Forbes.com

5 Macro Trends Bankers Should Watch

To play the long game, bankers should incorporate five key macro themes into their strategic planning.

By Niels Peder Nielsen, Thomas Olsen and Karen Harris

First published on Νοεμβρίου 13, 2017
min read


This article originally appeared on Forbes.com. With "disrupt," "adapt" or "agility" appearing almost 400 times in the latest annual reports of the 20 largest global banks, it's clear that bankers face an identity crisis. They can be forgiven a degree of paranoia: Of the 20 largest global commercial banks as of year-end 2016, seven are new to the list since year-end 2006. Paranoia leads many bank management teams and boards to focus overwhelmingly on the short game, especially next quarter's stock performance. Yet in many ways the underlying business remains a long game. Consumers change their primary bank very rarely. Tier 1 capital—the long-term capital that serves as a last defense against failure—has reached a record high. Bank equity investors currently pay for 13 years of annual earnings in the US and other Western markets. And the loan portfolio for the top 20 banks has one-third of loans maturing in more than five years. So discussions about strategy, which typically cover three-year horizons, should in fact prepare for a decade-long perspective. Bank leadership teams will want to understand all the possible disruptions to their institution, what the effect would be on profits and sources of advantage, and what the bank can do about those disruptions. To that end, Bain & Company's Macro Trends group has analyzed a set of interrelated macroeconomic themes that, taken together, sketch out a framework for this period of transformation. We have a high level of confidence in these themes, although the timing and degree of influence will vary for different banks. Among the most important themes for banking are these five: Capital superabundance. Total world assets are growing to $900 trillion by 2020, or 10 times the size of the underlying global economy. This state will persist at least through the next decade, which for banks means an environment of persistently low interest rates and pressure on spreads. Ages and stages of life. Later family formation and more expensive costs of adulthood stem from persistent unemployment in some markets, as well as rising real estate and education costs. These costs have created a new life stage: extended adolescence. People in this stage have fewer current responsibilities but high future needs in financial services. At the same time, preretirement has also emerged as a new stage, as some workers work longer or remain semi-attached to the workforce, even becoming entrepreneurs as a second or third career. Both of these new phases present new product needs and opportunities for banks. Bell curves to barbells. Technology has created new large-scale providers that function as utilities, enabling startups to enter at smaller scale. Whereas startups in the past had to buy everything from servers to marketing materials, and thus needed to carefully consider scale, today they can obtain computing from the cloud, use social media for marketing, and ship and small scale by "renting" distribution through fees to companies such as JD.com. This shift creates new commercial opportunities for banks that devise more innovative and flexible funding models. Rise of platforms. Business models that facilitate the creation of value by others rather than internally are growing rapidly. They will form protected harbors more dynamic than the walled fortress of firms, but more protected than the choppy seas of the open market. Banks have built extensive trust architecture, and have access to intimate details of their customers' finances. Extending that trust architecture to encompass third parties should make customers' lives easier and more secure while creating new opportunities to capture value. Banks do, however, run the risk of being out-innovated by companies such as Alibaba that already mine and deploy customer data, and are making forays into payments. Spatial economics. An array of new technologies including autonomous vehicles, ubiquitous connectivity and drones are causing the cost of distance to decline sharply, altering the way we live and work. Spatial economics will radically change the bank branch network. While the overall number of branches will likely keep dwindling, banks will have to consider relocating branches or kiosks to distant suburbs and exurbs outside the traditional commuter belt. To play the long game, each bank needs to determine which developments to prepare for and how. Waiting indefinitely to see how these themes unfold is not a viable option. Instead, senior banking teams benefit by committing to an explicit set of investments that prepare their organization to seize the opportunities that unfold. The best strategies blend three critical elements: No-regret moves. Some actions will increase a bank's competitive edge no matter which themes play out soonest and most forcefully. They include making everyday banking products more simple and digital, and migrating customers from the branch to online banking and call centers. Options and hedges. These consist of smaller scale, flexible experiments that can be launched quickly. For example, many companies have increased buybacks and dividends while their capital expenditures and research and development budgets have declined on a relative basis. The dearth of funding innovation gives banks an opening to devise new forms of financing for long-term corporate projects, or new forms of financial structuring that are equity based rather than debt based. Big bets. The most challenging balancing act involves large-scale investments that have different payoffs depending on how future uncertainties play out. One big bet consists of building a pure online bank to serve as an "engine 2" for the future alongside the "engine 1" that generates revenue and profit today. Incorporating macro themes into the long-term planning process helps banks build a strategy that will accommodate a future well beyond the next few quarters. Niels Peder Nielsen and Thomas Olsen are partners in Bain & Company's Financial Services practice. They are based, respectively, in Copenhagen and Singapore. Karen Harris leads Bain's Macro Trends group, and is based in New York.

This article originally appeared on Forbes.com.

With "disrupt," "adapt" or "agility" appearing almost 400 times in the latest annual reports of the 20 largest global banks, it's clear that bankers face an identity crisis. They can be forgiven a degree of paranoia: Of the 20 largest global commercial banks as of year-end 2016, seven are new to the list since year-end 2006.

Paranoia leads many bank management teams and boards to focus overwhelmingly on the short game, especially next quarter's stock performance. Yet in many ways the underlying business remains a long game. Consumers change their primary bank very rarely. Tier 1 capital—the long-term capital that serves as a last defense against failure—has reached a record high. Bank equity investors currently pay for 13 years of annual earnings in the US and other Western markets. And the loan portfolio for the top 20 banks has one-third of loans maturing in more than five years.

So discussions about strategy, which typically cover three-year horizons, should in fact prepare for a decade-long perspective. Bank leadership teams will want to understand all the possible disruptions to their institution, what the effect would be on profits and sources of advantage, and what the bank can do about those disruptions.

To that end, Bain & Company's Macro Trends group has analyzed a set of interrelated macroeconomic themes that, taken together, sketch out a framework for this period of transformation. We have a high level of confidence in these themes, although the timing and degree of influence will vary for different banks. Among the most important themes for banking are these five:

Capital superabundance. Total world assets are growing to $900 trillion by 2020, or 10 times the size of the underlying global economy. This state will persist at least through the next decade, which for banks means an environment of persistently low interest rates and pressure on spreads.
Ages and stages of life. Later family formation and more expensive costs of adulthood stem from persistent unemployment in some markets, as well as rising real estate and education costs. These costs have created a new life stage: extended adolescence. People in this stage have fewer current responsibilities but high future needs in financial services. At the same time, preretirement has also emerged as a new stage, as some workers work longer or remain semi-attached to the workforce, even becoming entrepreneurs as a second or third career. Both of these new phases present new product needs and opportunities for banks.
Bell curves to barbells. Technology has created new large-scale providers that function as utilities, enabling startups to enter at smaller scale. Whereas startups in the past had to buy everything from servers to marketing materials, and thus needed to carefully consider scale, today they can obtain computing from the cloud, use social media for marketing, and ship and small scale by "renting" distribution through fees to companies such as JD.com. This shift creates new commercial opportunities for banks that devise more innovative and flexible funding models.
Rise of platforms. Business models that facilitate the creation of value by others rather than internally are growing rapidly. They will form protected harbors more dynamic than the walled fortress of firms, but more protected than the choppy seas of the open market. Banks have built extensive trust architecture, and have access to intimate details of their customers' finances. Extending that trust architecture to encompass third parties should make customers' lives easier and more secure while creating new opportunities to capture value. Banks do, however, run the risk of being out-innovated by companies such as Alibaba that already mine and deploy customer data, and are making forays into payments.
Spatial economics. An array of new technologies including autonomous vehicles, ubiquitous connectivity and drones are causing the cost of distance to decline sharply, altering the way we live and work. Spatial economics will radically change the bank branch network. While the overall number of branches will likely keep dwindling, banks will have to consider relocating branches or kiosks to distant suburbs and exurbs outside the traditional commuter belt.

To play the long game, each bank needs to determine which developments to prepare for and how. Waiting indefinitely to see how these themes unfold is not a viable option. Instead, senior banking teams benefit by committing to an explicit set of investments that prepare their organization to seize the opportunities that unfold. The best strategies blend three critical elements:

No-regret moves. Some actions will increase a bank's competitive edge no matter which themes play out soonest and most forcefully. They include making everyday banking products more simple and digital, and migrating customers from the branch to online banking and call centers.
Options and hedges. These consist of smaller scale, flexible experiments that can be launched quickly. For example, many companies have increased buybacks and dividends while their capital expenditures and research and development budgets have declined on a relative basis. The dearth of funding innovation gives banks an opening to devise new forms of financing for long-term corporate projects, or new forms of financial structuring that are equity based rather than debt based.
Big bets. The most challenging balancing act involves large-scale investments that have different payoffs depending on how future uncertainties play out. One big bet consists of building a pure online bank to serve as an "engine 2" for the future alongside the "engine 1" that generates revenue and profit today.

Incorporating macro themes into the long-term planning process helps banks build a strategy that will accommodate a future well beyond the next few quarters.

Niels Peder Nielsen and Thomas Olsen are partners in Bain & Company's Financial Services practice. They are based, respectively, in Copenhagen and Singapore. Karen Harris leads Bain's Macro Trends group, and is based in New York.