Tomorrow’s banking world has the potential to be very different from today’s. A number of factors are converging that may see some banks relinquish some of their power. This is coupled with the rise in alternative payment methods, notably crypto.
The increased popularity of fintech is also leading to a change in the nature of banking services, with traditional banks being challenged by new entrants on both sides. Banks are responding by investing heavily in M&A activity, but are they too late? Join us for a preview of 2022 to find out…
Since the COVID-19 pandemic and the fallout from it shuttering the world’s economy nearly two years ago, banks have been navigating these challenges.
According to a survey of 175 bankers and fintech executives, a full recovery may finally be within reach, ushering in a new post-crisis financial landscape. It’s always possible that omicron or another COVID-19 variant will slow the process.This uncertainty did not deter survey respondents, ranging from CEOs and high level executives of big, global firms to non-management employees of more modest community banks, from making predictions about the industry in 2022. The survey was conducted in October by Arizent, the parent company of The Banker.
This included issues such as when a full economic recovery might occur, inflation fears, how banks plan for cryptocurrencies and potential mergers, as well as technology spending and branch network reductions.
What follows is a detailed breakdown of the executives’ answers.
Economy Recovery Forecast
Although the U.S. economy has yet to fully recover from the downturn caused by the ongoing COVID-19 pandemic, most executives expect a complete recovery by the end of 2022.
About one-third of respondents said they expect a full recovery by then, while 44% are not planning for a full recovery until 2023.
However, cautious planning seems likely for the remainder of next year, even when some positive signs emerge, such as the Labor Department’s report that jobless claims are at their lowest level in 52 years.
Ninety-two percent of executives said they were at least somewhat concerned about the impact of rising prices on their customers, according to the study.
The consumer price index increased 6.8% in November on an annual basis, the highest rate since the Reagan administration, according to the Bureau of Labor Statistics. Several bank CEOs expressed concerns about inflation at a Goldman Sachs industry conference.
“Inflation is very, very real,” Wells Fargo CEO Charlie Scharf said at the conference.
Preparing for digital currencies
Fewer than 2% of the industry executives who responded to the survey were already offering cryptocurrency transactions, but more are preparing to do so.
Signature Bank in New York, which holds $107 billion in assets, is one financial institution that has already embraced crypto. They have gone beyond offering one-time transactions and hold billions in reserves for crypto companies.
25 percent of those surveyed said they were “somewhat likely” to enable crypto transactions in the next three years, while 11 percent said they were “very likely.”.
About two in three executives said more work on policy might spur competition for products such as stablecoins as regulators get their hands around crypto. But there is still work to be done.William Demchek, PNC Financial Services’ CEO, warned about “suspicious collateral” surrounding some stablecoins during an earnings call on Oct. 15.
A recent research report by Fitch Ratings predicts that the Basel Committee on Banking Supervision will release a “consultative proposal” by the middle of 2022 for how crypto assets should be treated under existing capital rules.
U.S. banking agencies have started “policy sprints” to understand the risks from digital assets, the researchers noted.
Fitch researchers predict that agencies will provide further clarity on managing risks associated with digital assets, such as crypto-assets, in 2022 – noting that in-flight legislative efforts will likely drastically change the regulatory landscape.
Big Tech Fears
Large technology companies are finally gaining a foothold in the financial industry, but executives’ worries vary based on their size.
The majority of executives surveyed believe big tech companies will be a “major competitor” within the next three years. Researchers at Moody’s Investors Service said in a Dec. 2 report that large tech firms could pose a threat to the current banking industry. Google, Apple and Amazon have explored ways to get into traditional banking services such as checking accounts and credit cards.
Moody’s warned in the report that technology firms become increasingly adept at attracting and servicing clients in their ecosystems, disintermediating banking services. If banks are to stay competitive, they must invest in digital ecosystems.
In comparison to large global banks, regional banks seem to be the most concerned. Some 64% of executives from mid-sized banks predict that giant tech companies are a major threat.
Still hungry for deals
The industry seems unfazed by the Biden administration’s tougher stance on bank mergers.
Of the executives surveyed, 9% said a merger or acquisition is a “definite certainty” for their company in 2022, while another 14% said an M&A deal is “very likely” for them next year. Twenty-six percent of respondents said a deal is at least “somewhat likely,” while about one third said it is “very unlikely.”
Earlier this summer, the White House called on the Justice Department and banking regulators to take a fresh look at how they approve bank mergers in an effort to curb consolidation. Some deals have already run into delays because of red flags raised by regulators.
A review of bank merger policy was approved on Thursday after Democratic members of FDIC’s board broke from Trump’s appointment of chair Jelena McWilliams.
What it all means for potential deals in the near term remains uncertain.
“The fear is out there, but I think it’s still unknown,” said Christopher Marinac, an analyst at Janney. “You could have those scuffles, and we still proceed on the transactions.”
Bank Branch Shrinking
Around 38% of the executives surveyed expect to “somewhat reduce” the number of branches in the next year or “substantially shrink” their physical locations.
Among the aggressive plans of a company like Synovus Financial, a $55.5 billion firm with a network of 40 branches in Columbus, Georgia, it said it will close about 15% of its locations by 2022.
Other banks have decided to keep more branches open than might have been expected last year.
Two-thirds of the executives surveyed said they plan to expand their branch networks next year, while 1% plan to “substantially increase” theirs.
The strategies of small and large banks differ. About 58% of CEOs of regional banks expect to reduce their branches, while just 28% of CEOs of community banks and 17% of CEOs of credit unions anticipate that they will reduce their networks.
Investing in Technology Upgrades
According to executives in the financial industry, technology upgrades will cost more in 2022.
Sixty-seven percent of the executives in the survey expect at least a moderate increase in tech spending over 2021 levels.
Most of the spending is going toward new products or enhancing existing ones, as banks try to keep up with fintechs. However, 61% of executives said they expect their customers to use biometrics like facial or fingerprint recognition in the next three years, and they will need the underlying technology to support those innovations.
Fitch Ratings said in a report outlining the challenges that banks will face in 2022 that juggling their spending may prove difficult, even as long-awaited interest-rate income could arrive.
Fitch researchers wrote that, despite efforts to rationalize headcount and branch networks, cost management may become challenging in the next year, as the need to invest in technology ramps up to remain competitive.
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