As we step into 2012 and look back on the state of the banking industry, we can see that the sector is slowly returning to health after the effects of the economic slowdown. However, there is still a long way to go. Increased regulations are squeezing the profits of the banking industry. This trend is particularly visible in the U.S. credit and debit card spaces and was earlier seen during mortgage lending and foreclosure crisis. There are also the additional regulations in the form of greater capital standards from the Basel III Accord and related Financial Stability Oversight Council (FSOC) requirements by the U.S. federal government. As expected, this will further pressure the profitability of the American banking sector.
The strong challenge for the industry, as this whitepaper on The Basel III Era: Banking on IT to power growth? correctly points out, is to meet the growing demands for operation expansion while operating under increasing regulatory constraints. This tightened regulatory environment is common to banking sectors across other economies. Take for example, in India - banks are required to open at least 25% of its total number of branches in unbanked rural tier-V and tier-VI centers with populations less than 50,000.
So how can banks manage to churn out profits when they are required to hold greater capital which would have otherwise been invested? How can banks hope to expand beyond domestic operations to achieve revenue growth? The answer to the second question can, at least in part, be the marketing opportunities given by the "un-banked/under-banked". Overseas expansion among the under-banked in Latin America and Asia can prove to be good options for banks. Banks like ANZ are exploring the North Asian market for expansion.
However, this option too is not without challenges. Global privacy regulations pose large restrictions on the access and storage of data. This, again, means that such an undertaking could prove to be complex and expensive without the require flexibility and speed.
As we can see, the banking industry has an uphill task in maintaining profitability and meeting expansion goals while complying with the strict regulations. Will they find a way out of this catch-22 situation???