Home Banking The US banking industries’ challenges, risk and growth opportunities

The US banking industries’ challenges, risk and growth opportunities

by internationalbanker

By John Manning – john.manning@internationalbanker.com

The last few years have been a testing period for the U.S. banking industry. The economic slump highlighted the dependence of the economy on financial institutions and, it’s poor performance, negative impact on the health of the country. As a result, the banking industry witnessed some of the most comprehensive reforms and regulations in the past 60 years.

The U.S. banking industry is facing several challenges amidst a tough regulatory environment:

Dodd-Frank – Wall Street Reform and Consumer Protection Act: The “Dodd-Frank” Act came in to effect on July 21st 2010 and its main purpose was to set-up government authorities, such as Financial Stability Oversight Council and Orderly Liquidation Authority, that can monitor the finances of companies that are too big to fail and can affect the overall economy. The council can even restructure or liquidate firms with weak finances.

Consumer Financial Protection Bureau – CFPB is another federal agency whose sole responsibility is to protect consumers against financial products and services that pose a risk. In short, banking and investment firms have to regulate their financial products and offer considerable investment protection.

Volcker Rule – The Volcker Rule puts trading restrictions over banking institutions. The idea is to separate proprietary trading, private equity, and investment banking from consumer lending sector. The Volcker rule works to minimize conflicts and puts equal interest for both clients as well as banks. This rule can help in creating a transparent banking framework to control risk accumulation and unfair investment practices. The Volker Rule was scheduled to come into effect on the 1st of April, however a number of issues are yet to be ironed out which could delay the final date.

The banking industry has to bear the implementation cost of these regulations and a potential loss in revenue. The implementation of these regulations could drive an upward trend in operating costs with the formation of federal-compliant systems compulsory. According to the federal reforms, banks need to address and implement these regulations with immediate effect.

Beside the regulatory reforms, the American banking industry is still recovering from the global economic downturn. Along with these reforms banks are operating in an economy still dealing with uncertainty, low GDP growth and high unemployment.

Added to regulatory and economic issues is the increased uncertainty of customers of banking institutions in general, brought on by the bailout of several recognized Wall Street Banks. All of these factors have changed the consumers’ perception of the industry. The economic downturn agitated customers and shook their faith in the banking system.

The banking industry is in need of a new approach and transformation. It is vital to redefine financial products, create an efficient operation model, and work on customer satisfaction and trust. For any bank to survive, it is not only important to recognize these issues but to follow-up with appropriate actions.

It is crucial for banks to expand their markets with new products, services, pricing, and involvement in other sectors. Banks cannot sit back with the current consumer segments, the industry needs to look for new possibilities. An increased focus is needed on emerging opportunities and the cross-selling of those opportunities to an existing client base.

Above and beyond the traditional industry revenue streams, banks need to transform into a business body that offers multiple product packages and attract customers through different channels. Some of the unconventional channels that have yet to be fully utilized include social media.

A new product portfolio suited according to the needs of the customer segments is critical for success. Banks need to create portfolios that can attract, retain, and gain more customers with time. It is important to offer custom portfolios to suit the growth requirements of the customers. Banks need to consider value-added services while keeping the cost reasonable. The new price-model should focus on customer relationships instead of the product.

The best strategy is the one that offers high-quality products with incremental service, compliance with regulatory norms and an excellent marketing strategy. However, this will have to be achieved with new regulatory requirements that necessitate technology upgrades and redesign of the old banking model.

Some banks may need a complete re-engineering of their current IT architecture to incorporate their latest requirements. The industry needs focusing on its fundamental structure and getting rid of any overburdened or legacy systems that incur high costs.

One of the most important parts of the overall transformation is to prepare an efficient risk management model. The U.S. banking industry needs a system that has an appetite for risk while working in different sectors such as investing, trading and commercial lending practices. The foundation of a solid risk management system can only be laid upon big-data analysis.

In God we trust; all others must bring dataW. Edwards Deming

Banks would require transparent systems to collect information concerning the different aspects of their industry. Data can help banks in achieving better business alignment and prepare an effective governance model. The decision-making process will rely upon this data to analyze the conditions and act accordingly.

It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to changeCharles Darwin

The consumer demands and needs have changed over the last few years and so has their perception of the banking industry. The current banking industry needs to create a new operating model in accordance with the changing business focus of the financial market. One of the biggest difficulties in front of the industry is to adapt to a new environment that is still evolving with new regulations and challenges.

Banks should focus on complete enterprise strategies instead of just a banking perspective, flexibility is crucial for survival. It is important to adapt to the latest technologies that can create efficient operation models. Availability of automatic banking branches can reduce several operational redundancies. According to the analysis, replacing manual processes with automated systems can boost the overall performance of the banking industry. The chances of operational redundancies are minimized with automated systems.

Data mining has become even more crucial and banks need to adapt to the latest data analysis technologies. Data can offer a complete picture of the customer and help in understanding the changing needs of different customer segments. Advanced data analysis techniques and models can help in identifying potential opportunities in the future. Aggregation of data can offer a complete overview of a bank giving management a perspective they never had before. Proper analysis of data can help in making informed choices.

The modern U.S. banking industry needs continual self-analysis to understand the changing market conditions. A strategy that can help create long-term results for the banking industry is required. Banks need to review their strategies and upgrade them within every few quarters to cater the ever-changing demands of customers. The key is to create a strategy with flexibility, practical implementation and execution in mind.


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