD Ameritrade, USAA and Wells Fargo had issues in 2010 as they were all found to have severe vulnerabilities in their iPhone and Android banking apps by security firm viaForensics.

For this reason if no other, banks will look to create specific mobile apps that are secure, rather than just plugging an online access front-end onto their mobile services.

So there you have it.

The big focal points in banking generally for 2011 will be:

• Trying to gain clarity from the regulatory mess;
• Restructuring to maximise opportunities to arbitrage regulations;
• Reducing cost by moving to variable cost infrastructures;
• Maximising returns through creating high frequency intelligent trading (H-FIT) via algorithmic automation with real-time newsfeeds; and
• Creating differentiation through secure mobile financial services.

Meanwhile, if you want more of this stuff, here are a few other articles that are useful backgrounders on what people are looking for in 2011:

• What will 2011 bring?  The Economist
• 11 big ideas for 2011, from US Banker
• What the finance sector has to look forward to in 2011, by Brett King 
• The trends for the financial sector for 2011, from Marketing Facts (in Dutch)
• Will These Payments Predictions Come True in 2011? from PYMNTS.com
• 8 Online Banking Trends for 2011, from Gerson Lehrman Group (GLG)
• Seven Technologies that will Rock 2011, from Techcrunch
• Tech predictions for 2011: The winners and losers, from CNN Tech
• 5 Predictions for Mobile in 2011 and 10 Websites to Watch in 2011 from Mashable