Banking Article, Banking Finance 2021, Banking Finance April 2021

BANKING METAMORPHOSIS

It was that last classroom credit training program, just prior to this COVID-19 pandemic crisis, I was taking a class for Branch Heads of Semi-urban and rural branches. As usual, I started my class with an exclamation by asking the question what was banking.

I got various answers including the one I was expecting i.e. “accepting deposits for the purpose of lending”. Meanwhile, I heard a mild whispering from one of the participants, “Sir, we are doing everything other than what you defined”.

It made everyone in class laugh including me.  It really opened up the class which made my job easy. I continued class asking him with a smile what all you did then, so everyone opened up, lot of things came out such as cross-selling, technological issues, multiple software handling issues, lead generation, downward market trend, banking apps, recovery, disruptions from the payment banks, competition from private & NBFCs, low-cost QR (quick response) technologies, need of AI (artificial intelligence)and so on and so forth. Before the class get hi-jacked I smartly made an exit to the discussion saying thanks for such responses.

Well, somewhere consciously I agreed in mind that of course the banking was no more the same traditional accepting deposit for lending but there was a complete metamorphosis in the banking sector. Let us see how the banks look like with this facelift.

 

  1. What banking will look like in the coming decade?

If we just look back a few years ago, the business in banking meant the sum total of advances and deposit because the higher your total business higher would be the profit due to the substantial spread of interest. But, as of now, it is all about the bottom-line of what matters in the banking business irrespective of the size of the business. If I just put the same in my lighter sense it is all about being slim and productive rather than being hefty and docile.

The increasing pressure from a low-yield environment and the potential economic slowdown could negatively impact earnings, especially for smaller, less diversified and consumer lending-focused banks. Now the banks should continue to increase their fee-based income and increased focus on cost management and at the same time not to lose focus on their digitization efforts and regulatory obligation which may cost heavily in the days to come.

To enable insights-driven offerings to clients, attain a leaner cost structure and ultimately unlock future success, core modernization of the digital ecosystem is the key. Banks should digitize and transform across the entire value chain for all horizons of their products.

Redesigning customer experience by removing friction, enhancing value through rewards, access to other financial products and bolstering security is expected to remain top priorities.

While large payment providers could continue to offer an enhanced integrated experience, we are also likely to see an acceleration in unbundling the payments value proposition. This will comprise payment, credit, rewards, and security components but should also include the flexibility to interact with different experience providers.

 

2.    What will retail banking look like in the next decade?

By this decade end, fewer retail banks may exist although the degree of shrinkage could vary by region/country and will likely depend on the current level of banking capacity, competition, and market demand. As a result, the nature and degree of competition will likely change; the surviving fintechs should become mainstream players and traditional incumbents will have to recalibrate their strategies.

Nevertheless, scale and efficiencies will be the dominant factors. Also, in the next few years, banks could partner with others in the ecosystem to become defacto platforms, offering countless services that will extend beyond banking.

Banks should still be best positioned to own the customer relationship, which would enable them to rethink their value proposition and serve client needs holistically, supported by data and analytics. Product innovations are expected to focus on clients’ financial well-being and closely connect lending, payments, and wealth management services.

And, of course, maintaining superior customer experience and seamless connectivity to an ecosystem of other apps/application program interfaces (APIs) could be the norm. Offering advice should be a differentiating factor for banks as it becomes contextual and real-time. Banks should rethink and innovate pricing models accordingly. In an open data environment, privacy concerns will also be a big factor to be looked into.

 

3.    How is the payments business changing?    

Payments remain one of the most dynamic and exciting businesses in banking. The breakneck pace of change and the unprecedented scale of innovation are inspiring and testing established orthodoxies of traditional payment mechanisms.

The proliferation of digital payment options and innovative platforms especially after the note ban are encroaching on traditional payment systems and forcing many to reassess banks business models which is the need of the hour in the angle of profitability as well.

The foremost challenge is to remain relevant and quickly adapt to the new competitive environment. While fintechs are driving much of the disruption, incumbents are not far behind. Take, for instance, the threat of foray of the IPPB through QR ( quick response) technology can’t be ignored, as they are also having a provision of cash delivery through their robust base of postmen spread across every nook and corner of the country.

Payments will be invisible, seamless, and real-time but will likely be about more than just transactions. A whole slew of new value-added services, such as identity protection, real-time cash management and new purchasing insights that customers and merchants alike would value should be the norm.

Increasingly, differentiation and premium pricing will be driven by “payments+” services. Digital currencies will likely become the norm, most likely with regulators’ support. New platforms would necessitate new payment mechanisms—all digital, of course.

Meanwhile, abundant customer data should enrich personalized experiences while increasing payment providers’ responsibilities in the areas of privacy and security. The net result is an industry that may become more competitive, with interoperability still a challenge in the near term.

  1. How the profitability with technology looks like?

It is predicted that the cost savings from banks’ chatbot usage alone will reach $7.30 billion worldwide by 2023, up from an estimated $0.21 billion in 2019, according to a February 2019 report from Juniper Research which clearly gives an idea that ignoring any small innovations that are happening in the industry can not only bleed the profitability but also can ruin the complete existence of the existing model also.

Figure 1

  1. How risk management looks like in the next decade?

When we started the banking carrier, risk means it was only credit risk and all other risks were not looked at very seriously though the other risks do exist.  If you lend then only you are associated with risk were the viewpoints.

Over a period we can see risk in every action for that matter technological risk especially risk in relation to technological obsolescence has in fact overtaken any risk as the same may have an impact on the very existence of the current model of banking which is having a larger presence.

Regulatory divergence, geopolitical instability, and the possibility of a downturn have created a host of impending risks, requiring financial institutions to rethink traditional approaches to risk management.

Additionally, non-financial risks remain top of mind for regulators and banks alike and many have begun to sharpen their focus on this emerging subset of risks. While banks have made notable strides in assessing and mitigating risk across the enterprise in recent years, the next decade will likely test their ability to continue to modernize the risk function.

The top leaders of the banking industry can start by contemplating what might be an optimal risk management model. They should first re-evaluate their lines of defence to determine where duplicative efforts likely exist between the first line (where risk is owned and managed) and the second (where risk is overseen. Eliminating these redundant risk management practices could allow them to overcome cost and process inefficiencies and enable the first line to take on more ownership of risk.

Banks should then consider how best to leverage the power of new technologies which has yet to be fully realized. Technology has played a significant role in risk management for a long time. But thanks to recent advances, it can now help banks reshape their risk management program in more meaningful ways.

Very few banks, however, report that they have applied emerging technologies to the risk management function which could be a missed opportunity. Technology can increase efficiency by automating manual processes, assist in identifying emerging threats and provide insights into risks and their causal factors.

Robotic process automation (RPA), for instance, can be used to reduce human error by flagging exceptions in large data sets. And machine learning, coupled with natural language processing, could convert unstructured data such as emails into structured data that can then be analyzed to predict where risks might occur.

At the same time, banks should be mindful of the additional risks these new technologies might create. Third-party relationships with external technology vendors, suppliers or service providers could expose banks to information misuse and theft (insider risk), system failures, business disruptions (operational risk) or regulatory noncompliance. On the other hand, biases, automation errors and rogue programs could result in algorithmic risk.

Additionally, deploying these technologies to manage risk will require banks to access and use high-quality and timely data. Without robust data, technology implementation will likely not be as effective. For some time, financial institutions have had difficulty providing quality data from the source through the system.

This is due to a historic proliferation of disparate legacy systems which has limited their ability to capture, measure and report data. By enhancing their data architecture, banks could create new data tools and models that could readily sense and combat emerging risks.

Having better data, for instance, could help banks boost their monitoring and surveillance tools to detect and predict instances of employee misconduct (conduct risk). New tools could also help eliminate silos and empower the business line to make better risk decisions and allowing them to go from hindsight to foresight.

As the financial industry continues to innovate in various technological initiatives, there is a slow but steady upsurge in blockchain technology adoption and investment because blockchain allows for the decentralization of data storage. That means there will be safer transactions and greater asset transparency.

The World Economic Forum predicts that the financial sector will increasingly experiment with hybrid blockchain models, while the public sector will increase its use of smart contracts. Financial firms are currently in various stages of blockchain implementation.

According to PwC data from June 2019, when global financial institutions were asked about the implementation of emerging technology like blockchain and AI, 37% of them said they had fintech-based products or services available to their customers. More than a fifth (22%) of these companies said they had products or services in the pilot stage.

Figure 2.

Conclusion and way forward:

We have seen the banking business model moved from manual to ALPM (Automated ledger posting machines), from ALPM to IBS and from IBS to CBS. A new wave of disruption more forceful and more pervasive than what we have seen in recent years will likely unfold in the next decade.

While the roots of this disruption viz. technological, economic, geopolitical, demographic may remain the same, the unique convergence of these factors should unleash unprecedented change in the broader society, economy consequently, in the banking industry as well.

The above threat really gives lots of opportunities to enhance the bottom line with technological initiatives in every parlance of banking say it payment, lending, mobilization of leads, card distribution with a necessary tie with fintechs, which should necessarily aim at two important aspects i.e. customer satisfaction and profit enhancement.

Hence, there is an urgent need for banks to excel at data management, modernize core infrastructure, embrace artificial intelligence (AI) and migrate to the cloud. However, most banks are far from where they’d like to be in their digital transformation.

Despite an increase in new technology investment in recent years, this trend is expected to continue in the foreseeable future. For instance, in 2022, North American banks are expected to spend nearly one-half of their total information technology (IT) budget on new technology while European banks would spend about one-third, a figure higher than the current level (27 per cent), the question arises what is the volume of Indian banks spending on technology.

So being prepared for handling threats at any time is a must for all the bankers in advance. Let’s not allow the butterfly after the entire metamorphosis to escape from the brick and mortar structure or be prepared to follow wherever it goes by adding intelligence to digitals through AI( artificial intelligence), investment in blockchain,  and ML ( machine learning).

Finally, digital transformation is not limited to technology and data. To realize long-term success, the human side should also be addressed. As technology gets cheaper and is readily adopted by the industry, the initial advantages may decrease in the long term.

This is why it’s important for banks to learn how to use technology to develop new customer insights and deliver contextual offerings. Another equally important aspect to consider will be culture. More often than not, the success or failure of a digital transformation effort may depend on cultural issues rather than technical ones. To make transformation happen, leaders may need to focus on developing a new mindset for how best to use technology, people and processes.

The role of banks will definitely see a paradigm shift from mere being acceptor of deposit and delivery channels to being facilitators of financial services through the technological arms/channel and banking no longer will be confined to the existing “brick and mortar” model.

Banks also have to operate on the predictive model basis, take a look at figure no.1 above, we can see it has already been predicted the volume of the cost-saving that can be done by using just chatbox from 2019 t0 2023 is expected to grow to $7.30 billion. We can imagine the revenue generations from multiple ideas of this nature.

Only those financial institutions that build a collaborative and innovative culture to drive change can achieve real returns on their technology investments in the next decade.

Being a banker of the current generation the words of bill gates always haunts me “Banking is necessary not the banks”. So I would like to conclude with a view that, in past one or two decade many banks and financial institutes collapsed due to poor bottom-line which was attributed on account of poor assets quality, in the coming decade the fall can happen majorly with attributes on account of adopting the technologies, lower budget outlay for technological up-gradation and poor use of technology to enhance the profitability.

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