Banking, like any industry, has had clear moments that defined it, shaped it and made it what we know in the U.S. today. However, with those changes, one thing has remained constant: banking will continue to be a critical part of our everyday lives, core to our social and economic fabric and the engine that fuels our economy. Today, we are in the midst of yet another defining moment. Three significant trends have emerged in the last few years that have changed how bankers operate, and how customers see our role in their lives: risk management, payment electronification and globalization.
Banks have long been in the business of managing risk. It seems like yesterday that banks needed only to focus on credit and operational risk to stay profitable and out of trouble. Today, that process has become more complex. New legislation, corporations' access to world-wide capital markets, global issues and the threat of terrorism have helped create enormous new risk-management pressures on banks. Developments in recent years, such as Sarbanes-Oxley, Basel II compliance and risk-capital reform, anti-money laundering procedures, phishing attacks and identity theft have given new meaning to the term "risk management."
Pressures on profits cannot signal an appetite to accept greater risk. With the challenging yield curve, there's the major issue of net-interest margin compression. The shape of the yield curve spread has always held implications for banks' margins, and with them, their profits. Today, it is essential that banks don't reach too far for marginal credit. Banks must stick to the fundamentals, with the discipline they have maintained throughout the years-and not be tempted to be irrational just because others might be.
Risk management must be a core competency of all banking organizations. Banks must shift from basic compliance to a comprehensive risk-control system, which may include the appointment of a chief risk officer or the creation of systems that view a variety of operations and businesses in a consolidated manner. Though banks are light years ahead of where they were even five years ago, they must run faster to get where they need to be tomorrow.
Paper-based payments are clearly on the decline. Consumers and businesses are leaning toward and encountering more electronic payments of all types, such as through electronic check conversion, electronic bill payment and presentment and increasing debit, credit and prepaid card transactions. This increase has enormous implications and opportunities for our industry because electronic payments are faster and more efficient, while also emerging as a high value, high growth business.
However, banks are faced with the challenge of keeping pace with the electronic trend while accommodating a paper system. Despite years of talk that we would be living in a check-less society, the truth is paper is here to stay: Americans write nearly 110 million checks a day. Future success in payments will rely on a bank's ability to embrace this electronic-payments movement. Banks have no choice but to act quickly to ensure that they continue to be dominant forces in future payments systems.
Banking and payment processing is truly global and growing fast. Investment capital is crossing borders and oceans at an ever-increasing rate. Banks' dominance in large corporate lending has diminished, as companies have access to worldwide capital markets. Even the smallest of companies can now transact international business through the Internet, and more and more businesses are turning to their banks for expertise in foreign trade, payments, credit and other financial grease for their international wheels. Additionally, as more and more U.S. companies export jobs and service delivery to foreign countries, banks facilitation of payroll, payments and other financial transactions follow the jobs.
I have heard it said that there is no point in being for globalization or against globalization. Like the weather, it just is. We must concentrate on living with it, maximizing the benefits and minimizing the costs. There's no right or wrong answer to globalization for any bank, but it is imperative that we recognize its power. The bemoaning days are over. The challenge now is to see how banks can make globalization work in their favor.
To the editors, writers and staff of U.S. Banker, congratulations on 115 years of engaging the banking industry with thought-provoking and insightful coverage since your publication first rolled off the presses in 1891 as the United States Investor. From everyone at the 143-year-old U.S. Bancorp (which also has gone through some name changes), we thank you for your contributions to the banking industry and wish you even more success in the future.
Jerry A. Grundhofer is chairman and CEO of U.S. Bancorp. Through a series of predecessor firms, he has been CEO since 1993.
