Visualizing the Importance of Trust to the Banking Industry
In the digital age, money is becoming less tangible.
Not only is carrying physical cash more of a rarity, but we are now able to even make contactless payments for many of the products and services we use on the fly.
Our financial transactions are starting to be analyzed and optimized by artificial intelligence. Meanwhile, investments and bills are paid online, and even checks can now be deposited through our phones. Who has the time to visit a physical bank these days, anyways?
Trust in the Digital Age
The migration of financial services to the cloud is increasing access to banking solutions, while breaking down barriers of entry to the industry. It’s also creating opportunities for new service offerings that can leverage technology, data, and scale.
However, as today’s infographic from Raconteur shows, this digital migration has a crucial side effect: trust in financial services has emerged as a dominant driver of consumer activity.
This likely boils down to a couple major factors:
Financial services are becoming less grounded in physical experiences (using cash, visiting a branch, personal relationships, etc.)
- Personal Data
Consumers are rightfully concerned about how personal data gets treated in the digital age
Further, the above factors are compounded by memories of the 2008 Financial Crisis. These events not only damaged institutional reputations, but they elevated trust to become a key concern and selling point for consumers.
Trust, by the Numbers
In general, trust in banks has been slowly on the rise since hitting a low point in 2011 and 2012.
At the same time, consumers are consistently ranking trust as a more important factor in their decision of where to bank. To the modern consumer, trust even outweighs price.
Top Five Factors for Choosing a Bank:
- Ease and convenience of service (47%)
- Trust with the brand (45%)
- Price/rate (43%)
- Service resolution quality and timeliness (43%)
- Wide network coverage of ATMs (40%)
It’s important to recognize here that all five of the above factors rank quite closely in percentage terms. That said, while they are all crucial elements to a service offering, trust may be the most abstract one to try and tackle for companies in the space.
With this in mind, how can financial services leverage tech to increase the amount of trust that consumers have in them?
Tech Factors That Would Increase Consumer Trust:
- Reliable fraud protection (36%)
- Technology solves my problems (13%)
- Useful mobile application (9%)
Better fraud protection capability stands out as one major trust-builder, while designing technology that is useful and effective is another key area to consider.
The World’s Most Powerful Reserve Currencies
Here are the reserve currencies that the world’s central banks hold onto for a rainy day.
The World’s Most Powerful Reserve Currencies
When we think of network effects, we’re usually thinking of them in the context of technology and Metcalfe’s Law.
Metcalfe’s Law states that the more users that a network has, the more valuable it is to those users. It’s a powerful idea that is exploited by companies like LinkedIn, Airbnb, or Uber — all companies that provide a more beneficial service as their networks gain more nodes.
But network effects don’t apply just to technology and related fields.
In the financial sector, for example, stock exchanges grow in utility when they have more buyers, sellers, and volume. Likewise, in international finance, a currency can become increasingly entrenched when it’s accepted, used, and trusted all over the world.
What’s a Reserve Currency?
Today’s visualization comes to us from HowMuch.net, and it breaks down foreign reserves held by countries — but what is a reserve currency, anyways?
In essence, reserve currencies (i.e. U.S. dollar, pound sterling, euro, etc.) are held on to by central banks for the following major reasons:
- To maintain a stable exchange rate for the domestic currency
- To ensure liquidity in the case of an economic or political crisis
- To provide confidence to international buyers and foreign investors
- To fulfill international obligations, such as paying down debt
- To diversify central bank portfolios, reducing overall risk
Not surprisingly, central banks benefit the most from stockpiling widely-held reserve currencies such as the U.S. dollar or the euro.
Because these currencies are accepted almost everywhere, they provide third-parties with extra confidence and perceived liquidity. This is a network effect that snowballs from the growing use of a particular reserve currency over others.
Reserve Currencies Over Time
Here is how the usage of reserve currencies has evolved over the last 15 years:
|🇺🇸 U.S. Dollar||🇪🇺 Euro||🇯🇵 Japanese Yen||🇬🇧 Pound Sterling||🌐 Other|
Over this timeframe, there have been small ups and downs in most reserve currencies.
Today, the U.S. dollar is the world’s most powerful reserve currency, making up over 61% of foreign reserves. The dollar gets an extensive network effect from its use abroad, and this translates into several advantages for the multi-trillion dollar U.S. economy.
The euro, yen, and pound sterling are the other mainstay reserve currencies, adding up to roughly 30% of foreign reserves.
Finally, the most peculiar data series above is “Other”, which grew from 2.0% to 8.4% of worldwide foreign reserves over the last 15 years. This bucket includes the Canadian dollar, the Australian dollar, the Swiss franc, and the Chinese renminbi.
There have been rumblings in the media for decades now about the rise of the Chinese renminbi as a potential new challenger on the reserve currency front.
While there are still big structural problems that will prevent this from happening as fast as some may expect, the currency is still on the rise internationally.
What will the composition of global foreign reserves look like in another 15 years?
Where the World’s Banks Make the Most Money
Last year, the global banking industry cashed in an impressive $1.36 trillion in profits. Here’s where they made their money, and how it breaks down.
Where the World’s Banks Make the Most Money
Profits in banking have been steadily on the rise since the financial crisis.
Just last year, the global banking industry cashed in an impressive $1.36 trillion in after-tax profits — the highest total in the sector seen in the last 20 years.
What are the drivers behind revenue and profits in the financial services sector, and where do the biggest opportunities exist in the future?
Following the Money
Today’s infographic comes to us from McKinsey & Company, and it leverages proprietary insights from their Panorama database.
Using data stemming from more than 60 countries, we’ve broken down historical banking profits by region, while also visualizing key ratios that help demonstrate why specific countries are more profitable for the industry.
Finally, we’ve also looked at the particular geographic regions that may present the biggest opportunities in the future, and why they are relevant today.
Banking Profits, by Region
Before we look at what’s driving banking profits, let’s start with a breakdown of annual after-tax profits by region over time.
Banking Profit by Year and Region ($B)
|Rest of World||$196||$243||$265||$285||$309||$327||$348||$361||$387||$421|
In 2018, the United States accounted for $403 billion of after-tax profits in the banking sector — however, China sits in a very close second place, raking in $333 billion.
What’s Under the Hood?
While there’s no doubt that financial services can be profitable in almost any corner of the globe, what is less obvious is where this profit actually comes from.
The truth is that banking can vary greatly depending on location — and what drives value for banks in one country may be completely different from what drives value in another.
Let’s look at data and ratios from four very different places to get a sense of how financial services markets can vary.
|Country||RARC/GDP||Loans Penetration/GDP||Margins (RBRC/Total Loans)||Risk Cost Margin|
1. RARC / GDP (Revenues After Risk Costs / GDP)
This ratio shows compares a country’s banking revenues to overall economic production, giving a sense of how important banking is to the economy. Using this, you can see that banking is far more important to Singapore’s economy than others in the table.
2. Loans Penetration / GDP
Loans penetration can be further broken up into retail loans and wholesale loans. The difference can be immediately seen when looking at data on China and the United States:
|Country||Retail Loans||Wholesale Loans||Loan Penetration (Total)|
In America, banks make loans primarily to the retail sector. In China, there’s a higher penetration on a wholesale basis — usually loans being made to corporations or other such entities.
3. Margins (Revenues Before Risk Costs / Total Loans)
Margins made on lending is one way for bankers to gauge the potential of a market, and as you can see above, margins in the United States and China are both at (or above) the global average. Meanwhile, for comparison, Finland has margins that are closer to half of the global average.
4. Risk Cost Margin (Risk Cost / Total Loans)
Not surprisingly, China still holds higher risk cost margins than the global average. On the flipside, established markets like Singapore, Finland, and the U.S. all have risk margins below the global average.
Future Opportunities in Banking
While this data is useful at breaking down existing markets, it can also help to give us a sense of future opportunities as well.
Here are some of the geographic markets that have the potential to grow into key financial services markets in the future:
- Sub-Saharan Africa
Despite having 16x the population of South Africa, the rest of Sub-Saharan Africa still generates fewer banking profits. With lower loan penetration rates and RARC/GDP ratios, there is significant potential to be found throughout the continent.
- India and Indonesia
Compared to similar economies in Asia, both India and Indonesia present an interesting banking opportunity because of their high margins and low loan penetration rates.
While China has a high overall loan penetration rate, the retail loan category still holds much potential given the country’s population and growing middle class.
A Changing Landscape in Banking
As banks shift focus to face new market challenges, the next chapter of banking may be even more interesting than the last.
Add in the high stakes around digital transformation, aging populations, and new service opportunities, and the distance between winners and losers could lengthen even more.
Where will the money in banking be in the future?
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