The banking environment for the coming year likely contains equal parts resolution of past challenges and the introduction of new ones. The economy in the United States is showing evidence of a continued recovery, with jobless rates continuing their slow decline and the housing market showing evidence of some recovery. But this recovery is still somewhat tenuous.
At the same time, the weakening of the European economy appears to be continuing. Stopgap measures have been passed over the recent months, but whatever the outcome, it is not likely to be quickly implemented, nor likely to come without significant pain. China, too, appears to have seen somewhat of a slowdown in its previously accelerated growth. Reduced economic activity, with consequent reductions in demand for commodities to fuel that output, may have a knock-on effect on many economies throughout the world.
Returning to the United States, bankers will likely continue to be challenged to find profit in an environment of low interest rates, and thus low net interest margins. Although there appears to be some increase in loan demand -- particularly among middle-market corporate borrowers -- many consumers are continuing to deleverage their household balance sheets and so a broad-based return of consumer loan demand may be unlikely in the coming year.
Finally: regulation. What we have seen is the creation of the most comprehensive set of new regulations in the last 70 years. During the last year in particular, bankers appear to have adopted a "wait and see" attitude about these regulations, as the detailed implementation procedures had not yet been written. Based on the dialogue we've been having with industry executives, I and my colleagues expect 2013 to be the "year of implementation" for the U.S. banking industry, as much of the regulatory uncertainty has been resolved and industry leaders assess their organizational structures and capabilities in the face of narrower margins, increased capital requirements, and consumer protection.
There are a handful of major challenges that most banks are likely to address in the coming year: Thinning margins and capital requirements have combined to compel industry executives to consider re-evaluating their banks' competitive strengths. As a result, there will likely be increased activity around reframing strategic opportunities to identify businesses in which they can compete and win. Another issue is data: Regulators are seeking greater transparency; customers may be seeking a more relevant and targeted experience, and bank managements are likely to look for growth opportunities. Effective data management has been elusive for the banking industry, and with good reason: Technology silos and exploding volumes of data make this a daunting effort. Despite these issues, we look for bank leaders to increasingly embrace the massive effort involved in restructuring their ability to manage and utilize data.
Beyond these issues, bankers will likely increase their efforts -- to varying degrees -- in these four areas:
Industrialized operations: As with previous economic downturns some executives have doubled down on cost reduction to protect margins. Unfortunately, previous efforts to streamline through reengineering and outsourcing may have eliminated many of the more obvious opportunities to reduce cost. At the same time, continued client dissatisfaction is forcing bankers to reconsider their approach to service levels. The coming year will likely see increased efforts around the development and delivery of clear disclosures, streamlined and consistent processes, and development of training and compensation to reinforce proper sales behaviors.
Asset protection: As the implications of the passage of Dodd-Frank and its attendant focus on bank safety and soundness become more clear, banks will likely look to move to compliance as a "business as usual" activity, rather than as a series of isolated regulatory responses. More generally, banks will continue to improve their risk management capabilities. One area that appears to be increasing in importance is the need for more effective management of technology-based risk, whether based on aging legacy systems or emerging cyber threats. Bank technology and business leaders should consider taking action to secure the operational stability of their operating platforms in the face of these risks.
Delivery transformation: While not new per se, bankers' interest in the potential for mobile payments is likely to continue to grow in 2013. We have seen a number of initiatives developing among banks, mobile network operators, technology firms, and even emerging innovators. Banks may consider an increase in the level of investment in mobile payments. This underscores the need for industrialization discussed above, as the foundation for delivery transformation is found in the important effort to rationalize and streamline banks' overall technology infrastructure to better support the kinds of front-office digital services that their customers are demanding from them.
Return on capital:: As a follow-up to the strategic assessment mentioned above, many banks have spent the last decade acquiring assets, and entire businesses. It is likely that the pace of divestitures -- and acquisitions -- will reshape the competitive landscape. Alongside these structural changes, banks are likely looking for growth opportunities in their preferred areas of strength. When the economy improves, the corporate and institutional markets may provide some opportunity for revenue growth, and it will be up to each bank to determine where their competitive strengths lie.
In the end, the coming year may merely see a re-attempt at old strategies that were used during previous economic downturns: cost cutting, a focus on more profitable customers, and investments in compliance. We are likely to be able to discern the emergence of a few institutions that really do take on the hard work of legitimate restructuring, repositioning, and rebranding -- perhaps not in all areas, nor all at once. Nevertheless, those few could by their actions and potential competitive success lead the more conservative fast-followers.
Jim Eckenrode is the Executive Director of the Deloitte Center for Financial Services, part of Deloitte Services, LP).