By Ron McMillan and Graham Hayward
The future of the banking industry remains uncertain, but there are a number of long-term catalysts such as the expected demographic shift and the rise of state-directed capitalism that will further shape the global financial sector.
This is the fourth installment in a series of articles by PricewaterhouseCoopers, the leading tax and advisory firm, which aims to provide a framework for discussion and offer fresh perspectives on how the banking landscape will look like, enabling bankers to identify and prepare for the threats their organizations face.
PwC’s research shows that there are several forces at work— the weak economic environment, regulatory reform and fiscal pressure — that are shaping tomorrow’s banking world. This transformation coincides and will be accelerated by the increasing importance of emerging market banks and the rise of the SAAAME bloc (South America, Africa, Asia and Middle East).
Western banks will have to abandon the universal banking model, which also had its part in creating a debt-fueled economic expansion that paved the way for the global financial crisis.
The new world order of banking will be further molded by a demographic trend, whereby ageing or even declining populations in many key western countries mean that these markets will offer low or no growth. These demographic changes will fundamentally impact the way banks need to interact with their customers.
Western banks will have to be cautious to avoid over-investing in low growth or declining markets and to consider the mechanism and rate by which they innovate products in order to remain relevant to their changing customer profile. Younger generations, for example, will interact in a different way— note the rise of social media — and will likely demand a new and distinct offering from their bank.
The products and services required to fund an ageing population will also need to adapt to the changing demographics. It is likely that assets will increasingly need to be divested to younger people in high growth markets in order to fund retirement. Banks must keep open the conventional distribution channels required to communicate with older customers at the same time as younger customers demand new ways to interact with their banks.
Demographic projections clearly show that the populations of many western economies are both shrinking and aging. In Western Europe, for example, the population responsible for peak consumption of financial services (25 to 55 years old) is projected to shrink by 21 percent by 2050 and the median age is projected to increase from 42 to 48 over the same period.
The European Commission recently said that while immigration could potentially compensate for an ageing and declining population in the EU, a further 7 million new migrants a year would be needed by 2024. However, the EU only received 3.5 million migrants in 2006 and numbers are forecast to even decrease.
The same trend applies to most of the individual economies in Western Europe and also much to Central Southern and Eastern Europe, although there are pockets of population growth like Ireland.
It should be noted, however, that this trend doesn’t universally apply across all western economies. While the median age in the US will increase from 37 to 39 by 2050, its total population is forecast to grow by 42 percent and the population responsible for peak consumption of financial services is expected to grow by 26 percent over the same period.
Aside from a strong demographic shift, there is a considerable risk that there will be an increasing number of disputes — whether economic, political or military — over resources as global supply will fail to meet demand. Climate change is likely to exacerbate the problem. Long-range projections of the impact of climate change on agricultural productivity highlights the likely future challenges in food security, particularly in Africa and South America.
Banks will need to finance and invest in technologies and resources that are sustainable going forward. Stakeholder pressure will ensure that sustainable investments become a key driver of the way banks allocate capital.
Growing demand for oil, coupled with known reserves and increasing exploration costs, could drive up prices to a level where global trade is impacted and the competitiveness of certain economies is threatened.
A third long-term driver is the rise of state-directed capitalism. Governments may continue to believe in capitalism as a strong financial system, but at the same time they exert increasing control over both banks and the real economy. In developed markets, the crisis necessitated a rapid increase in state intervention and, in many people’s eyes, has legitimized intervention. Governments have exerted significant control for many years and this is likely to persist.
Governments are also becoming increasingly important clients for banks, in particular their advisory business, and banks will need to assess the impact of government intervention on the real economy when considering how to allocate investments across asset classes and industry sectors.
Only those financial services companies preparing and understanding the long-term underlying trends will be able to play a role of significance in the new world order of banking.
Ron McMillan is the Deputy Chairman and Head of Assurance for PricewaterhouseCoopers, Middle East Region and Graham Hayward is the Middle East Region Financial Services Leader at PwC. This article was written exclusively for Daily News Egypt.
