Experts across the financial services industry expect no significant changes to the financial sector as well as the overall economy for the upcoming six months, despite growing public concerns over a looming economic downturn. “Short-term, for the balance of 2019, it will be steady-as-she-goes,” W. Henry Walker, president of Farmers & Merchants Bank, told the Business Journal.
Business as usual also means continued challenges to the profitability of banking posed by government regulation of the industry, rising employment costs and expensive technology upgrades, according to Walker. Paired with low interest rates, he noted, these factors will continue to put a damper on the industry’s profitability.
“Banking has suffered considerably since the Great Recession from a compressed net-interest margin. It appears as though, with the current forecast, we will not see interest rates going up,” Walker said, noting that low interest rates had a compressing effect on profit margins. “Margin compression, I think, will be a part of banking as a whole for the foreseeable future.”
Walker also noted that government regulation on record-keeping, reporting and analysis of financial transactions has not eased under the current administration. “We spend an enormous amount of dollars being the policeman for the government,” he noted. Regulatory requirements increase the need for new internal technology, which comes at a cost. “Internal and customer-facing technology is very expensive,” Walker said.
Yet, customer-facing technology has become an integral part of the equation for banks seeking to grow their client base. “People use cash less and less,” Walker noted. Customer services, including access to convenient technology, has emerged as the main opportunity for growth among regional and community banks in their race against national competitors, Walker explained.
“The regionals and community banks work diligently on providing great customer service and knowing the customer. And there’s a large segment of the affluent population that wants a true banking relationship and wants to be known by their bank,” Walker said. “That is a segment that is being separated at the larger banks and is an opportunity for regional and community banks.”
Kris Allen, area manager at the FirstBank branch in Bixby Knolls, agreed. “A big opportunity for [the] financial services industry lies in providing comprehensive or 360-degree services to clients,” Allen said. “Meaning, for institutions to become a true partner to clients in all things financial.” With this proposal for more comprehensive customer service, Allen also touched on another trend identified by several industry experts: consolidation. “So instead of having different providers do banking and lending, and wealth management, and insurance, and trust, and treasury, etc. – you have one institution who can provide it all,” he explained.
Allen also noted the dual role technological advances have played for the industry. “We know the rapid advances in technology and process innovation will continue to have an impact on our industry in this second half of the year and well into the future,” he said. “This is both exciting and challenging, offering both new benefits and new perils.”
While technology can enhance the customer experience, it also provides additional opportunities for fraud and identity theft, a growing concern for the financial services industry, according to LBS Financial Credit Union President and CEO Jeff Napper. “Identity theft is on the rise, no doubt as a result of the continuous and nationwide data breaches we have all seen over the past few years affecting millions of consumers,” Napper told the Business Journal.
Like most financial institutions, the credit union recently transitioned to a chip-based credit and debit card system to mitigate the risk of digital transactions. The effort has shown results, Napper noted, with card fraud losses dropping by over 50% in just one year. “But we anticipate the fraudsters will not give up, and we all need to be vigilant about protecting our personal financial information.”
Serving the area for 83 years, LBS Financial is the largest credit union to be founded in Long Beach, with 137,000 members and $1.5 billion in total assets, according to Napper. Overall, the credit union has done well in the first half of 2019, he stated. “Rates for deposits and especially for certificates of deposit are much higher than they were a year ago,” he said. “The financial services industry has benefited [from] having a near-record economic expansion cycle in U.S. history.” While noting that loan growth has softened in 2019 and auto loan growth has declined from the prior year, Napper said “very few delinquencies and losses [have demonstrated] that consumers at present are able to generally handle their debt obligations.”
Blake Christian, of accounting firm Holthouse Carlin & Van Trigt LLP, said he expects overall economic conditions to remain positive for the industry. “I think we still have the economic underpinning for more growth in the economy, and this will bode well for the financial services sector,” Christian said. “Absent some global conflict or significant stock market correction, I do not see any major change.”
In his practice, Christian noted, one of the “most explosive areas of growth” has been advising clients on the relatively new Opportunity Zone program, which allows taxpayers to invest in a Qualified Opportunity Fund (QOF) in exchange for capital gains tax incentives. The QOF, in turn, is designed to invest in one of 8,700 designated census tracts throughout the U.S. “This is creating real estate projects in Long Beach and most other cities, and new businesses are looking at the Opportunity Zones as great places to start or expand businesses – thereby spurring real estate sales, generating construction activity, increasing loan activity, and increasing job growth,” he explained.
Overall, Christian noted an increased demand for financial services from both individuals and businesses. “There is a healthy entrepreneurial segment in the economy and that is helping drive business-to-business activity as well as employment,” he said.
Trent Bryson, CEO of the Long Beach-based financial consulting firm Bryson Financial, noted that private equity investment will have a significant impact on the financial services sector. “We will see a continued influx of capital plugged into the industry,” Bryson said about efforts by private equity firms to buy up companies with various levels of earning potential. “While long term I think the valuations are unsustainable, they are creating an opportunity for companies to sell unlike we have ever seen.”
Locally, however, he warned of the effects of regulation on private business, while noting the opportunities business relocations offer to the financial services industry. “The biggest challenges we see are hyperlocal to California, with continued laws being passed that are anti-business,” Bryson said. “As companies continue to get chased out of California by politicians, it will be important for financial services companies to understand clients’ needs in the new markets they are moving into.”
For his industry, Bryson projected a continued tailwind, while noting that consolidation is likely to continue. “We expect the financial services industry to remain strong for the rest of the year,” he said.