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Banking on Consolidation, Cross-selling and Global Sourcing
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Posted by : thedesk   Feb 1 2006
Key Trends in the Global Banking Industry: A sector to bank on for continued job growth
Money makes the world go round. This is so true about the global banking industry and financial markets, which are becoming more inter-linked and integrated day-by-day. As per a survey by IBM’s strategic research unit - worldwide, total financial services revenue is forecast to experience compound annual growth of 7.1 percent between 2000 and 2015, from US $2 trillion to US $5.6 trillion.

The financial services sector (IT and ITES spending by Banks, Insurance companies, and securities firms) accounted for the largest share of India’s software and services (ITES including BPO/KPO) exports at around 40%. The next biggest vertical was at 12%. This just goes to show the importance of global banking trends to the IT and ITES business in India.

In the past few decades, the world of commercial banking has been undergoing deep transformation due to increased competition because of:
- Marketable instruments (like commercial papers, Medium Term Notes) are competing with loans and demand deposits. Because of this strong competition, not only from other banks but also from investment banks marketing these instruments, commercial banks are struggling to make acceptable margins from their traditional businesses. There has been an increasing convergence between the activities of investment and commercial banks, because of the deregulation of the financial sector. Today, some investment and commercial banking institutions compete directly in money market operations, private placements, project finance, bonds underwriting and financial advisory work.

- Technological changes have also heightened competition. The traditional advantage of physical proximity to clients by way of branches is vanishing with the advent of e-banking, ATMs etc.

- Banks have to compete with money market and income mutual funds for the deposits business. E.g., in the US, the share of total assets held by banks and other depository institutions relative to all financial intermediaries has fallen from 56% in 1982 to 42% in 1991, and this downward trend is likely to continue (Source:

Due to the shrinkage of margins from traditional businesses, globally banks have been forced to cut costs, consolidate, expand into newer geographies and explore new areas of earning incomes by diversifying into insurance, private banking, asset management, pensions and investment banking. We have seen a good deal of consolidation in the banking industry. The biggest banks have in fact become complex financial organizations that offer a wide variety of services to international markets and control billions of dollars in cash and assets. Supported by the latest technology, banks are working to identify new business niches, to develop customized services, to implement innovative strategies and to capture new market opportunities.

Below we look at some key trends in the global banking industry and how they would impact jobs and careers in India.

Global Trends in Banking

Trend #1: Increasing consolidation and globalisation
Till as recently as around 20 years ago the financial sector in most countries was among the most regulated with extensive controls on prices, entry to the industry, competitive practices, and portfolio composition. Many nations over these decades have removed important regulatory barriers to international banking. Advances in Information technology also now enable financial institutions to manage larger information flows across more locations and to evaluate and manage risks at lower cost than ever before. As mentioned above there is increased competition and shrinkage of margins in the traditional banking services, thus banks have been getting into newer areas like selling mutual funds, insurance, private banking, investment banking, etc.

At the same time, growth in the international actitivies and trade of MNCs has increased the demand for services from financial institutions that operate across borders. Barriers between different financial markets are coming down, and finance is increasingly global and integrated. The emergence of an affluent class and the expansion of the middle class in several developing countries is driving growth of banking in developing markets like India, Brazil, Eastern Europe etc. and international banks are looking at expanding presence there to the extent that regulations permit. All these factors have led to global consolidation and mergers and acquisitions in the global banking industry. Few industries have experienced as intense a spasm of consolidation and corporate restructuring as has banking. Consolidation in the industry is likely to continue, with mega-brand survivors assembling, cross-selling and delivering to customers globally a value chain of products and services sourced through the most efficient internal or external channels. Consolidations in the industry are of the following types:

a. Horizontal mergers or acquisitions where two or more institutions of the same type merge to take advantage of economies of scale
b. To have access to additional distribution channel. E.g., large insurance companies often seek a fast way to access a widespread network of points of sale, like bank branches, through which they can sell their products
c. To widen the range of products that the bank can offer to both actual and potential customers. e.g., the acquisition of investment banks by commercial banks.
d. To enter a new geographic market. For a foreign commercial bank, any national market has significant barriers to entry, because it is difficult to establish an efficient and effective network of branches in foreign countries in a limited period. Most often, acquiring a domestic bank is the only feasible way to access that market.

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Trend #2: "Niche" Players Also Win
A number of experts also expect that besides the mega-brands, a wide range of niche-focused players of varying sizes will thrive by specializing and providing superior customer value to captive or highly-targeted markets. Many will be large players who select multiple specialties.

Trend #3: Banks moving away from being just transaction processors to financial advisors.
Banks are increasingly moving away from being just transaction processors and getting into becoming trusted financial advisors to their customers. Banks are increasing their resources to areas like private banking where they act as financial advisors and sell products from 3rd party product provider's too. Earlier Private banking was restricted to offering specialized services to High-Net-Worth individuals. Now banks are taking on even less affluent customers to provide these services. There is thus the growth of Private Banking for the mass-affluent globally. Wealth managers will need to focus using systems like CRM systems if they are to realise their strategy of becoming trusted advisors.

Trend #4: Tighter regulation and increased transparency.
As mentioned in Trend 1 above, restrictions in various global financial markets are coming down and that is helping global business, but governments/regulators had to find some other means to protect depositors from the prospect of financial meltdown and also had to find a way to regulate entities which operate globally, so governments/regulators the world over are strengthening and standardizing prudential rules such as capital requirements that banks have to maintain and mandatory disclosures by banks. Another reason of standardized regulation and accounting, is that financial instruments are increasingly becoming more complex. Standard guidelines are required to recognize and measure such instruments in order to ensure fair value reporting. Some important regulations impacting banking are Basel II (provisioning and regulatory compliance), IAS 39 (accounting) and the Sarbanes-Oxley Act (corporate-governance)

a. The Basel II accord is set to be implemented at the end of 2006. It specifies prudential capital requirements which force banks to hold reserves as a cushion against bad loans and to limit loans to some specified multiple of paid up capital. It also establishes formal bank supervision standards (ie, more rigorous), addresses credit concentrations, interest rate risk (banking book) and business cycle effects.
b. IAS 39 applies to financial instruments and discusses how they are to be accounted for.
c. The Sarbanes-Oxley Act is probably the most important piece of regulation affecting corporate governance, financial disclosure and the practice of public accounting since the US securities laws of the early 1930s. Fundamentally, the Act acknowledges the importance of stockholder value, strengthens the role of directors as representatives of stockholders and reinforces the role of management as stewards of the stockholder’s interests. The act also has expanded the role of audit committees.
Regulatory compliance is increasingly getting costly. It has now become accepted as an inherent cost of doing business, and will be leveraged by successful financial institutions as an important means to gain and maintain customer trust. Banks need to comply with globally enforced standards of transparency and accountability will force them to adopt integrated, enterprise-wide systems and processes.

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Trend #5: Risk Management becoming a primary strategic activity for financial firms
Risk Management is gaining in importance for banks. The risks faced by financial institutions come in several forms, including: 'Market risk:' the risk that a whole group of traded financial products (eg. stocks, bonds or commodities) falls in value simultaneously, due to such outside events as rising oil prices and terrorist bombs; is also known as “systemic risk”. 'Credit risk:' the risk that a particular company or an individual will default on their obligation to repay their debts. 'Operational risk:' the risk that something might go wrong in the day-to-day running of the bank, from computer failures and hurricanes, to employee fraud. 'Reputational risk:' the risk that something will happen to damage a bank’s good reputation; is sometimes considered a subsector of operational risk.

Risk Management includes proper risk measurement and risk control. Quantifiable risks like credit risk and market risk continued to occupy most of banks resources. While market risk was traditionally the most complex discipline in the risk pantheon, that distinction increasingly goes to credit risk. New credit derivatives products mean that banks are now able to bundle up the risk that a company will fail to repay a loan, and sell it on. Meanwhile, the importance of operational risk has also risen under Basel II. The regulations specify the amount of capital banks should hold in case of an operational problem, and outline ways of managing and measuring organisational risk. Banks will continue to implement better and better systems to measure risk accurately and find ways to control this risk.

Trend #6: Increased use of Information Technology
First, the financial sector is highly information intensive, and the greatest innovations of recent years have been in the processing and transmission of information. Banks use computers for just about everything - from communicating with staff, to storing information on clients, and running complex computer models to price financial products. They are known for having some of the world’s cutting-edge computer systems, especially for the trading floor. Advances in Information Technology is permitting the development of new products, services, and risk-management techniques. The financial services sector (IT and ITES spending by Banks, Insurance companies, and securities firms) accounted for the largest share of India’s software and services exports at around 40%. The next biggest vertical was at 12%. The Banking and Financial services sector is also the largest vertical for the domestic IT industry accounting for around 22% of the total IT spending in 2003-04. Some key technology trends impacting banking are:

a. Adoption of integrated, enterprise-wide systems and processes and implementation of centralized core banking solutions: The need to comply with globally enforced standards of transparency and accountability will force the adoption by banks of integrated, enterprise-wide systems and processes and implementing centralised core banking solutions. Banks would also interact with Customers through multiple and diverse electronic channels. This means there will be a rapid increase in customer contact through multi-channel access as a result of ubiquitous computing. This requires a fully architected environment so that it is easy to plug in new channels and new services.
b. More stringent regulatory guidelines, increased need for transparency and more sophisticated risk management systems will be some of the catalysts for growing IT usage.
c. Increased use of Business Intelligence Tools:Banks today face higher challenges to maintain customer loyalty. Banks increasingly are turning to business intelligence (BI) tools to transform data into actionable information. By helping banks better understand customers' needs, BI initiatives can create competitive advantage and lead to increased customer wallet share. The customer wants to be known individually, and business intelligence gives you the opportunity to do that. By taking advantage of business intelligence technologies bank's can differentiate themselves by sincerely knowing their customers and appropriately responding to their needs. Winners in the financial services industry will take advantage of precise predictive analytics and automated decision support tools to manage business more effectively and deliver higher customer value.
d. Integrated CRM Systems: Banks want to get an overall view of their customer rather than just a product by product view. Customers too want banks to offer a complete financial solution for their lifestyle needs and not just a product. Aggregating customer information to provide better service to the customer will become critical. This means multi-channel integration and CRM - Customer knowledge that is made available to all customer-facing employees regardless of channel/location/product specialty. Pioneering banks are coming very close to providing real-time and salesfocused customer information which enables customer service representatives to deliver personalized service.(
e. Growth of e-payments: Experts expect an acceleration in the growth of electronic payments over the next couple years. Innovative, multi-channel payments will continue to grow on the retail side and there will be a gradual push for e-payment adoption in business-to-business (B2B) transactions driven by a medley of players from banks to standards-focused consortiums (e.g., RosettaNet and the IST Harmonization Working Group) etc. to EIPP/e-payables/ERP application providers.
f. Further investment in check imaging: More infrastructure will be built to support end to-end check image processing
g. Heightened attention to security and fraud control: Fraud and security concerns remain top of mind for many banks. Several factors are driving banks to invest more heavily in IT and human resources to combat fraud. Such factors include: increasing exposure across virtual channels (e.g. rise in phishing and identity theft); increasing concern regarding regulatory compliance (e.g. the need to implement a consistent, compliant strategy across products and channels); vulnerability created by check imaging and the need for new check fraud measures; and continuing attacks (e.g. skimming) against cards at both the POS and ATM.
h. Expansion of ATM networks and Internet and mobile banking: With increasing proliferation of ATMs, deployment of telebanking and availability of Internet banking facilities, the customer contact points have increased enormously, thereby resulting increased services to customers. This has been possible solely due to the implementation of technology.

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Trend #7: Outsourcing of processes to low-cost centers:
Banking is one of the early adopters of global resourcing of services. Adoption of global resourcing is mainly driven by intensifying cost pressures and player’s global presence. Many global banks have already set up captive outsourcing centers or given contracts to 3rd party vendors in India and elsewhere. This process is likely to accelerate. The functions amenable to outsourcing include:
a. call centers,
b. telemarketing,
c. data mining,
d. back-office processing (including data entry functions, analytical tasks, statement production, financial calculations, in areas like trade finance, cash management, retail banking, capital market operations, depository services, credit card services, lending services etc.),
e. Credit evaluation
f. general and admin functions (like general accounting, HR, increasing needs for regulatory compliance etc.). etc.

Trends in Jobs and Careers related to the Banking Industry
Luckily for us in India, a number of the trends outlined above are likely to lead to increased job creation in India. The financial services sector (IT and ITES spending by Banks, Insurance companies, and securities firms) accounted for the largest share of India’s software and services exports at around 40%. The next biggest vertical was at 12%. This just goes to show the importance of global banking trends to the IT and ITES business in India.

Some of the areas of growth include:
1) As mentioned in this article IT firms and BPO/KPO firms will be taking up a number of projects in the Banking space. There will thus be good amount of demand for business analysts and project managers who understand the banking business and can tell programmers/BPO/KPO staff what’s required. The challenge in future will be to find people with a good understanding of banking products and processes who can manage the outsourced functions.

2) The BFSI sector has the largest share amongst IT exports at around 40%. It is likely to continue to be the largest sector creating more jobs for software engineers, networking professionals, professionals working on implementation of core banking solutions, CRM technical and techno-functional professionals, security experts, Datawarehousing/Business Intelligence, knowledge management professionals, etc.

3) There will be demand for BPO/KPO professionals There are likely to be requirements in the areas of call centers, telemarketing, data mining, back-office processing in areas like trade finance, cash management, retail banking, capital market operations, depository services, credit card services, lending services etc and general and admin functions. People with knowledge of operations in these banking areas would also be required.

4) Things seem to be looking good especially for the private banking sector. Banks globally and also in India will be hiring more personal financial advisers who can help banks provide retail wealth-management services. ( As the array of potential investment products widens, the job of a private banker is becoming increasingly complex. Private bankers need an understanding of financial products, from basic stocks and bonds to complex financial derivatives. As affluence in India increases more and more people will need professional financial advisors. Thus private banking seems to be a high growth area for many years to come.

5) Another area of persistent hiring is compliance and risk management. Tighter regulation of the banking sector by the regulators are prompting banks to hire more staff to comply with regulations. Credit and risk-management executives are being sought to help banks manage credit risk and comply with government regulations. These managers keep reserves in line with lending and ensure that lending remains within prudent parameters.

6) There is likely to be demand for financial analysts, economic researchers and credit evaluation professionals. In future ,with the growth in structured products and the increasing complexity of financial instruments, people with a financial engineering background may also be in demand.

7) With banks wanting to derive more intelligence out of their customer and other data, there is likely to be a demand for analytics/ statistical analyst profiles. Professionals with a knowledge of statistics and tools like SAS/SPSS etc. are likely to be in demand.

Thus this is one sector to bank on for continued job growth and expansion.

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