Finance Industry Overview and Cost Reduction Analysis

Finance Industry growth/decline, challenges, cost reduction & future trends.

Businesses “are demanding more customized products at a lower price point and with greater levels of service.”

growth_decline

What is the growth/decline in the Finance Industry?

Banks, commercial and retail

  • The Statistics at a Glance Historical Trends chart for all FDIC insured institutions (commercial banks and savings institutions) shows a steep and continuing decline in the number of problem institutions, from a high of 884 in 2010 to 228 year to date 2015. The number of failed institutions declined from 157 in 2010 to 5 this year to date.

finance

  • More general data is available at the FDIC’s bank data and statistics site.
    Commercial banks
  • IBISWorld cites the FDIC when it says, “Revenue for commercial banks declined every year over the past five years, largely driven by historically low interest rates over the period” adding that “inflation-adjusted interest income for commercial banks declined every year between 2010 and 2014.” (IBISWorld Commercial Banking Report, 52211, Aug. 2015)
  • FDIC shows that interest income declined from 481,769,538 in 2010 to 430,088,090 in 2014 and non-interest income has gone up slightly
  • Net income has risen.
  • IBISWorld finds that although revenue has declined, “profit margins have been rising.” With consolidation “many unprofitable banks exiting the market.” Added factors include “robust performance of capital markets over the past five years” and an improving economy which “has increased the credit-worthiness of an average borrower,” reducing commercial banks’ provision for loan and lease losses.”

Savings institutions/retail banks

  • FDIC shows that interest income has declined over the past five years and non-interest income has been up and down, while net income has risen slightly.

Securities industry

  • Securities Industry and Financial Markets Association publishes the SIFMA Fact Book annually. The most recent was published Sept. 30, 2015. This annual publication compiles “comprehensive data on the securities industry, capital markets, market activity, investor participation, global markets, savings and investment, and much more.”

global-markets

Highlights include:

  • “The securities industry raised $2.2 trillion of corporate capital for U.S. businesses in 2014.” (p. 8 of the PDF)
  • IPO volume in 2014 was $94.2 billion, the highest on record (p. 8 of the PDF)
  • While U.S. household savings were below those of other countries, retirement assets grew over 5%. (p. 9 of the PDF). Of course, some of these assets have been wiped out by stock market losses this year.
  • “Total U.S. retirement assets grew 5.2 percent to just over $28 trillion in 2014” (p. 9 of the PDF). As above, these have fallen this year.
What are they doing about cost reduction now:

cost-reductionThe financial services industry in general needs to:

  • “Automate or standardize core processes, taking advantage of rapid advances in technology such as artificial intelligence.” Oliver Wyman, “Managing Complexity: The State of the Financial Services Industry 2015,”
  • Financial institutions and banks are looking at new shared services and finance outsourcing models to improve efficiency, simplify transactional activities, improve risk management, become more agile, and improve service quality and capital efficiency. (“Shared services can strengthen more than the finance function,” Accenture

Banks:

  • As noted above, commercial banks will need to improve operational efficiency to “reduce costs and improve profitability” without “damaging customer service” and retail banks “need to attract more depositors in order to stabilize their books.”
  • Banks are leveraging growth through third party partnerships in part to cut costs. They are also defining customer strategy, not trying to be “all things to all people.” The example given is a large bank that “decided to focus on convenience, innovation, and simplicity” and so invested in “standardized platforms and processes” that would grow revenue and reduce cost. (2015 Retail Banking Trends: Excellence & customers.
  • Crowe Horwath recommends some very specific measures, including “branch staffing reductions equivalent to one to two full-time equivalents (FTEs) per branch;” reducing commercial, mortgage, and consumer lending staff to less than one FTE per lender; improving payment processing by the “equivalent to two to four basis points;” and increasing “procurement and sourcing efficiencies enabling up to a 15 percent reduction” in “targeted spending categories.” (“Beyond Cost-Cutting: Six Strategies for Improving Banks’ Operating Efficiency,” by Timothy J. Reimink, July 9, 2015.

bank

  • It further recommends efficiency improvements including:
    – “assessing the minimum commitment of resources needed to compete in a particular line of business” without losing competitive advantage
    – making sure the channels used by customers to interact with the bank are a “cost-effective combination”
    – reducing process costs for each activity or transaction
    – using automation tools to improve staff productivity
    – leveraging vendor relationships for the greatest value, and “consolidating vendors and bench marking costs against comparable services in the market.”

chart

What are the challenges/struggles the industry faces:

Challenges:

Top challenges for all aspects of the industry include:

  • Regulatory compliance
  • Data security
  • Risk management
  • Mobile technologies changing the way consumers access their money
  • Global economic conditions

Robert Half surveyed executives in the U.S. financial industry and presented the perceived challenges and responses below in a Feb. 2015 post.

  • Regulatory compliance will continue to be a major challenge. Financial organizations are hiring more “risk, compliance and internal audit professionals.”
  • Bank lending is increasing in all areas, especially commercial real estate. Consumer credit is also expanding and mortgage lending is strong.
  • Mobile applications are disrupting the traditional ways of banking and “mobile payment solutions and digital wallet services” are replacing “traditional currency and credit cards.”
  • Data security is a top issue which continues to cause problems for the entire industry.

A recent survey by Raddon Financial Group found that almost half of U.S. consumers think nontraditional providers (such as Apple, Google, Amazon and PayPal) “will drive innovation in the financial services industry,” but that less than 40% say they would consider using such a source at this point. However, younger consumers are more likely to use these than older generations. (“Can You Compete With Apple, Google & Amazon?” by Michael Bartlett, Credit Union Journal, Nov. 9, 2015)

Retail banks
PcW’s Strategy& reports on challenges at:

  • Profits which have been based on “increasing consumer lending” can no longer be relied on. Retail banks “need to attract more depositors in order to stabilize their books, and lenders need to have a much deeper understanding of their customers and risk profiles before they lend.”
  • Additionally, the industry is “increasingly competitive and cost-conscious.” PwC feels that “banks must deliver fundamental performance improvements” to remain profitable.
  • Industry-wide challenges include: “specialist players and captive-finance providers – especially in product manufacturing and distribution;” a “better understanding of customer needs and risks,” including what level of service each customer segment needs; “faster response to government and regulatory changes;” improvements in efficiency; and expansion into “the emerging markets” of “the wealthy.”Another Strategy& report on retail banking trends says that increasing “commoditization of retail banking products” is “putting pressure on banks to distinguish themselves in an intensely competitive, low-growth, low-margin environment.” Because of this banks are shifting “to a more client-centric strategy.” (2015 Retail Banking Trends: Excellence & customers.

Commercial banks

  • PcW’s Strategy& reports on challenges at
  • It finds that businesses “are demanding more customized products at a lower price point and with greater levels of service.” Additionally, “the flow of capital in the market” had been reduced and will “require a more in-depth view of risk.”
  • PcW feels that “commercial banks will need to fundamentally restructure in the coming years to enable them to deliver a profitable business as the market improves.”
  • Challenges include “transitioning from a product-focused to customer-focused organization,” and “improving operational efficiency” to “reduce costs and improve profitability” without “damaging customer service.” Banks will also need “to substantially step up the way in which they deliver risk management across their organizations.”

American Banking Association’s Economic and Policy Research team produces numerous statistical reports and policy papers.

Major findings:

  • Data security is a major concern of consumers.
  • Mobile banking is growing, although brick and mortar banks are still the norm.
  • Many banks are cancelling or holding off on new products, due to regulatory uncertainty.
  • Predictions regarding industry growth from earlier this year are holding up: income and loan activity are up across the board, equity capital is up, and assets declined in the third quarter.
Future_threats“security concerns and the potential rise of digital currency.” “Top security concerns include credit card fraud, identity theft and the breach of confidential information.”

 

What does the future look like for the industry:

Commercial banks

  • In the five years to 2020, IBISWorld predicts that government regulation and technology-driven competition will “dramatically change the business model that commercial banks use.”
  • It also expects revenue to be less volatile.
  • Finally, “too-big-to-fail banks will grow deposits at a faster rate than smaller savings institutions.”
  • IBISWorld expects revenue “to increase at an annualized rate of 6.0% to $915.3 billion over the next five years.” (IBISWorld Commercial Banking Report, 52211, Aug. 2015)

Retail banks

  • IBISWorld, in its Savings Banks andThrifts, report 52212 dated Oct. 2014, expects continuing consolidation in the industry, coupled with market share loss to commercial banks. Savings institutions will need “to invest in new technologies and expand product lines to stay afloat.” Additional costs will come from regulation changes that “will increase capital requirements and supervision for savings banks and thrifts.”
  • In spite of these factors, rising mortgage rates were expected “to cause industry revenue to grow slightly over the five-year period, at an annualized rate of 0.2%, reaching $73.6 billion in 2019.”

credit_card

 

Credit card/payments industry

 

 

The industry has had steady growth and has reached record levels as of 2015.

  • IBISWorld, in its Credit Card Issuing in the US, report 52221, Oct. 2015, predicts:
  • Online transactions have risen steadily, helped in part by mobile technology (smartphones and tablets.)
  • The industry will grow steadily over the next five years “at an average annual rate of 2.1% to $130.6 billion, including expected growth of 2.7% in 2016,” but competition will also increase and “more financial institutions will enter the industry.”
  • Regulatory compliance costs, including IT infrastructure and employee training, are rising and “many major industry players cite rising legal and compliance costs as risks” to profits. Cyber security is increasingly important, with data breaches becoming more common.