Deloitte predicts 'Japanification' of banking in 2020s
We all hear that term rather often - Japanification - what exactly is behind it and why this is predicted for banking industry?
Japanification, (or Japanisation), is the term economists use to describe the country’s nearly 30-year battle against deflation and anemic growth, characterized by extraordinary but ineffective monetary stimulus propelling bond yields lower even as debt burdens balloon.
Analysts have long been concerned that Europe is succumbing to a similar malaise. And seems that it is happening, in Europe, especially UK, but also in US. However, in this post we are not talking about the economy, but only about financial services. Please find below summary of '2020 banking and capital markets outlook' report, where the Big Four firm highlights its forecasts for financial services in the next year and beyond.
Deloitte's broad prediction for the next decade is that of a consolidated industry with fewer banks existing in ten years' time. Fintechs will become mainstream players while the incumbents will adjust their strategies to compete. - kind of "long story short". But... this is not everything.
The report refers to the possibility of 'Japanification' - long-term stagnation, low inflation or deflation and near-zero or negative interest rates - occurring across numerous economies, particularly Europe, which would hamper the growth potential and profitability in the banking sector.
Deloitte believes this could seriously challenge banks that lack scale or a differentiated offering. They therefore need to
"re imagine the possibilities for how banking is done,"
forming new partnerships and alliances to offer services that will extend beyond banking.
Deloitte believes banks can fine-tune their value proposition and continue to own the customer relationship. Deloitte offers its outlook for the next decade across an array of other areas that financial services firms should have their eye on. Below more details.
Signs of economic slowdown in 2018-19 resulted in countries' regulatory standards diverging, bucking the post-2008 synchronisation trend.
Should Japanification set in in a big way, this may be a trend that will continue, with agencies pushing for tailored regulatory requirements to suit size and complexity of operations.
The next decade will also see fintechs becoming mainstream and so the issues of regulation will escalate. Innovators desire the protection of regulation, but not to the extent that it stifles creativity.
Banks will need to overcome the burden of legacy systems in the years ahead to unlock the potentials of AI and cloud, harness the power of data and move from product-centric to customer-centric business models.
As consumers' digital footprints grow, so does the reservoir of data that banks can tap into though this will bring with it complications of data managment and privacy concerns.
Banks' abilities to assess and mitigate risk is likely to be tested in the decade ahead, as regulatory divergence, geopolitical instability and a potential economic downturn create a host of challenges.
While new technologies are likely to be prominent in this area, they bring with them risks of their own. Relationships with third-party providers could open chinks in the armour of banks' cyber defenses, while biases and rogue programs could compromise the reliability of AI engines.
8%t of financial institutions admit they are less than effective at developing leaders that can keep up with the changing nature of work.
Deloitte believes the leaders who will define the next decade are those that have tech fluency, strong interpersonal skills and can inspire change with an innovative, forward-looking vision, as well as being able to empower a diverse payroll of hot-desking and remote working.
Products need to offer a holistic focus on customers' financial affairs, bringing on board lending, payments and wealth management services.
Providers should priorities customer experience through connectivity to other apps and making advice "contextual and real-time".
The payments industry will become more competitive, with value-added services - purchasing insights, identity protection, cash management - becoming prominent.
Digital currencies are also expected to become the norm, particularly if backed by regulatory tailwinds.
Human advisers are unlikely to be replaced by robots in the decade ahead, especially when it comes to serving the high-net-worth (HNW) and ultra-high-net-worth (UHNW) segments.
Wealthtechs are likely to partner with incumbents to provide hybrid offerings, harnessing the best of digital and human-led services.
This sector is likely to become fragmented further with a small number of, large American, banks dominating the global market while smaller players focus on local markets.
AI and blockchain could become integral to investment banking, in the operation of capital markets and tailoring client insights.
Transaction and corporate banking
These are both area where emerging technologies including cloud, 5G and quantum computing will become increasingly common.
Banks should harness these alongside AI and blockchain to own the advisory role as clients will increasingly look to mitigate against political or environmental risk and insure digital assets.