Banks must make radical technology updates to save profits, KPMG warns

banks

Only the “radical use” of new technologies can help the UK’s biggest banks become more profitable, KPMG has warned, as shareholder returns continue to drop six years after the financial crisis.

In its annual UK bank benchmarking report, the accountancy firm said Britain’s five biggest banking groups must “urgently tackle” low returns for shareholders.

KPMG recommended that Lloyds, Barclays, HSBC, Royal Bank of Scotland and Standard Chartered employ new technologies to reduce costs while boosting the customer experience.

Cost reduction is high on the banks’ agendas, with all the lenders undertaking so-called “optimisation” programmes. Cost-to-income ratios are ranging from 51 per cent to 81 per cent, KPMG said.

Older banks continue to struggle with technological advances, which has prompted the emergence of new challenger banks and peer-to-peer platforms which allow customers to deposit and borrow funds more freely.

“Technology-led services such as PayPal and e-wallets [also] change the way money is transferred and goods and services paid for,” said Bill Michael, head of financial services at KPMG.

Evolving regulations also mean that banks are being held to greater account for their conduct, which can have financial reparations. Together, the banks were fined £39 billion for misconduct over the last three years. Conduct costs, which included mis-selling payment protection insurance and interest rate hedging products, reached £9.9 billion – 8 per cent down on 2013 and 19 per cent on 2012.

On top of fines charged for misconduct, implementing new measures can also add to banking costs. The Financial Times reports that by 2019, banks holding at least £ 25 billion of deposits will be forced to ringfence their retail operations to protect customers from investment banking crashes. The “significant” resources and management time needed to do so will incur costs that could be funnelled back to customers, the report continued, referring to a recent report by credit rating agency S&P.

HSBC chairman Douglas Flint expects the process to cost the bank $1 billion to $2 billion.

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