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2023 Banking and capital markets outlook

BY: Charlotte Forson-Abbey
The writer

The Global Economy remains fragile going into 2023. Uncertainties abound due to an unprecedented confluence of factors— Russia’s invasion of Ukraine, supply chain disruptions, the meteoric rise in inflation, and tightening monetary policy across the world.

The potential for a mild recession or stagflation in certain economies is high. Global GDP growth in 2023 is likely to be muted at best—barely above three per cent, compared to six per cent in 2021. This growth will not only be uneven across countries but also more divergent than in the recent past.

The ripple effects from a more fragile and fractious global economy will be felt disparately across the global banking industry. Developing countries will continue to deal with food and energy shortages, which may lead to socioeconomic turmoil.

Large, well-capitalised, diversified banks should weather the storms reasonably well.

This article analyses how various factors are expected to influence retail banking, consumer payments, wealth management, commercial banking, transaction banking, investment banking, and market infrastructure. The article also highlights how banks and capital market firms should respond to charting a new path.

Sectors Affected

Retail banking: Envisioning new ways to serve and engage with customers

In the near term, retail banks will have to deal with higher rates, inflation and lower growth. Nevertheless, they should prioritise developing customer experience strategies that are data-driven, consistent across channels and offer consumers personalised advice to navigate difficult economic conditions. This may require front- and back-office harmonisation, as well as an overhaul of branch infrastructure. Banks should also be prepared to deal with potential challenges from the housing and auto lending markets, heightened regulatory scrutiny on fees and data security.

In the long term, banks should develop inventive new applications for ESG, embedded finance, and digital assets.

Consumer Payments: Unlocking deeper financial relationships beyond transaction flows

There are only a handful of industries as dynamic, innovative and competitive as consumer payments. The breakneck pace of innovation in digital payments, the plethora of payment options and gradual mainstreaming of crypto payments are revolutionising how consumers pay.

In the short term, digital payments should not only accelerate but transform the payments experience on multiple fronts. Yet, where money goes, so could fraud. Digital identity is expected to evolve as a counterbalancing force to mitigate fraud risks in the long run. Meanwhile, the way money is created, stored, valued and exchanged via digital currencies could have profound implications for consumer payments in the long term. Issuers, card networks, acquirers and fintechs across the value chain need to demonstrate an unwavering commitment to elevate their roles and become the top-of-mind choice among consumers and merchants.

Wealth management: Creating a new recipe for greater success

The wealth management industry is at an inflection point. Market dynamics are being shaped by multiple forces, in addition to macroeconomic conditions. Other trends, such as the democratisation of advice and demographic shifts, including generational wealth transfer, are also upending established business models and existing ways of serving customers. Customers are increasingly expecting holistic advice, prompting a shift from a product focus to client-centricity. These changes, however, are coming at a time when the industry is in relatively good health.

Wealth managers need to be bold in reshaping their business models and building a franchise that is defensible, scalable, and cost-efficient. For instance, delivering holistic advice, especially to mass affluent clients across the bank, is an efficient and effective way for wealth managers to win greater wallet and mind share. Further, product optimisation strategies are becoming increasingly important to win the war for assets.

Commercial banking: Designing a new service model bolstered with insights and digital tools

Inflation, higher rates, persistent supply chain shocks, and a potential recession portend a more stressful environment for corporates. While commercial bank net interest income should improve as central banks raise rates, banks may also be forced to raise rates on deposit products to retain clients seeking higher interest–earning opportunities.

Despite a loyal client base, commercial banks will likely face fierce competition to win a greater share of corporate clients’ wallets. They are demanding bespoke digital, data-rich solutions and tailored advice. These will likely require banks to excel at a new client service model.

Meanwhile, the fight against climate change presents a massive opportunity for banks to mobilise finance to aid corporate clients’ transition to net-zero carbon emissions.

Transaction banking: Shaping the future of global money flows

Transaction banking businesses are standing firm despite recent market uncertainties. For many banks, these divisions have been a steady source of revenues and profits. In the near term, however, macroeconomic uncertainties and geopolitical risks are expected to test their resilience. There are, however, some bright spots, including migration to the new ISO 20022 standards that should help banks with richer data to achieve their digital aspirations.

In the long term, banks would have to contend with new fragmentation risks to their revenue pools and operating model. Meanwhile, the relatively slow pace of digitisation can diminish future potential.

Transaction banks should focus on building a modern, efficient, scalable technology platform to provide a holistic, real-time view of client transactions, and enable insights and innovation to serve clients better.

Investment banking: Weathering the storms with patience and ingenuity

Investment banking businesses will likely face a unique set of challenges in 2023. In the near term, banking institutions will likely be preoccupied with how best to react to macroeconomic conditions, including divergent interest rate trajectories across the globe. Volatility across asset markets may bode well for the Fixed Income Clearing Corporation (FICC) and equities divisions. Yet, the same market unpredictability could create headwinds for prospective deal-making and underwriting and also stress capital and liquidity buffers. These dynamics are in sharp contrast to the last two years, when investment banking divisions posted record profits.

Investment banks should preserve their role as capital market intermediaries in the wake of deglobalisation, the rush toward a green economy, and the rise of private capital. As client demands evolve, they should also bolster customer experience by enabling front-to-back modernisation. Accelerating digitisation will remain key to unlocking future sources of value. Banks should also be agile and decisive in responding to the new talent dynamics and rising cost pressures. These challenges will likely test most investment banks’ patience and ingenuity.

Market infrastructure: Carving a new identity by creating differentiated sources of value

Market infrastructure providers are increasingly being asked to provide more than the best execution, low latency and competitive costs. Buy-side and sell-side customers now demand a bundle of services across the trading life cycle to simplify their workflows and give them a competitive edge.

The most urgent priorities for large exchanges include bringing new technologies to scale, such as cloud-enabled microservices, market data tools and analytics and digitised trading processes. In the near term, they should work to differentiate their offerings from specialist providers through mergers and acquisitions or by developing new capabilities internally. They also need to address heightened calls for fee transparency from global regulators and prepare for the transition to a faster securities settlement cycle.

Exchanges should also seize medium-to-long-term opportunities in carbon trading, crypto markets, and the mass tokenisation of financial assets.

Conclusion

Over the long term, banks will need to pursue new sources of value beyond product, industry or business model boundaries. The new economic order that will likely emerge over the next few years will require bank leaders to forge ahead with conviction and remain true to their purpose as guardians and facilitators of capital flows.

Banks should be bold and stay ahead of the curve, proactively shape emerging forces and envision the possibilities beyond the current fog of uncertainties.

The writer is Partner,

Audit, Deloitte Ghana

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