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The future of banking

  • Published at 05:23 pm March 5th, 2020
Can a banking commission remedy banking sector problems?
Photo: Dhaka Tribune

Banks need a clearer sense of the posture they wish to adopt

“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.”

That famous quote from Bill Gates certainly captures the shifting landscape of the banking industry. While banking may still look almost the same as of today as in the next year or two, the springboards for dramatic change are already in place. 

Powerful forces like mobilization of almost everything, disruptive technologies such as Artificial Intelligence and Blockchain, regulatory requirements, demographics and economics -- operating in tandem with shifting consumer expectations -- will have unprecedented impact on the banking landscape. 

Hence, banks must not only execute on today’s imperatives, but also radically innovate and transform themselves in order to win in the next era. 

PwC Banking Survey 2020 has identified the six strategic priorities for banks to keep up with the pace of transformation. The graph included here depicts these strategic priorities, the importance, and preparedness levels of banks.

This scenario holds true for banks in both developed and emerging markets and the achievement of these strategic priorities require banks to tune in to the changing consumer preferences, embrace disruptive technologies like AI, Blockchain, and IoT as enablers wherever appropriate, and develop a culture of innovation through research and development. 

Banks in developed countries are doing better in this regard owing to greater industry maturity and higher rates of technology adoption. Even emerging countries like India has jumped into the bandwagon wholeheartedly while Bangladeshi banks are lagging.

Although the banking industry in Bangladesh has come a long way over the last 48 years, we were unable to do much other than the management of cross-border trade volume increasing. 

Large non-performing loans (NPLs), low automation, the least possible number of retail banking solutions, low access to internet banking, concentration of banking limits, or exposure to few groups or families (that too in cash credit), hypothecation of assets, import loans, and term loans are synonymous of Bangladeshi banking. 

Too many banks, far too few banking solutions or products, and rising level of NPLs are also not helping the banks maintain or strengthen their profitability and ROE. 

The solutions to these problems lie in the prudent implementation of the six strategic priorities identified by the PwC Banking Survey 2020 (a survey among global banking executives).

The boom of the mobile banking sector with almost 80 million clients and average daily transaction volume of over Tk1,300 crore can largely be attributed to a simplified customer-centric business model and optimized distribution powered by innovative utilization of mobile technology. 

Financial inclusion achieved through agent banking or booth banking, an Alternative Delivery Channel (ADC), is another evidence of optimized distribution and business process simplification. 

Moreover, Bangladesh Bank has recently mandated e-KYC, which should help reduce the instances of default and NPL due to increased objectivity. 

Following a similar logic, we can also argue the case for big data analytics and automation of relevant due diligence can cultivate the power of information and help predict behaviour patterns of both regulators and consumers, thus equipping banks with a tool of proactive risk management. 

The scenario is similar in most other emerging economies and the existing shortcomings do point towards hanging back investments in research and development and appropriate technologies. 

That, in turn, has resulted in a paucity of efforts towards consumer service enhancement and product portfolio expansion. PwC Banking Survey 2020, presented in a graph also included here, identifies the top three investment priorities according to the opinion of bank executives in emerging markets. 

The graph, recreated based on the PwC Banking Survey, validates the emphasis required on innovation and technological adoption focused towards providing consumers with improved experience through seamless service and diverse product offerings. 

Consumer preference, cost-cutting needs and regulatory requirements are making automation a hygiene factor rather than differentiator. Utilization of alternative delivery channels like virtual banking and POS based banking are becoming increasingly important for profitability. 

Jim Marous in The Financial Brand magazine opined that: In the long run, banks will need to move further into the daily lives of customers, becoming wealth management advisors who provide assistance before, during and after a financial transaction.

To succeed in this rapidly changing landscape, banks need to have a clear sense of the posture they wish to adopt -- whether to shape the industry, rapidly follow the leaders, or manage defensively, putting off change -- and a strategy which addresses these priorities, including third party collaborations and application of lessons from other industries. 

Of course, the level of focus on each of them depends both on a bank’s starting point and its unique strengths and challenges. 

However, each priority is important, and success will come from a balanced execution across them -- and a balance of tactical initiatives and longer term programs, all coming together as an integrated whole. 

Mamun Rashid is a partner at PwC. The views expressed here are personal.

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