What is the future of banking? A number of forces are reshaping it and will make it very different from what it is today. A report by management consultancy Oliver Wyman says six forces are changing it.
First is the end of low or declining interest rates. Barring a Japan-style deflationary scenario, rates in the US and EU can only move up from today's extraordinarily and artificially low levels. As rates rise from today's historic lows, debt servicing will become more burdensome each year.
The second is increased consumer deleveraging as consumers wind down their debt levels. The bottom line is people will be borrowing less, which means less money for the banks.
Another force that will change the shape of banking is the way regulators around the world will force banks to have higher capital requirements as a buffer against the next crisis. That will raise the costs of financial services products and services.
Fourthly, there is the ageing population. More of this group will be demanding services like annuities and structured income contracts. Banks will have to change their offerings to consumers, cut down in certain areas and add to others.
Also we will see the end of credit risk-free sovereign borrowers. After Europe, sovereign debt are now dirty words. Market perception of real credit risk in sovereign debt will increase. That will affect the liability guarantees extended by banks.
And finally, there is the credit growth in emerging economies. That will significantly outpace growth in developed markets, creating new areas of focus for banks. Banks will have to reallocate resources from developed to emerging markets. But the problem is that emerging markets are too small.
For banks, the future is looking very messy.
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