At the end of this week, I was struck with the sober realization that my next career move may require a departure from banking. Initially, this notion weighed heavily on me, but in reality, it was the culmination of all that I’ve observed over the last decade. Since the financial crisis, this industry has been transforming and the role which banks once played as the linchpins of the capitalist economy have been reduced to those of stodgy utilities. The pain that banks endure will only continue, as subtle but dramatic shifts put them in a position where they are dying a death by a thousand cuts.
During this time while I’m gainfully unemployed, I have caught-up with my fellow industry colleagues. Interestingly, that while the U.S. economy soars, many of them have found themselves in the same predicament as me, jobless. In this ever-changing landscape, it seems that having decades of experience has lost its value. Jobs that were once filled by senior level executives have been downgraded and subsequently repriced. We are all finding ourselves faced with the reality that we have out-priced the market and the knowledge, skill and experience that we have has lost its worth.
It all began with Regulation
In 2014, I wrote a blog post warning that onerous regulations, inflicted on the banks in response to the financial crisis, would eventually strangle the banking system. Access to capital would become more difficult to obtain and the cost of financing would be more expensive while credit-worthiness would come under greater scrutiny. Innovation would also come to halt as many risk-taking activities would become impermissible. Stifled capital flow, a lack of market liquidity and limited financing options would ultimately increase the costs of banking products for consumers.
The dominoes began to fall shortly after the crisis, as regulations prohibited the banks from taking certain types of risks and limited the types of products they could sell to clients. Customer needs however didn’t just evaporate and so non-banks stepped in to fill the void and a shadow banking system emerged. Less regulated financial institutions used this opportunity to capture new revenue streams but the scale advantage that banks had, offered greater efficiencies which smaller entities just couldn’t replicate. This resulted in more expensive products for the consumer but because the options were limited, banks lost market share.
For banks, gone are the days when they were handsomely paid for their sophisticated product innovations and their risk-taking capabilities. Now it’s all about flow products that yield narrow spreads with an advantage given to those with scale that could handle volume. Before the financial crisis a bank’s ability to thrive and prosper was dependent upon on their ability to innovate and a bank’s competitive advantage was based primarily on the quality of its talent.
Loss of intellectual capital
Once upon a time, banks would hire rocket scientists and mathematicians who would engineer highly complex financial products that would serve its sophisticated investor base. Today many of these products are impermissible and so the need to innovate has gone away and so has the demand for immense brain power. Banks have lost their intellectual appeal and as a whole have been dummied-down.
The work has also lost its cache as every job today includes some type of regulatory component. While it is prudent to operate with an eye towards compliance, this adds layers of minutiae that put a strain on bank resources; the bureaucracy that has been created decreases efficiencies and bloats operating costs. Everyone is expected focus on the regulatory aspect of their role and no one is exempt, not even the revenue generators. As a result revenues have suffer and yet there is little evidence to suggest that these regulations will actually prevent the next financial crisis.
The only areas within a bank that are earmarked for investments in innovation are in the technology space. These investments are a survival imperative that protect banks from competition of predatory companies seeking to disrupt the industry. Banks are also constantly searching for ways to increase profitably and when product innovations are less of an option than banks seek to increase profits by decreasing cost. Technology offers opportunities for greater efficiencies by streamlining operations which also means a reduction in headcount. Machine learning and AI will inevitably replace the need for humans as we’ve already seen in some areas with algorithms and electronic trading platforms. A bank’s inability to move forwarded with technological advances puts their business in jeopardy as part of a natural order of evolution.
Banking’s new business model requires a different skill level than was required a decade ago. This caliber of employee exists in various off-shore locations and where talent is much less expensive than in any of the primary banking hubs. Cities like Jacksonville, Mumbai and Manila offer adequately qualified staff in volumes at an enormous discount. It is no longer necessary for banks to spend top dollar on talent in New York, London and Hong Kong. Talent is expensive and what you can extract from them in terms of revenues has become limited by regulation.
After twenty five years in banking, it is difficult for me to imagine a career in any other industry. I have always been grateful for the opportunities that were afforded to me and have been passionate the dynamics of the industry. But I also recognize that the industry has changed substantially and sometimes you got to know when it’s time to walk away. I’m not entirely sure if that time for me is now, but what I do know is that the party is over for banks.