Financial services has its challenges, for sure. But all that change means plenty of dollars, and sector leaders remain optimistic about the opportunities ahead.
By Eric Krell
A June report issued by the Consumer Financial Protection Bureau (CFPB) crystallized the major hurdles U.S. financial services companies confront as they, finally, shift into to growth mode. The first challenge highlighted by the report on checking account overdraft programs is the active regulatory environment.
The CFPB, birthed by the 2010 Dodd-Frank Act, is just beginning to find its feet. By crafting a case that many overdraft fees are "unfair," the regulatory body illustrated a second challenge in its willingness to target a revenue stream, just as other post-crisis rules have done. Although the CFPB has no overdraft-fee rules on deck, its scrutiny of the fees, which generated more than $32 billion for U.S. banks in 2012 according to The Wall Street Journal and Moebs Services Inc., shed light on a third major challenge: Finding new ways to generate growth and revenue amid rock-bottom interest rates and a newly conservative post-crisis customer base.
The CFPB found that programs designed to protect customers from overdraft fees actually socked them with higher overdraft fees. This conclusion points to a less obvious but potentially more serious challenge. "Loss of trust in financial institutions has been marked through the financial crisis, and slow to return," reports Mike Baxter, partner and head of Bain & Company's financial services practice in the Americas.
While these challenges are daunting, they hardly qualify as discouraging.
"There is so much change going on in this space right now," asserts Ismail Amla, a Partner and CEO of Capco's North American business. The consulting opportunities within the financial services sector sound positively rosy. "Without a doubt, the doom and gloom has lifted—drastically so, in the past eight weeks," says Joe Guastella, the National Managing Director and the Leader of Deloitte Consulting's U.S. financial services team.
The Implementation Wave
The time frame used to forecast significant financial services changes seems to have shrunk from months to weeks to days. Pervious discussions of low yields and regulatory uncertainty have been shoved aside by headlines about the promise and perils that rising interest rates pose to financial services companies.
Booz and Company's 2013 "Retail Banking Industry Perspective," published just seven months ago, describes three broad priorities for this year: "grinding out profits," "building performance into the company's DNA," and identifying new growth opportunities.
Today, many banks have moved beyond identification and headlong into implementation, says Hank Prybylski, Global Financial Services Risk Management Leader for Ernst & Young. "The period of uncertainty surrounding rules and regulations and maybe even markets has solidified to the point where failing to act is worse than acting on incomplete information," he explains, noting that conversations with financial services CEOs have changed dramatically in the past 12 to 18 months. Back then, Prybylski says industry leaders generally were saying that they did not know enough about how post-crisis regulatory changes would be implemented to integrate those considerations into their strategic planning activities. As a result, many strategic planning activities languished in neutral in the long wake of the global financial crisis.
Although the impacts of major regulatory changes, including Dodd-Frank, remain less than clear, there is enough clarity to take action when it comes to planning and implementing strategy. "Our bank clients today have moved from analysis to revising their strategy and now into implementation," Prybylski reports.
Old Challenges, New Twists
The strategic analyses Prybylski describes feature familiar inputs: economic conditions, the regulatory environment, customer expectations and technology. "It's very much the same stuff that's always gone on, except that the strategic imperative to get things done is probably more intense than it's ever been before," notes Guastella.
There are new wrinkles, of course—inching-upwards interest rates, the ubiquity of tablet computing, and rapidly growing cyber security risks to name a few—but the primary forces enacting on the industry remain similar to the drivers of change in previous years. If there is one theme that unites these forces as well as the specific business challenges and consulting opportunities they give rise to, it's the issue Baxter emphasizes: trust.
One trust-related risk that financial services firms often neglect relates to human capital, notes Daniel Durham, North Highland Vice President and the firm's U.S. financial services lead. Firms should look closely at how the sector's overall trust challenges influence workforce morale, Durham explains.
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