Critical Issues and Trends for 2008

CU360
April 4, 2008 | COMMENTS

The U.S. subprime mortgage lending crisis made world headlines in the summer of 2007 and its continuing fallout is one of the top issues facing the banking and securities industry in 2008, according to Deloitte's Banking and Securities Industry Outlook. While the outlook for the industry as a whole is guardedly optimistic, it depends on how quickly the crisis is resolved and the credit market opens up again.

In addition to credit challenges and uncertainties, the banking and securities industry will need to address several other important issues in 2008:

Regulatory Complexity

The industry will continue to see increasing regulatory complexity in numerous areas, so it's important that organizations stay on top of evolving regulatory expectations, engage in dialogs with regulators when issues arise, and review the effectiveness of their risk management processes.

The subprime mortgage crisis likely will prompt additional consumer protection laws around subprime lending and predatory lending practices. Already, additional rules to guard against unfair/deceptive acts--such as prepayment penalties and no-doc or low-doc loans—are expected to be in place in 2008.

Meanwhile, the Federal Reserve is drafting new regulations for improving disclosure around consumer credit card billing and rate increase practices. On the supervisory side, new rules and regulations are being established for examiners and supervisors when they conduct their onsite reviews of financial institutions.

Increasing globalization will bring about heightened focus on regulatory issues. On a global level, industry executives will need to address the convergence/reconciliation of international measurement and accounting standards; the role of the different central banks; compliance with anti-money laundering regulatory requirements; and the effectiveness of different regulatory structures and their ability to handle crises.

The Future of the Branch

As consumers increasingly conduct their retail financial transactions at ATMs or online, what does it mean to the future of the financial institution branch? Should branches focus on offering complex sales and services? Should they function as a customer gathering place for educational seminars?

During this transitional period, some financial institutions are starting to experiment by emulating retail practices, such as providing concierge services or opening coffee houses. Others are placing renewed emphasis on employee training. In the future, consumers might see fewer tellers and more customer-service representatives at each branch.

Evolving Payment Industry

A growing trend called "search to pay" could serve as a disruptive force in the payment industry.

The "search to pay" model contends that the value being created for consumers in a sales transaction is in finding the products to purchase, and that payment is a secondary part of the process. Search players such as Google or Yahoo could emerge as serious threats to financial institutions' domination of the payment industry.

Also in the payments industry, we see continuing pressure on the cost-income ratio in payments leading institutions to rethink their current approaches. Financial institutions have a substantial opportunity to reduce operating costs by automating their payment processes and consolidating them across the institution. For the largest institutions, there's an additional opportunity to generate revenue by processing payments for smaller institutions that lack the necessary scale to operate efficiently and want to outsource this function.

The "Green" Financial Institution

The push for environmental sustainability means more to the financial services industry than simply constructing a "green" building or reducing a company's carbon footprint. In the coming year, financial institutions should investigate and thoroughly understand this new reality because they can either make or lose money from it.

In general, 2008 is expected to be a year of managing through uncertainty. Continued volatility could lead to some revenue disappointments, and many financial institutions could remain challenged by the repercussions of the subprime mortgage crisis.