Banks urged to brace for geopolitical and regulatory tensions in 2018

Banks also need to prepare for increased competition from non-traditional players.

According to KPMG, a decade after the global financial crisis (GFC), the financial services industry worldwide is now nearing the end of the cycle of regulators and governments recouping money from banks through fines and other forms of redress. In the US alone, banks have paid USD 150 billion in fines since the GFC. The associated investigations and remediation activities have held back the level of investment and management time that could have been spent on innovation.

Going into 2018, there are a number of significant external factors that banks need to monitor and prepare for. Banks cannot ignore the geopolitical tensions and the more nationalistic and protectionist tone being taken by some leaders.

Here's more from KPMG:

Ongoing developments around Brexit continue to impact many international financial institutions, with several banks considering moving key business and staff out of the UK due to a lack of clarity over the path Brexit will take. We are also seeing similar reported issues around Catalonia’s possible secession from Spain.

Banks will also continue to closely monitor the actions of the US in respect of regulation. While there is continued discussion about rolling back aspects of US regulation, the less reported area of concern is that the US appears to be stepping back from implementing Basel 3, which has been hammered out between the leading economic powers.

As a result, some leading European nations have said that they will also not implement aspects of the regulation, as they only agreed to do so on the basis that the US would as well. The Basel framework has been an important mechanism for international cooperation in the post-GFC world, and its demise would leave a worrying vacuum.

One consequence of the increased capital requirements for banks has been to dramatically reduce the attractiveness of Fixed Income, Currencies and Commodities (FICC). This business has long been one of the biggest revenue engines for wholesale investment banks.

As this area of business continues to shrink and become less profitable, it has forced many major investment banks to seek alternative growth strategies, which can put more pressure on executives to find new revenue streams. Banks need to be mindful of the need to drive profitable growth while maintaining a focus on promoting a sound banking culture and mitigating operational and conduct risk.

Across the world, non-traditional players are challenging the traditional banks, and banks are experimenting to find the right balance between treating these insurgents as competitors or partners. In mainland China, powerhouses Tencent and Alibaba are transforming the way business is done and are threatening to replace the traditional means of B2B commerce and trade finance payments conducted by banks.

China already leads the world in mobile payments with volumes increasing five times in 2017 from the prior year to RMB59 trillion (USD 8.8 trillion). This has led to the central bank mandating that all mobile payments will need to go through a centralised clearing house by next June to give the authorities greater visibility and control.

With this trend showing no signs of abating, banks in Hong Kong and mainland China need to seriously consider how to transform, innovate and compete with the fast-growing non-financial players.