By Thomas Olsen and Jan-Alexander Huber
Many corporate and investment (C&I) banks are hurting. Much of the pain stems from tighter regulations and cyclical factors such as the low interest rate environment. The biggest US banks not only reported lower profits in the most recent quarter, most also posted shrinking revenue—led by a 40% drop at Goldman Sachs. Even in fast-growing Asian markets, many C&I banks struggle with declining profitability.
C&I banks have been adept at reining in costs during tough economic times. However, long-term structural challenges are mounting that cannot be addressed by quickly adjusting compensation or headcount. New technologies that drive down cost structures, shifting client demands, and the infiltration of new competitors threaten to permanently shrink banks’ profit pools and the viability of their business models, no matter what stage of the economic cycle.
Why, for example, does settling a cross-border payment take hours or even days in the age of instantaneous digital transactions? The answer lies mainly in the legacy practices of banks that have operated the world’s payment systems—methods that are on the verge of being swept aside by technologies such as block chain, the engine underlying bitcoin digital currency.
In other areas, the gap also has widened between what clients need and what traditional banks offer. Corporate clients want faster, more transparent, efficient and integrated transaction solutions, according to the latest survey by the Association for Financial Professionals. Hence the rise of insurgent companies using new technology or alternative business models. Atlanta-based PrimeRevenue, for example, provides supply chain financing through the cloud, either partnering with banks or going directly to corporate clients.
Many bankers, meanwhile, have been distracted by regulatory changes and an extended trough in the economic cycle, which have reduced the industry’s return on equity by 30% to 40% since the global financial crisis began.
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