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Brexit’s impact on US financial institutions: turning challenges into opportunities
WORLDPAY EDITORIAL TEAM
August 15, 2019
In the vote heard round the world, Britain elected to invoke article 50 of the Lisbon Treaty to abandon the European Union (EU). While the separation of Britain from the EU will take time to be complete, the questions and uncertainty the departure brings is already spreading rampantly across the globe. One of the major concerns for the UK and its allies is the impact the exit, commonly referred to as “Brexit,” will have on financial institutions and the global market.
While the UK and Europe will likely spend about two years figuring out the terms and details of the exit, some repercussions will be immediate. Since the decision largely caught the global financial market off guard, it’s too soon to tell exactly how it will play out in the global economy. But predictions of change are strong in three main categories: international gateway restructuring, lower interest rates, and slower markets.
In the US, big banks with large multinational operations and large business units for global markets, investment management, and investment banking are more likely to be disrupted as they manage around Brexit implications. Many large US banks use London as the gateway to other European markets, so the impact to cross-border collaboration is significant. While big banks fared well on the Dodd-Frank Act stress test, experts agree that Brexit will push valuations lower. This uncertainty will likely keep the Federal Reserve Board from raising interest rates as it assesses financial stability. The impact will be felt in 401K retirement funds, as well as mortgage rates.
As large banks navigate around the complexities surrounding the Brexit, there is an opportunity for smaller banks and credit unions to help insulate themselves against the likelihood of interest revenue stagnation. In an environment where certain revenue streams may be lower, putting pressure on short term rates, and lending isn’t as profitable, capitalizing on non-interest revenue can be an effective strategy.
A great way for financial institutions to capture more non-interest revenue is to strengthen activities around the small business market. Making an investment in the small-to-midsize business segment (SMB) now can help bolster revenue over the next few years of uncertainty. While larger banks are focused on restructuring their international operations, and increasing immediate liquidity and maintaining their stress threshold, smaller financial institutions can be strategically positioning themselves to make large gains in the SMB market.
Small businesses can be highly profitable for financial institutions that offer solid and affordable merchant services to SMBs. Smaller businesses represent a significant profit center, even larger than the combined affluent and high net worth customer profit pool. Oliver Wyman’s Winning with Small Business demonstrates that the SMB market profit margin is comparable to consumer segment profits with the benefit of even more additional revenue in the form of additional consumer business. A small business often brings its owner into the relationship as well, increasing the profit potential by over 60 percent.
Growing the small business segment requires deepening customer relationships to make them more satisfactory and “sticky” for businesses. This requires concentration in three key areas: effective targeting of SMBs, offering better product sets with the ability to effectively cross sell, and crafting quality services that focus on retention.
When it comes to attractive product positioning, successful financial institutions have focused on product suites with three similarities: those that are simple and segmented, easy to implement, and priced to maximize profit. In a nutshell, products must generate value for the customer and for the financial institution. The more value it has for the customer, the more profitable it will be for the bank or credit union. For example, a business checking account that offers quick funding and allows more transactions before item fees kick in has more perceived value than slight differences in interest rates.
Simple bundles that allow a small business owner to leave a meeting with the financial institution with everything they need to effectively run their business, from a business checking account to the payment device and merchant services, are a great way to capture immediate profit from the merchant segment. Concentrating on the particulars that make one merchant services provider stand above the others is important when it comes to retaining merchant business.
Partnering with a reputable merchant services provider with strong profitability and retention rates is a great way to bolster non-interest revenue and mitigate the uncertainty of the global market over the next few years. Worldpay specializes in merchant services for banks and credit unions of all sizes.