Insights/Case studies/Newsroom/CareersCareersCareersPartnersConsultantsTechnology innovationCorporateEarly careersSearch Jobs/About us/Contact us Global locations

Search paconsulting.com
  • Phone
  • Contact us
  • Locations
  • Search
  • Menu

Share

  • Add this article to your LinkedIn page
  • Add this article to your Twitter feed
  • Add this article to your Facebook page
  • Email this article
  • View or print a PDF of this page
  • Share further
  • Add this article to your Pinterest board
  • Add this article to your Google page
  • Share this article on Reddit
  • Share this article on StumbleUpon
  • Bookmark this page
.
 
Close this video

The world of banking is changing

Marcus Agius quote

Interview with Marcus Agius, Chairman of PA Consulting Group and former Chairman of Barclays, the British Bankers Association and Deputy Chairman of Lazard Ltd. 

The world of banking is changing. It is impacted by economic conditions in countries and regions, by technological trends, new competition and changing preferences and behaviour of their customers, among other factors. 

The global financial crisis started in 2007, ten years ago. Banking has gone through more change in these ten years than it has in any equivalent period in the past. Regulation has played an important role in that change, and it is likely to continue to do so. Going forward, we will see regulation and technology combine in new ways. We can split the global banking scene into four groups of countries:

First, we have the developed and technologically advanced countries. The banks in these countries are building significant technological advantage, exploiting Fintech through dynamic customer involvement. The Scandinavian countries are among these.

The second group consists of developed countries where banks are technologically lagging. It is most intriguing that we find the United States in this category. Although the US is the home of world-leading technology, its banks are rather antiquated, and well behind the curve in technological advances.

The third group contains developing countries where banking is technologically advanced. An example here is Kenya. Without going through traditional intermediate steps, they have leap frogged into an impressive banking setup based on mobile phones.

Finally, there are the developing countries where technology is lagging. We find both India and China here, with banking systems still evolving. 

I think there will be different answers to that question in different countries. Many find it surprising that the new challengers have not yet been more successful and that the classic stickiness of existing customers has prevailed. This is principally because banking is all about money and there is nothing more important to an individual than their personal wealth. People may comfortably use a new online holiday booking system, and buy a washing machine or other products online. But trusting their bank account to someone new is a much bigger step.

Having said that, there will be further change. Regulators are pushing for it and PSD2 may accelerate these changes significantly. There is a strong desire in parts of government to see change and increased competition in banking, and to see the challengers strengthening. 

This is a very valid view. Large banks are not about to cave in to new entrants but they will need to consider whether the smart thing to do is to be a pioneer or whether it is better to wait and see which technologies may succeed before they act. There is no doubt that the pace of change is so great, that failure for some banks and some new technologies will occur. A bank or an existing company could easily spend a lot of money trying to push a new device or a new technique, only to find out that they have been left behind by someone with a newer or a better idea. The second point is that many banks are big, rich and powerful organizations. They take this threat very seriously. I don’t know of any banks who are complacent. They are spending a lot of money on their own research, and they have access to a wide range of solutions. I think it is difficult to call right now, how this is going to play out. 

Without trying to be cute, I think the answer is all of the above. I believe the relationship between a bank and its customers is a very personal thing and it has to reflect local traditions, local habits, local spending patterns and all the rest of it. Having said that, globalization is not going to go away, despite some cries for protectionism right now. In trade terms, the world is getting smaller and smaller. For trade to continue there will be a need for global banks which operate across country borders and across currencies. 

I don’t think that protectionism is going to stop globalization, but it may affect the pace of change. It has become part of our everyday life. We go to Marks and Spencer now to buy a rose, but the rose is not grown in Kent but in Kenya. This is what globalization is about. For your smartphone, the supply chain is really very complex and reaches right around the globe. This is not going to stop. Globalization will continue and bankers will need to be active in every stage of the process. 

I suspect we will see a further consolidation right at the very top. But there will continue to be a handful of very large global banks, who have the scale, the asset base and the skills to operate that way. But I don’t see any reason why, at a more local level, you can’t have challenger banks or existing smaller banks operating perfectly well. 

Your question touches on one of the key elements of banking, which is bankers, and the need to have people who know that banking is all about risk. Every time a loan is made, the banker doesn’t know whether the loan is going to be repaid. He has to make an assessment, based on the customer, their credit history, the asset cover etc., and that requires judgement skills. I will give you a precise example: When the financial crisis hit the UK, it wasn’t just caused by problems with exotic financial instruments or sub-prime mortgages. Some of the banks that were worst hit, were hit because of an overextension of poor credit and poor lending to the real estate industry. Property was overvalued, leverage was too high, and when the market crashed, it crashed. There were one or two banks who had been caught out in a similar way in similar cycles in the past. They weren’t so exposed, and so did relatively well. The situation was analogous in other geographies where banks came out relatively well. Canada is a good example, Scandinavia another. And the reason for that wasn’t that they were immune to these risks. It was just that there had been crises in those countries in the past, and they had learned their lessons. When the overheating took place they saw it for what it was whereas others didn’t. 

Brexit is work in progress and I can’t sit here and say that I know exactly what is going to happen. What is clear, is that the banking industry will be affected. According to the Prime Minister’s speech, we are going to leave the single market and therefore, the access which UK based banks have had into the rest of the EU will change. How that is going to be done remains to be seen.

The tension relates to what comes out of the negotiations. From a British point of view, the importance of the City and the contribution it makes to the employment and to tax revenue is unquestioned. It is a vital industry and it must be protected as well as possible. By the same token, the City of London doesn’t just operate as the capital market for Great Britain, it operates as a capital market for continental Europe.  

It is THE prime capital market in the time zone, and provides capital for all European countries. Access to that is going to continue to be an absolute requirement for people who operate outside the UK, but within EU. So there is a common desire to see the City of London continue to prosper. Inevitably, there will be some impact, and jobs will go, because they will need to accommodate changes, but the central question is whether this is going to lead to a collapse of the City of London. I doubt that, if only because the installed base, the ecosphere which is the City of London, is so complex and so well established that it is too difficult to reproduce. It is a little bit like trying to cut down the rainforest and recreate it somewhere else. Theoretically, it is possible but it is actually very, very difficult to do.

But I don’t think there should ever be grounds for complacency and I say that because I have seen a couple of regulatory revolutions in my time. While they are quite different from each other and quite different from Brexit, it is interesting to study their impact. One would of course be the Big Bang in the City of London in 1987, where there was deregulation and increased competition. In the early stages the City of London was like a battlefield, with banks who failed to adapt and could not compete suffering mightily. Ultimately, the City prospered, but the short term cost was enormous.

The second example I have in mind is the aftermath of the Enron scandal. The US authorities introduced the Sarbanes-Oxley Act to prevent further abuses by making sure that regulation was far more rigorous and far reaching. This impacted, but didn’t destroy Wall Street, but it did lead to a dramatic and, never since reversed, change in the relative size of the City of London and Wall Street. Business moved to London, which wouldn’t have moved if it hadn’t been for the regulation. So these big changes are seldom terminal but they are relatively impactful. 

A lot of the regions will want to try encourage such a shift and try to make it attractive whether through personal tax or low property costs or whatever. I think that the reason why a marketplace exists is because this is a place where people know that they find other people with the ability to do whatever trade it is that they want. And for that you have to have a certain critical mass. And the threshold of critical mass is huge. The City of London has it and other centres don’t. It is a huge barrier to cross over. 

I think a lot depends on what Mr. Trump does. He is making noises about relative deregulation of the financial services sector in America. I don’t know whether that’s going to be the case. But if he does, then I think it is likely that other financial centres will follow suit. The regulation which has followed on from the last financial crisis has been massive - for perfectly understandable reasons because the financial crisis was so huge and the damage it did was so great. But there is no question that its impact has been an enormous increase in the cost of running banking operations in terms of compliance, and a huge number of heads are involved in that. Coupled with the increased capital requirements, it means that it is actually very difficult for banks to make a sensible return on their shareholders equity. While shareholders may tolerate that for a short time, eventually they won’t, and something has to give. Maybe we will end up with fewer banks charging higher fees or maybe we will end up with different ways of handling regulation, which will require less. I don’t know, but my sense is that the pendulum will probably swing a little bit back from where it has got to. 

I think it is hard to imagine otherwise. The only thing that could possible change this would be if someone such as Google, Facebook or whoever, decided to really go for it. That’s about the only thing I can think of which would be able to challenge banks on the scale that they exist at the moment. Maybe they will. If you think about it, part of the success of banking is knowing your customer and no one knows their customers better than these huge social media corporations. 

I couldn’t say. But since the companies we think about can go into driverless cars, they could certainly go into banking. It is perfectly possible, and it is really a question of how the people who run these companies see their opportunities as they exist. They are not short of opportunities. The banking industry is huge but maybe they will decide that the return isn’t going to be attractive enough. 

Find out more about our work in financial services.

Contact the financial services team

Knut Erlend Vik

Knut Erlend Vik

Email

Connect

Thomas Bjørnstad

Thomas Bjørnstad

Email

Connect

Contact us by filling in the form below

» Indicates required fields

Your details

By submitting this form you are agreeing to be bound by our legal terms and conditions and our privacy policy.

By using this website, you accept the use of cookies. For more information on how to manage cookies, please read our privacy policy.

×