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Banking industry challenges [How automated SDLs can offset them]

Banking industry challenges [How automated SDLs can offset them]

The challenge that probably impacts many European commercial banks at the current time is the effect of negative and low interest rates dictated by their central banks.

Whilst it is impossible to ignore the directive, it is possible to take full advantage of the opportunities this can create. Our blog highlights one of those fortuitous prospects in the form of a lucrative, highly sought-after solution with an excellent payback period.

The following blog outlines one of the key banking industry challenges encountered by financial institutions today and offers an in demand, profitable solution to offset it.

Gunnebo has been providing secure storage solutions to banks for decades. It is in our interest to not only understand the challenges financial institutions face, but to come up with ways to overcome them.

In this blog, we have highlighted one of the major challenges that the banking sector is presently experiencing and how an automated safe deposit locker (SDL) facility can help to alleviate the negative impact it is having on commercial banks. This article concentrates on the effects of this very specific, externally imposed factor.

Access a fuller picture of the current banking industry challenges and opportunities that safe deposit locker installations create by downloading our full free guide.

Download the free banking guide

 

Central Bank Directives

Some of the main challenges that commercial banks face today, are imposed upon them by their central banks and are thus out of their control. In tough economic times, these governing financial institutions are forced to take decisive action. Most notably, in recent years, the imposition of low or negative interest rates to help stimulate the economy.


Low / negative interest rates

This somewhat controversial measure, that punishes savers and rewards borrowers, is becoming a popular monetary policy. Sweden, Switzerland, Japan, Denmark and the 19 Eurozone countries have already taken interest rates to below zero.

Aside from those already at zero or below, there are also plenty of countries with very low interest rates between 0.1% and 0.5% as well. Australia and Israel are at 0.1%; Canada, Cape Verde, Fiji, New Caledonia and the US are at 0.25; and the UK, Albania, Macau, Norway, Oman and Thailand are currently at 0.5%.

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Risk for banks

Even though these rate reductions have had a positive influence on the respective economies, addressing the low inflation environment with unconventional monetary policy tools like this has had significant adverse side effects for financial institutions and subsequent repercussions on their clients.

If central banks cut interest rates too low or move too far into negative territory, it could cause commercial bank customers to withdraw their deposits and provoke hoarding of excessive amounts of cash. In a study requested by the ECON committee entitled ‘Low for long: Side effects of negative interest rates1 and a McKinsey & Company article ‘How banks can ease the pain of negative interest rates2 both claim that over time, negative interest rates will impact bank profitability by eroding the interest rate income of banks and thus they would lose their funding for lending. As income received from loan interest is a commercial bank’s main source of income3, low lending rates would obviously also influence their revenue and profit potential.

Alternatively, it may create asset price bubbles, a phenomenon currently being experienced with the price of precious metals, particularly gold, and could also be a major contributor to the exponential rise in cryptocurrency value.

With this likely profit erosion, some leading European economists are even suggesting banks may lend to riskier counterparties or invest in riskier assets in their quest for revenue and thereby endanger financial equilibrium.

Given that so many countries have already introduced negative or very low interest rates on savings deposits, it is a fact that many banks are going to start feeling the detrimental effect of this development.

Research is ongoing, but It is likely that the low interest rate environment will persist for a long time in advanced economies, due to the decade-long decline in the natural rate of interest. These challenges have also not been helped by the ongoing COVID-19 pandemic and are most likely to worsen, the longer or the lower the rates fall.

Not only do negative and low interest rates reduce commercial banks’ profit margins, prolonged periods of low or negative interest rates may encourage banks to completely cease or dramatically decrease lending in line with profitability diminution, which in turn defeats the Central Bank objective of helping to re-invigorate the economy.

According to economists and business analysts, the current constraint on margins will last at least five years, and probably longer, so what can commercial banks do to ease the pain of low and negative rates?

Why are automated safe deposit lockers a potential solution to the challenges banks face today?

Download the free banking guide


It’s not all ‘doom and gloom’

“In the midst of chaos, there is also opportunity” Sun Tzu. Whereas it is impossible to circumvent the effects of Central Bank directives, it is possible to maximise the potential they make available. Banks need to don an innovative hat, review their income sources and consider shifting to other, more profitable earning methods.


Interest rates have caused investment portfolios to change

Tangible assets

The risk that customers might withdraw deposits from low interest paying bank accounts is evident, but it is how they then re-invest that money that is important. Shrewd investors will seek more lucrative, alternative investment options and consequently, there has been a sharp increase in the acquisition of tangible assets, such as precious metals like gold in 2020.

Other economically attractive, physical investment opportunities, including priceless art objects, high-quality, branded watches, precious stones and other expensive metals, are also increasing in popularity. What do all these things have in common? They are all extremely valuable entities that need to be kept secure.

This aggressive increase in worth and heightened investment activity has also logically led to a rise in the demand for a safe and convenient place to store these costly items away from the home environment.

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Cryptocurrency

Considering the value of and the increase of investment in cryptocurrency, as one of the diversified portfolios, there is even more requirement for actual safe storage. ‘Crypto wallets’ should be backed up, encrypted and stored in multiple physically secure locations. Alternative offline storage is available in the form of a ‘paper wallet’, a cold wallet that can be generated from certain websites and produces both public and private keys that are printed out on a piece of paper.

Nowadays, it is possible to own physical crypto-coins that let you store digital currency on them and that, in their own way, also double up as valuable collector’s items.

All these items need protecting from theft. Where better to store those assets than in a safe deposit box in a maximum-security vault at a financial institution you already trust? This all shows how low and negative interest rates are actually boosting demand for safe deposit lockers.

A profit generator

There is an increased need for safe storage based on the change in investment portfolio, and there is clearly an opportunity for banks to offer this service as a valuable resource. 24/7, safe deposit locker facilities as an alternative revenue stream and business opportunity can replace other less profitable sources that have or are drying up. They offer an attractive ROI and a short payback period.

In our full guide, we further explain why safe physical storage needs are growing, list an example profitability calculation and detail how to implement it as a great stand-alone profit generator.

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Summary

Although banks can pass their costs on to savers who hold deposits with them, to date, few banks have done so and instead have chosen to either increase banking fees or charges.4 However, the Wall Street Journal, reports that this is now happening in Germany. In an article entitled ‘Banks in Germany Tell Customers to Take Deposits Elsewhere’5, Patricia Kowsmann writes ‘Interest rates have been negative in Europe for years. But it took the flood of savings unleashed in the pandemic for banks finally to charge depositors in earnest.’

Banks are restricted by depositors' willingness to maintain funds with them given the low cost of keeping cash at home and, if the well-respected German financial community are imposing these levies, how long will it be before others follow suit?

In essence, if clients do choose to withdraw low return account cash and invest in tangible assets, it is possible to gain their custom back by offering unrestricted, highly secure access to and storage for these valuable assets. Not only is it an extremely feasible way to compensate for the income deficit from the lack of loan income, rentable safe deposit locker facilities can provide a supplementary revenue stream when interest rates rise again, and lending becomes popular once more for banks.


References:

  1. https://www.europarl.europa.eu/cmsdata/235693/02.DIW_formatted.pdf
  2. https://www.mckinsey.com/business-functions/risk-and-resilience/our-insights/how-banks-can-ease-the-pain-of-negative-interest-rates
  3. https://corporatefinanceinstitute.com/resources/knowledge/finance/how-do-banks-make-money/
  4. https://www.schroders.com/en/insights/economics/what-happens-if-uk-interest-rates-turn-negative/
  5. https://www.wsj.com/articles/banks-in-germany-tell-customers-to-take-deposits-elsewhere-11614594601#:~:text=Charges%20range%20between%200.4%25%20and,40%25%20to%20325%2C000%20in%202020

 

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