A Series Identifying Trends, Challenges and Opportunities Banks and Bankers Will Face in 2015
Bankers throughout the globe primarily focus on operating their banks in a safe and efficient way. But, they have little time to gain clear, established and organized information about the industry as a whole, and as we move into a new year, it is as critical of a time as ever to understand the factors that will be driving the industry moving forward. Therefore, Banking Reports, Ltd. Research, a leading banking industry research firm, has identified the following trends to help bankers better understand the challenges and opportunities that will arise throughout 2015.
Trend #1: Apple Pay
Apple Pay is the first physical payment infrastructure innovation since plastic cards that has a real chance to spread worldwide and to become a de facto standard. There have been thousands of attempts, hundreds of good ideas, dozens of serious players and a couple of partial successes in modernizing or transforming the plastic card system. But, Apple’s attempt stands out high! Why?
- Brand: Apple has a very strong and highly trusted brand image and brand resonance. As trust is fundamental consideration when dealing with payments, this serves as a major asset to Apple.
- Standard: Apple has proven to the market that it has the power and the culture to create global standards in products, services, hardware and software alike. Global presence is almost essential when it comes to payments, and it is something that Apple already has as opposed to most payment-innovators. Remember: when plastics were first conquering the world, the major advantage was that it stored and carried value across borders and provided a convenient payment infrastructure for card-holders around the globe.
- "Coopetition": Apple has got it right in terms of cooperating with existing ‘old payment’ players as well as competing with the ‘new payment’ ones at the same time. This seems to be the right combination and a smart tactical decision on Apple’s side. This fine blend of competition and cooperation is what we call "coopetition."
The major challenge ahead of Apple Pay is that the timing may still be a bit too early for a real global break-through. We will see how markets react and how quickly they transform over the next year.
Trend #2: FED Rate-hike
It is almost certain that 2015 is going to be the year of the first US rate-hike since the 2008 crisis. This seems to be a minor technical thing. But, it is much more: it is something potentially carrying major global risks and challenges. Why?
- Emerging Markets: Emerging markets have been benefiting from loose US monetary policy in two major ways. (i) Liquidity provided by QE. (ii) Low US interest rates that let the more risky emerging markets keep their rates relatively low due to lackluster US competition (extra-low US rates were so unattractive that more risky emerging countries could afford to offer relatively low yields on their bonds and still attract investors). QE is over, and taper-tantrum was more than a US phenomenon. But, it is behind us. Our forecast is that US rate-hikes may have a more severe impact on emerging markets.
- Strengthening USD: As a result of the rate-hike expectations, the USD has already significantly strengthened since the beginning of tapering and especially since the end of QE. As we are getting closer to the first actual rate-hike, this trend is expected to continue. This is pretty indifferent for the US economy since the US economy is much less open in macro terms than most would expect [1]. But, the strengthening of the USD means the weakening of many other currencies. This can reach an extent of some currency crises in emerging economies.
- Dissolving Liquidity-Trap: When interest rates are quasi-zero, the market has asymmetric expectations. Expectations are asymmetric since rates can only move to one direction: up. This "one way street" of expectations leads to the exciting phenomenon of liquidity-trap, first described by John Maynard Keynes [2]. QE 1,2,3 has cca doubled US monetary base, i.e. the amount of dollars in physical and electronic circulation in the US economy. According to monetarists, the doubling of the monetary base should have proportionately led to the doubling of nominal prices. Instead, prices remained pretty well-anchored. This is exactly the condition of liquidity-trap. The key question going forward is if, when and to what extent the hidden inflationary pressure currently quite seamlessly contained by the asymmetric rate-expectations will burst out as the condition of liquidity-trap is dissolved by rate-hikes. The US economy is growing fast [3], unemployment is shrinking and, so, if inflation starts to move up and the liquidity-trap is dissolved, the FED may have a hard time containing it and a quick, intense and repetitive series of rate-hikes may occur that at this point Janet Yellen is indicating the FOMC is not planning to do. Let’s remember: historic average Federal Funds Rates are oscillating around cca 5 percent, so we think that there is well enough space for the FED to move upwards. Now, this series of US rate-hikes, which was forced, catalyzed and probably quickened by the dissolution of the liquidity-trap, may put a much heavier than expected burden on emerging economies.
The major challenge ahead of emerging markets is to withstand the interest-rate and exchange-rate pressure indirectly asserted on them by the FED.
Trend #3: Africa
African banking is thriving. Africa is a frontier market of the best kind: vast in area and population alike with a demographic composition of youth and intensely lengthening life-expectancy that western economies have rarely, if ever, experienced. We are thrilled by the banking-innovations in Africa, and we think that investing into African banking is something to consider as a part of a well-diversified portfolio. But, opportunities and risks go hand-in-hand in Africa, and we expect 2015 to be a year of dichotomy in this sense. Why?
- Pan-African Banks: An increasing number of African banks are extending their presence cross-border between African countries. We expect four things to happen in this arena: (i) The Pan-African banks will continue their expansion, (ii) A number of banks currently present only in their home-country will go beyond borders, (iii) Some Pan-African banks may be considered to be acquired by western players, and (iv) Some Pan-African banks will struggle and may even direct attention to risks in African banking in general.
- Commodity Prices: In the last quarter of 2014, we have experienced a sharp fall in commodity prices. Africa has been the last, and one of the most precious, frontier of commodity-related investments. Some African economies will withstand this global downwards price-pressure well while some may suffer disproportionately. While in the short run low commodity prices are negative for many African nations on a macro-level, we expect this to be an overall positive for Africa in the mid-run and on a long-term time-scale. We will have to keep our eyes on how this all affects the African banking-system.
- Ebola vs. Innovation: Ebola has somewhat crippled the bright economic expectations in West-Africa in 2014. This most unfortunate outbreak of the deadly disease is a true disaster in a human sense, but probably luckily only a short-term setback in the broader economic dynamics. Ebola brought attention to serious shortcomings of healthcare systems in a number of West-African countries, while it was exposed to the world that even after a decade of dynamic growth many countries basically lack an existing healthcare system as a functioning socio-economic institution. This striking underdevelopment on one hand is balanced by a nature of innovation and a sense of vivid-creativity in many areas of life, including finances on the other hand. Due to lackluster infrastructure and security issues, mobile banking spread fast instead of ‘brick and mortar’ banks in the last five years. World-leading innovations in mobile-banking on the supply side intertwined with an unprecedentedly high level of openness and embracing attitude of the public on the demand side in many African countries. The rest of the world has a lot to learn from Africa in terms of banking innovations. But, Africa has a lot to learn from the rest of the world in operating a functioning healthcare system. We are certain that in the mid-run the innovative edge will remain present, while in another decade of such a high-growth environment, important socio-economic institutions will strengthen.
For more information on delevoping trends in the banking industry, check back with the MarketResearch.com Blog for more future insights.
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Editor's Note:
This post was written by David Gyori, Executive Director at Banking Reports, Ltd. Research. Mr Gyori advises banks and bankers on how to win in a changing global banking-landscape. He has been working as a banking researcher and consultant for nearly 15 years. His favorite methodologies are research-based report-writing and research-based consulting. He is an enthusiastic squash player and a coffee-lover.
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[1] There are many ways to measure openness of an economy, but most indicators are revolving around the ratio of total export plus total imports to the GDP. This is cca 0,15 in the USA, but, for example, cca 1,50 in Singapore or cca 0,80 in Ireland. OECD average is cca 0,50. This shows how surprisingly closed the US economy in fact is. Many ask why? The answer is that US companies have an attitude, culture, know-how and power to invest abroad and, instead of trading with many countries the US on a macro level, is investing in many countries, therefore, producing and selling goods on-site. This nature of local presence of production provides a natural hedge against a significant number of fx-related phenomena, while creating some risk-factors that other economies are less exposed to.
[2] And, recently reinvigorated by the Nobel prize winner economist Paul Krugman.
[3] 2014 Q3 revised GDP-growth rate has been cca 5 percent.
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