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A Look Back at 2022: Forces at Work in Banking

February 25, 2023

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The meteoric shift in the banking landscape necessitates banks to embrace the changes proactively to stay relevant and competitive in the digital era. Here we discuss the various forces at work in banking and how banks can remain relevant and competitive in the digital age.

Economic instability has been a constant in recent years, beginning with the pandemic and continuing with geopolitical upheavals, supply chain chaos, and much more. However, what continues to remain resilient throughout the economic slowdown is the banking sector. After a decade and a half of flat returns, the sector’s revenue grew globally by $345 billion.

The sector’s steadiness has been vindicated by the rise in interest rates, resulting in a sharp expansion of net margins. But even at tier one of the capital ratio (14-15%), the banks are recommended to stay pre-emptive toward the economic trends to remain relevant and competitive, as the reformation rate is still high.

Digitalization

The continuous penetration of smartphones, computers, internet connectivity, IoT devices, and Artificial Intelligence (AI) into people’s daily lives is one of the primary impetuses behind the digitalization of the banking sector.

While the momentousness of being digital is definite, the real question for banks is ‘how to go digital?’. While embarking on the digitalization journey, the opening gambit is to digitalize internally. Digitalization in banking is about having a digital platform for the users as well as digitalizing the back end. Understanding that digitalization cannot look the same for all banks is also pivotal. Even though they are in the same industry and work under similar laws, each institution is unique; therefore, their digitalization solutions should be precisely cut to fit them.

Competition

With today’s innovations becoming tomorrow’s realities, the banking sector is shifting from its brick-and-mortar forms. While the FinTech market is currently worth $179 billion, the banking sector is currently witnessing an upward spiral of FinTechs. But this might not be glad tidings for the traditional banks, who are looking to retain their dominant position given their highly regulated environment.

The rise in the FinTech, even if not a threat to their dominant position, will assuredly fork a significant chunk of the banks market. And resistance to technologically advanced financial solutions will not be the answer. For banks to up their game—active and intelligent collaborations can be a viable solution. The collaboration between Google with 11 financial institutions, consisting of three big banks, four community banks, two credit unions, and two digital banks, can exemplify the same.

Concerns About Security and Privacy

The banking industry makes extensive use of its customers’ personal information. With the expansion of services and platforms, personal data collection has also increased. The trouble with this is the vulnerability of personal data and the exorbitant cost of misusing it. In 2022, the average cost of data breaches in the financial sector amounted to a whopping $5.97 million.

As personal data is central to banking activities, banks, and financial institutions invest in cyber security and privacy. The investment by banks in cyber security is substantial compared to other sectors. 95% of banks have deployed strong cyber governance practices like employing a CISO or CSO. They also actively engage in solutions like Zero Trust Strategies, Security AI, and Automation Controls. However, the endeavors toward cybersecurity cannot halt, as the threat is still discernible.

Blockchain Technology

Today, banks are not only noticing the rise of technology but are also responding to it with agility. The views of highbrows about blockchain technology and its impact on the banking sector are divided. It, in equal measures, is viewed as an opportunity and as a threat. 90% of the European Payments Council is of the view that blockchain technology will redefine the landscape by 2025.

Big Data and Banking

On average, around 2.5 quintillion bytes of data are produced globally daily. Today’s organizations depend on data analytics solutions to make significant and minor day-to-day decisions. There has been a considerable 8% rise in revenue and a 10% decrease in the cost ascribed to big data and data analytics. One of the major consumers of big data is the financial sector. The practical benefits of big data in the banking sector are:

  • Better analysis of customer spending habits
  • Device risk management methodologies
  • Cut-to-fit product offerings
  • Inculcate customer retention strategies
  • Collect, analyze, and respond to customer feedback

Interoperability

Interoperability enables a user to operate a financial service platform in conjunction with another. It is the embryonic stage of the phenomenal transformation of the banking sector. It makes things easy for the end consumer. That said, how is it beneficial for banks? Initially, the sector was indisposed by using SaaS, but the market trends forced them into the field. However, with interoperability, the risk to personal data increases ten folds. Banks, due to heavy customer demands, have now embraced the latest sector trend.

However, banks must realize that the solutions developed at the given time will be ephemeral. Customized interoperability platforms possess a high risk of becoming obsolete in 3-4 years. Nonetheless, the banks cannot shun them; instead, they need to be nimble in their responses to the continual changes to be able to make the most out of them and lead by example.

Wrapping Up

Banking is one of the fundamental pillars of society. Despite the economy’s rapid shift, the sector’s dominance cannot be denied. The industry has demonstrated a high level of proactivity to date. The quality of the sector’s acclimatization has kept it afloat to date, and this is what the sector must persevere to maintain. However, the rapid leap toward digitization has flipped the scenarios 180 degrees. While the banking sector needs to be proactive in its change management, they also need to redefine its structure. The need of the hour is to have pioneers from the tech sector in their change management wing.

In need of expert assistance? Contact our team today to get the right solution for your business.

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