Pub. 8 2018 Issue 2

24 www.azbankers.org Figure 9: FICC performance ($M) Figure 10: Equities performance ($M) Beyond technology, shifting talent needs reflect new drivers of business opportunity and shift risk. Hiring high-quality data modelers and cy- ber-risk experts has become a priority. Changing client needs and great - er industry convergence also often necessitate that banks augment pure industry specialists with domain-specialists (e.g., an expert in platform business models who serves clients in multiple industries). Banks’ ability to stay ahead of these trends may determine the success and stability of their business models. The migration to electronic trad- ing in high-margin products, like interest-rate swaps and greater price transparency with reporting requirements could result in increased margin pressure (see A MiFID II clean-up beckons). Finally, ongoing regulatory change makes for a demanding agenda. A material rewrite of the Volcker Rule could create vast changes in banks’ strategies and market structure. Proposed rules in the European Union, such as the creation of intermediate holding companies for European entities that would be subject to EU prudential regulation, may result in meaningful operational and legal shifts. Additionally, Brexit contin - ues to pose major challenges for many global banks (see In the face of Brexit uncertainty, banks prepare for maximum change). A MiFID II clean-up beckons Many banks with global capital markets operations, particularly those in the United States, have been late in appreciating the sheer implications of the recording, reporting, and transparency require- ments of MiFID II. Many firms are still scrambling to meet the fast-approaching January 3, 2018, compliance deadline, and much of the compliance achieved by that date could be imperfect and disorderly for many institutions. Many data-reporting structures still need to be adequately refined. Client-facing compliance processes, such as recording calls or ensuring that client conversations do not drift into “informal” channels are going to require vast operational shifts. And while buy-and sell-side firms have begun to reshape their business models in response to the unbun- dling of research from other services, this recalibration could have vast implications for the investment industry. 43 The scale and the relative unpreparedness by many for MiFID II suggests that a significant part of 2018 may be devoted to beefing up effective compliance and reevaluation of business models. Even those few that are ahead of the curve may find themselves working to truly embed these requirements into business processes, and respond to the competitive implications. Payments: Making the right strategic choices Incumbent payment providers have to make tough choices on whether to be one-stop providers of traditional and digital, frictionless solutions, or to leave some of the payments pie to the exclusive domain of fintechs and other emerging players. The competitive dynamics in the payment industry continue to intensi- fy both among incumbents and alternative digital payment providers. A big challenge that incumbents face in this changing payment landscape is how to stay relevant to their customers while finding new income streams, especially as benefits from managing the “float” diminish with faster, digital payments. In the United States, the Faster Payments Task Force’s Call to Action and the launch of Zelle (a bank-owned peer-to-peer payments solution partnered with a number of major US banks) mark an evolutionary leap to catch up with other parts of the world, and are geared to benefit the US customer. 44,45 In Europe, the upcoming PSD2 could push banks to open their APIs to third-party providers, enabling them to build new solutions on top of banks’ data. It would also allow customers to authorize using bank account information for third-party applications, shifting ownership of this data to the customer. Adding to the regulatory developments, the Interchange Fee Regulation of the European Union, in 18 months of its implementation, has potentially axed €2 billion in credit card inter - change revenue, while allowing an “Honor All Cards” rule (requiring merchants to accept cards of certain schemes) for the cards subject to interchange fees. 46 But these developments have not slowed many incumbents’ efforts to maximize the potential in traditional businesses. An example: card-is - suing banks are flooding the market with reward-based products; 47 2018 Banking Industry Outlook w Continued from page 23