Economics Newsletter Edition #27

DUBAI KEYNES

SOCIETY NEWSLETTER

MARCH 2023 ISSUE

JASIM YOUSAF

ORGANISED

The first term of the academic year of 2021-2022 has been a rather successful one for the Keynes Society. We have had the pleasure of hosting many different speakers this term, both internal as well as external, presenting on a vast range of concepts. We have held a plethora of sessions ranging from “Human or computer traders: Who wins?” to “the oil and gas industry today.”This term the Dubai College Environmental and Keynes society also organised a Beach Clean Up, along with Goumbook for their “Save the Butts” campaign. Students from Dubai College helped to pick up cigarette butts from Black Palace beach to convert them into value-added material

We would like to sincerely thank all the speakers who dedicated their time to presenting and answering questions, as well as Mr Christopher for always being readily available to provide a helping hand, and finally all the economics enthusiasts who attended the talks every week - all of you are responsible for the smooth running of the sessions so far!

Jasim, Eun Soo and Danyaal

Economics in Football Nishk Moorjani

Football is the biggest sport in the world, with the recent Qatar World Cup having a global audience of 1.4 billion viewers. This immense industry is not only a source of entertainment, but brings in billions of dollars annually, and economics can play a crucial role in the sport through many different ways.

The first way is player wages, which can be determined by supply and demand. Why are professional players paid so much? When in all likelihood they would be ready to play football for less than £1000 per week, they earn over £20,000 per week. The first point to keep in mind is that only a very small percentage of football players receive these extremely expensive salaries. The two fundamental factors of supply and demand determine these astronomical wages. For example, acquiring one of the best strikers in the world comes at a very steep cost, due to their supply being so limited, meaning that the commodity's supply curve is completely inelastic The wage will then be decided by the demand curve where any rise in demand for that player will lead to an increase in price.

It is worth to think of major sports teams as entertainment firms. The truth is that the more people who see the product, the more money can be produced Player acquisitions don't just benefit a club in terms of winning games and prize pools, but they also generate revenue for clubs in shirt sales and ticket sales. This is why some clubs are willing to pay so much for a player’s transfer fees and wages; They aren’t just paying for the player’s ability, but also the revenue that the big name will generate from fans purchasing replica shirts and scarves to mugs and keychains.

For example, Cristiano Ronaldo is widely recognised as the world’s greatest athlete. Apart from the success he was expected to bring, Ronaldo arrived to Juventus with more than 500 million followers across various social media platforms, which the club sought to monetise by appealing to fans in both established and emerging markets. According to the club's most recent financial statements, the accountants anticipated that this would boost the team's broadcasting, sponsorship, and match-day income, which together accounted for more than 64% of Juventus' revenue.

It can be difficult for a football club to maintain profits given the vast expenditure required in the club, where they have to allocate spending on player salaries, transfer fees, stadium maintenance, and coaching staff salaries. However, the main way that clubs can generate revenue in order to afford costs and maintain profits is from sponsorship deals, which surprisingly make up a majority of a clubs revenue.

The top teams in the world rely on this as a substantial source of income. This includes naming rights to stadiums, shirt and sleeve sponsorships, kit sponsorships, and any other sponsorships you can think of. Top companies pay upwards of cash to partner with football clubs. For example, Since 1998, Adidas and Real Madrid have been working together under a deal that is estimated to be worth $113 million annually. Adidas jerseys have been worn by Real Madrid while they have earned numerous trophies. 2019 saw an entirely new renewal of the agreement. The game shirts and training attire for Real Madrid are designed and manufactured by the German sportswear business because it is the club's official kit supplier. The average football fan might be perplexed as to why these companies would pay so much to have their logos displayed on these shirts, but from the standpoint of marketing, it makes sense given that approximately 400 million individuals follow Real Madrid on social media globally.

To conclude, the economics that can be applied to the sport of football is very important to the success of the game. The sport has been able to develop into the multibillion-dollar industry that it is today due to the industry's enormous income routes for its teams, players, as well as businesses.

Ponzi Schemes Rania Hans

Fraud. Deception. Scam.

A Ponzi scheme is a fraudulent investment operation in which money is collected from later participants to pay returns to earlier investors. This entices investors with high rates of return and little risk. The ponzi scheme was formulated and named after Charles Ponzi in the 1920s. Ponzi was a businessman who guaranteed investors a 50% return for their investment in what he said were international postal coupons within a few months. Ponzi paid phoney "returns" to earlier investors using money from new participants Ponzi schemes need a steady inflow of new money to survive because they have little to no actual earnings. When it becomes impossible to recruit new investors, or when substantial numbers of existing investors cash out, these schemes tend to implode.

What's the difference between a Ponzi scheme and a pyramid scheme?

In Ponzi schemes, investors give money to a portfolio manager who then pays them back with money that later investors contribute. To participate in a pyramid scheme, new recruits must pay the person who recruited them in exchange for the opportunity to do so or possibly to sell a specific product. The first schemer recruits more investors to do the same and this chain carries on. Over all the main differences between the two are: Ponzi schemes: the promise of future rewards tempts victims to invest. Pyramid schemes: they provide their victims with the "opportunity" to earn money by enlisting new members

One of the most infamous cases of a Ponzi scheme is the 2008 Bernie Madoff scandal. Madoff deceived thousands of investors for tens of billions of dollars over the course of at least 17 years. So how did he do it? Madoff was a respectable figure and had a reputation for being a reliable investor which he used to his advantage. Investors would give Madoff their money to invest and Madoff would provide them with a ‘return’. However, in reality the money he would return wasn’t from investments but was simply a small proportion of their initial investment, which he would disguise as a ‘return’.

Eventually, more money was needed, therefore Madoff would move onto the next investor, growing the scam. On record, the investors had money invested in Madoff's firm and received a good return. In actuality the money was being syphoned into Madoff’s account as well as being used to pay back old investors to keep the scam afloat.

Are Ponzi schemes still prevalent today?

In recent times, there has been rising concerns regarding ponzi schemes being used in cryptocurrency. This is considering that when evaluating anything unique, new, or "cutting-edge," potential investors are frequently less cautious of an investment opportunity. In 2016 a man by the name of Trenton Shavers was arrested after his bitcoin ponzi scheme was exposed. Shavers guaranteed investors astronomically high returns on their Bitcoin investments, averaging 7% weekly. Shavers utilised the Bitcoin he received from clients to pay for personal costs and make unsuccessful attempts at day trading. There has been an increasing amount of similar crypto scams in more recent years.

How can you identify a ponzi scheme?

Look for these signs:

A pledge to provide great profits with minimal risk

A steady stream of returns irrespective of market conditions

Unregistered investments

Customers are prohibited from viewing the official papers related to their investment and the investing methods are classified as confidential or too complicated to explain.

Previous Customers had trouble withdrawing their money

How prevalent is wage slavary? Eun Soo Park

"Wage slavery is the new slavery"

Wage slavery is a term that refers to a person’s dependence on wages for their livelihood; in theory, you are stuck doing a job solely for the money, leading to a situation in which you are effectively enslaved to your job. Often, it is indicative of low wages, inferior treatment, and poor conditions, as well as the scarce chances of upward social mobility.

The term is used by critics of 'wage-based employment; to criticize the exploitation of labour and ‘social stratification’, with the former seen primarily as unequal bargaining power between labour and capital and the latter described as a lack of worker self-management, fulfilling job choices, and leisure in an economy.

Wage slavery is tied to slavery because "wage slaves" have few options at their disposal and are forced to work jobs that offer little bargaining power to the worker. The only bargaining power slaves had were things like active resistance, such as slowing down the pace of work or faking illness.

In addition to a lack of bargaining power, wage slaves usually have a lack of fulfilling job choices at their disposal. Their opportunity for leisure is little, and they lack self-management when it comes to their jobs. This means they have little control or say over their work. Their jobs are predicated on following instructions, without input from the individual. Although the circumstances are incomparable, the characteristics of slavery and wage slavery are similar.

“Wage slavery” dates back to western philosophical and scientific traditions which viewed human work as inherently onerous, wearisome, and degrading.

Adam Smith, writing in the 18th, saw work as the toil and trouble that humans really pay for everything they need or want. Karl Marx, writing in the 19th century, considered wage labour alienating but saw the possibility of selfexpression in work. Dupré and Gagnier, a philosopher and a critic writing near the end of the twentieth century, agreed that work could be self-fulfilling, but only for an elite minority.

Various methods proposed in an effort to ‘eradicate’ wage slavery such as:

Promote full employment

A classic, free-market approach to providing flexibility and freedom to workers is by promoting FE. By growing the economy, more jobs are created, reducing unemployment. Then, when the economy is near "full employment" (categorized by unemployment around four percent), companies begin competing for workers by offering higher wages and better benefits, thereby reducing the ‘inferior’ work conditions.

Lower the cost of living

Through technological advances, we can make subsistence cheaper. The drop in prices of some of the necessities of life should mean we have more flexibility to job hop without starving and, therefore, reducing one’s reliability to wages.

Create a better ‘safety net’

Perhaps the introduction of a universal basic income, a social welfare proposal in which all citizens of a given population regularly receive a guaranteed income in the form of an unconditional transfer payment, could be the first step to help eliminate wage slavery. Clearly, such a complex and exorbitant program has its downfalls, but it would mean that everyone could live, even without having to work. Furthermore, this could incentivise employers to end the exploitation of their workers due to the constant awareness of the fact that their workers are free to leave at any time.

Clearly, one solution cannot eradicate wage slavery—but neither can the status quo.

Throughout history, people have often been subjected to working in horrible conditions to eke out a living. Although, the pace of poverty alleviation has accelerated, meaning fewer people are forced to live hand to mouth, wage slavery is still prevalent today.

Japan's Lost Decade Jasim Yousaf

Japan’s Lost Decade, which occurred from the late 1980s to the late 1990s, was a period of economic stagnation in Japan. This period was marked by a significant decline in asset prices, real estate values, and stock prices, resulting in an economic recession that lasted for years.The Lost Decade began in the late 1980s when Japan's economy was booming. The country was experiencing a massive economic bubble, with land prices in Tokyo soaring to astronomical levels. Real estate values were so high that the land under the Imperial Palace was worth more than the entire state of California. This bubble was fueled by an easy monetary policy that kept interest rates low, encouraging banks to lend money to anyone who wanted it.

However, the bubble burst in the early 1990s. Property prices collapsed, and Japan's economy went into a tailspin. Banks, which had been lending money freely, suddenly found themselves with a lot of bad loans on their books. Many of these loans were made to companies that were heavily invested in the real estate market, and when the bubble burst, these companies were left with huge debts they could not repay.The Japanese government tried to revive the economy by implementing policies such as increasing public spending and lowering interest rates. However, these policies were largely ineffective. Japan's economy continued to stagnate, and many companies went bankrupt.

The Lost Decade had a significant impact on the Japanese people. Unemployment rose, and many people lost their homes and savings. The country's suicide rate also increased, as many people felt they had lost everything they had worked for. One of the reasons why the Lost Decade lasted so long was the reluctance of the Japanese government to take drastic measures. The government was hesitant to implement significant reforms, such as restructuring the banking system or allowing more foreign investment. Many policymakers believed that the Japanese economy would recover on its own, but this did not happen. Another factor that contributed to the Lost Decade was Japan's aging population. As the population grew older, the number of people in the workforce declined, which reduced the country's overall economic output. The government tried to encourage people to have more children and to allow more immigration, but these efforts were largely unsuccessful.

Despite the challenges, Japan eventually emerged from the Lost Decade. The country began to recover in the late 1990s, and by the early 2000s, the economy was growing again. The government implemented reforms to restructure the banking system, and many inefficient companies were allowed to go bankrupt. These reforms helped to clear out some of the bad debt that had been weighing down the economy.Today, Japan's economy is once again one of the largest in the world. The country is known for its technological innovations and its high standard of living. However, the Lost Decade still looms large in the minds of many Japanese people. The economic stagnation of the 1990s had a significant impact on the country's psyche, and many people are still cautious about investing and taking risks.

What will China’s economic recovery look like after reopening to the world?

Aoife Palmer-O'Riordan

After three years of President Xi Jinping’s zero-Covid policy, China has finally reopened its borders to the world on January the 8th and this has spurred hopes of an economic revival and rapid recovery. Due to how abrupt restrictions have been lifted, there is expected inflation along with economic growth. Although the pandemic has dented the Chinese economy, there are signs that disruption to economic activity is fading fast as worker shortages are decreasing and consumer spending is increasing. In addition, Fitch Ratings has revised its forecast for China’s economic growth in 2023 to 5.0% from its previous 4.1%. This displays the evidence that economic activity and spending has recovered much faster than previously anticipated as China moves away from its zero-Covid policy.

Despite this revision in forecast growth, the economic rebound in 2023 is expected to be less flourishing than the economic activity in 2021 when China’s GDP was 8.4%. This brings to light how there are still persistent weaknesses in China’s economy such as its weak property market as it’s yet to signal it’s bottoming out with continual decreasing house prices. Data in January 2023 showed a 27% contraction in house sales, a continual decline since July 2021. Investment in this sector continued to drop, as did house prices and property investment overall in 2022 dropped 10%. To revive the property market, the government has ramped up its support for developers and lenders, policymakers have lowered mortgage rates for first-time home buyers to stimulate purchases and regulators are planning to relax restrictions on developer borrowing.

Yet, demand for housing is remaining subdued as the persistent drop in house prices are the main reason for holding back buyers from entering the market

On the one hand this shows how the property market will be a drag on China’s economic growth in 2023, even with all these easing measures. On the other hand, it may still be too early in the year for favorable policies to trickle through the market and increase the willingness to buy real estate.

China’s economic recovery will be primarily consumption led as households re-engage in consuming goods and services that were previously hampered by the zero-covid policy. The nature and speed of this recovery depends how consumptions and investment levels change throughout the year as growth will mainly be coming from these two factors and less so from manufacturing. With restrictions lifted, more workers are back to work as well as land and port traffic are back to normal. A return to normality means there are more job opportunities open and it’s easier for idle workers to find a job. This means that it’s expected for wages to rise in the second half of 2023. Job growth will create consumption growth. During the Chinese New Year, households were able to spend generously in businesses and shops as they were now open which boosted retail sales. However, middle-income groups had had their spending power eroded due to lost jobs during COVID but it is anticipated that most should be able to find a job by the end. of the first quarter. A shift in the type of jobs being taken by the labour population, especially seen in the younger generation, from the manufacturing industry and into the service sector is becoming more common as the service sector is growing rapidly. It is expected for consumption to rebound significantly during the May holidays with a predicted growth in retail sales by 8-10% in 2023.

Trussonomics and inequality in the UK: A promising solution?

Danyaal Zobairi

44 days. In modern politics it’s rare to see politicians crash and burn as quickly as Prime Minister Mary Elizabeth “Liz Truss”. Unlike her predecessors, whose rapid downfalls could be explained by scandal and controversy, Truss’ came at the hands of her own policy, more specifically, one proposal: the September Mini-Budget. In an attempt to comprehend how this could have happened, one must consider the idea underlying the “growth plan”: Trickle Down Economics. Backed by the likes of Thatcher, Reagan and Trump in the past, the concept really is nothing new. The philosophy’s basic idea is to pass policies such as tax cuts that disproportionately benefit corporations and the wealthy, with the expectation being that those savings will be invested into the economy, and result in growth benefiting everyone holding a piece of the pie. With Truss, this took the form of 45 billion pounds in cuts. Similar to Reagan’s 1981 tax cuts, Thatcher’s income tax reductions, and George W. Bush’s elimination of estate tax, these all benefit the rich directly, with the added promise of benefitting the wider population as a result. Yet as time proves, this promise has gone unfulfilled, and thus can be argued to be counterintuitive in relation to the goal of “levelling-up” the UK, adding only to the ‘black holes’ that are the pockets of the wealthy and affluent, widening the ridge of inequality (a key target of the levelling-up scheme) between them and ‘everyone else’. It is as the saying goes: “the rich get richer, the poor get poorer”

One of the principal arguments made by proponents of the idea is that “it pays for itself!” (Donald Trump). This idea that when tax cuts are granted, the government does not actually lose out on taxation revenue. The idea stems from the Laffer Curve, a bell-curve style analysis that sought to plot the relationship between changes in the official government tax rate and its actual tax receipts. The Laffer Curve’s non-linear shape suggested that taxes were too light or too onerous to produce maximum revenue, which is logical as both a 0% and 100% tax rate result in tax revenue being nil. Therefore, from this understanding, a “Prohibitive Range” (as Laffer called it) could be determined: beyond point x, additional taxes result in reduced government revenue. It is based on the establishment of such a range, that the likes of Trump and Reagan proposed their cuts in taxation, selling this idea that their economies were in the prohibitive range Taking a step back, this could be explained by theory. A cut in corporate taxation, would stimulate greater investment into the economy, which would improve aggregate demand, encourage employment and result in more proportionate sums of economic growth, helping society to prosper, as a whole. Greater consumption, and increased unemployment would, in theory, provide an ample source of revenue - through higher VAT and income tax revenue, as well as reduced need to spend on social protection; all of which, paying for the initial tax cuts. But there is always a catch. There is a flaw. See when granting tax cuts to the wealthy, it is assumed that in any given scenario, they will invest all their additional profits that they are admitted ownership of. This could not be further from reality.

Shifting back to Trump, and the “Tax Cuts and Jobs Act of 2017”, we see corporations use “the biggest tax cut in American history” (Donald Trump) to buy back shares of their own stock and boost share prices, instead of investing directly within the economy From 2017-2018, stock buybacks were observed to have increased by a staggering 50%. We see Lowes spend $10 billion dollars on stock buybacks, and $0 on severance for laid off workers, Walmart and AT&T laying off thousands of workers as well. So instead of greater employment and higher incomes, we see “no unusual or sustained wage acceleration” (Economic Policy Institute). Instead of higher levels of investment, we see no significant change, and instead of economic growth we see the growth of individual businesses' stock values. With no change in investment, or consumption, and no increases in levels of employment, all the government is left with is a greater pile of debt. The tax cuts do not pay for themselves.

A counter example made by supporters of ‘trickle-down’ economics is the success of Ronald Reagan’s 1981 tax cuts. While it is true that economic growth rates surged, soon after said cuts were made, it is very conveniently left unmentioned, what Reagan accompanied his cuts with, these being lower interest rates and enormously high government spending While it cannot be proved for certain that government spending, or lowered interest rates were the cause of such growth, the same can be said the other way round. There is no proof that trickle-down economics had any part to play in the experienced growth.

The fact of that matter is, there have been more studies conducted to disprove any suggested correlation between the use of the method and the result. George W. Bush too promised that his tax cuts would “pay for themselves”, by spurring economic growth. Well, this promise too was left unfulfilled. In the paper: Effects of Income Tax Changes on Economic Growth, Bush’s former chief economist Andrew A. Samick concluded that there was “no first-order evidence in the aggregate data that these tax cuts generated growth.” In fact, growth declined, slowing to 2.8% from over 3% during the Clinton Years, some of the lowest since WW2 - the American economic review. Additionally, a recent LSE study analysing tax data spanning 50 years across 18 OECD countries came to the same conclusion Their analysis found that “cutting taxes on the rich increases income inequality but has no effect on growth or unemployment”. Following Truss’ “growth plan”, the IMF warned the same, urging the UK government to “reevaluate” their tax-cutting plans. This all points in the same direction, these all reinforce the same idea: the tax cuts do not pay from themselves. And so, they must be paid for by the people.

The levelling up scheme, first announced in 2021, was a bold declaration by the government to say the least. Many would agree that a pledge to “level up opportunities across all parts of the United Kingdom, supporting jobs, businesses and economic growth and addressing the impact of the pandemic on public services" would not be an easy feat, especially with a lack of funds. Take for example, the funding for Levelling Up Round 2, this being £29 per head for projects lasting two to three years – say £12 per head per annum. That’s roughly equivalent to 0.1% of total public spending per head in England. Or, put it another way, about five packets of peanuts (large packets admittedly) per person. The LU funding per head is higher in other parts of the UK but the point remains: too few peanuts. With already an insufficient pool of capital, the burden the trickle-down scheme would have placed on tight government funds would be monumental, funding would simply be spread too thin. Even if policymakers managed to scrape up just enough to allocate equally, there would always be the problem of the standard centralised approach. Similar criticism to trickle-down, a top-down approach would never be feasible, the government would never be able to get their allocation of resources, their spending, fully right. Decisions would have to be made at a local level, the responsibility of ‘levelling up’ would have to be placed in the hands of those who know their region’s ailments the best, these being local councils, representing their local communities. And so on top of the lack of funds, there also exists organisational error. The list goes on, with critics of the levelling up scheme accusing the government of using it to appease and reward its political allies, rather than to genuinely address regional inequalities.

One thing is for sure. With reduced government taxation revenue, we all know what comes next. The government is left with a lesser capacity to spend on welfare, public education, and healthcare. Who suffers? Not the wealthy, not them, who hold 84% of the UK’s wealth, and managed to triple their wealth. It is the bottom 10%, who’s real incomes increased by 16% on average in comparison over the same time frame, are reported to have negative wealth and who must worry about what the Russia-Ukraine war means for their energy bills. An elevated budget deficit is the last thing they would need, as it would mean the government have even less in the pot than before to give them. Inequality would inevitably increase, with even further reduced spending on public services, skill provision and industry there would only ever be one real outcome: you don’t level up, you level down.

Rathore

Big Tech's perfect storm Aryaansh

2022 has given us a spectator view of the stormy bloodbath between Nasdaq's Big Tech Godzillas and only one thing mattered in the tsunami of panic sellingresilience. Alphabet proved that digital advertising is not immune to global economic storm clouds as both Google Search and YouTube revenue dips were a shocker. Meta proved that you cannot build a billion-dollar business off of “virtual real estate” and that a lack of bathrooms is still a pressing issue in the metaverse. The free-money faucet was turned off by Jerome Powell and his cronies at the Fed a long while back, and the smart guys are hunting for some safe companies to park their big bucks. Here’s a little checkup on how healthy Facebook and Google are looking:

Alphabet: The ad king under pressure

Sundar Pichai and co. reported $280 billion in revenue for 2022, up 9.78% from 2021. However, this growth was slower than expected, as both Google Search and YouTube ads needed higher demand. The first department where companies cut costs is marketing, so all those million-dollar ad budgets are quickly evaporating. That gives Google Search a big hit.

Google Search & other revenue dropped from $43.3 billion in Q4 2021 to $42.6 billion in Q4 2022, while YouTube ads declined from $8.6 billion to $7.9 billion over the same period. These segments account for a lot of Alphabet's growth, so any weakness here could have significant implications for its profitability and valuation. On the bright side, Alphabet continued to invest heavily in its cloud computing business, which generated $26.3 billion in revenue for 2022, up 37% from 2021. This segment is still behind Amazon Web Services (AWS) and Microsoft Azure in market share, but it has been gaining ground fast

Alphabet also saw strong growth in its "other bets" segment, which includes side projects such as Waymo (self-driving cars), Verily (life sciences), Loon (internet balloons), Wing (drone delivery), and Calico (biotech).

This segment generated $1.1 billion in revenue for 2022, up 42% from 2021. However, it also incurred an operating loss of $5.5 billion for 2022, indicating that these bets are still far from being profitable or scalable.

Google going crazy.

Meta: The social giant under scrutiny

Zuckerberg reported $116.6 billion in revenue for 2022, down 1.12% from 2021. That’s their first revenue drop in history. The pandemic has accelerated the shift to online commerce and social media, but it has also exposed the dark side of these platforms. From misinformation to privacy breaches to mental health issues, Meta has faced a barrage of criticism and lawsuits that have eroded its public trust and reputation. This gives Facebook and Instagram a pretty big hit. Plus, Facebook is no longer cool with the Gen Zers and millennials, who prefer to spend their time on Insta and Snap instead of hanging out with the aunties. Facebook's time spent per user per day in the US was 34 minutes in 2019, but it dropped to 32 minutes in 2020 and currently sits at 29 minutes.

That 5 minutes might not seem like anything, but add all that up amongst 2 billion users, and we have a multi-billion dollar casualty on our hands. Less time spent on the platform means fewer ad dollars in the pocket, meaning the entire business could boom. And I’m not even gonna talk about their metaverse. (which incurred a $14 billion loss last year, and will give them a $16 billion dent this year). It would be crazy to think about everything happening in 2021. But hey, as they say, there’s no way to tell when the good old days are unless you leave them It’s now a different game. No longer one of the unicorns. It’s one of the cockroaches.

Banking: An evolving landscape Philip Manipadam

The Banking industry is one of the largest industries in the world managing roughly USD 370 trillion in assets. Banks world over are recalibrating their way of working in response to challenges instigated by technology advancement, new forms of competition, regulatory issues, and changing customer expectations.

Global banking trends

Largest banks are Chinese banks - Since 2019, the global 4 largest banks in term of assets have consistently been Chinese banks

Declining profitability and valuations: Bank profitability has sharply fallen post the 2007 global financial crash and is still low compared to the highs of pre-crash eras.

Rising popularity of Digital Banking:

The Covid 19 pandemic and the resultant requirement for contactless banking has fuelled the momentum for digital banking As of 2022, over 2 billion people worldwide use digital banking services, and the industry was valued at over USD 12.1 billion as of 2020.

Consolidation of banks and closure of physical banks: The banking industry has been undergoing a string of mergers and acquisitions. In 2000, the USA had over 8000 commercial banks: by March 2022, just over half remained. The consolidation has led to the closure of physical branches. In USA, since 2009, 13,089 bank branches have closed.

Traditional Banks are Facing Intense Competition

Traditionally a bank was a ‘bundled’ service - a one stop shop, with a physical presence where a customer accessed all the financial services required. With the advent of Open Banking, banks now compete with any organization that has the capacity and desire to offer any kind of financial service including NeoBanks, FinTechs and Big Tech companies. FinTech and Big Tech firms are reimagining and recreating finance. They can do this as they are not bound by stringent banking regulations and are able to continually offer innovative products at lower prices They are able to directly match lenders (investors) to borrowers, making services more efficient.

FinTech platforms facilitate various forms of credit, including consumer and business lending, and lending against real estate, making it easier to attract a wide variety of consumers.

Big Tech - Big Tech companies such as Amazon, Google, Microsoft, PayPal, embrace cross-industry platforms which enable diverse player to work collaboratively. The strength of each industry is leveraged, to provide an offering superior to economic models of traditional banks.

Big tech companies have advantages over incumbent banks due to their deep pockets, sheer scale of operations and client reach, ability to continuously innovate unhampered by legacy issues or regulations, quick turnaround time and access to the latest technology which enables it to effectively monetize the large amounts of customer data it has access to.

NeoBanks operate exclusively online differing from traditional banks in that they have no physical locations. This keeps their overheads are low enabling them to provide services at a lower cost as well as offer higher interest rates, making them more appealing for consumers.

Unbundling of Banks is the fragmentation of individual banking services across multiple financial service providers i.e. FinTech/Big Tech/non-banking digital service provider

More than 50 different companies compete with Bank of America in its core services, offering them at lower costs, easier credit, and commission free trading among others. However, banks are fighting back by investing in technology.

Key areas impacting banks

The introduction of Open Banking and BaaS and consequent falling of entry barriers to “core” banking services has resulted in the opening of the industry. Banks are now facing intense competition and are struggling to retain customers. Unlike in the past where customers tended to be loyal to a bank, today with digitalisation, and decreased personalization, customers are increasingly treating banks as a commodity. Customers expect quick and low cost service and are willing to movebanks High regulatory burdens continue to act as a barrier to the growth of traditional banks with stringent laws governing among others, capital requirements, money laundering prevention regulations, as well as bank secrecy laws. Banks have a vast amount of data available with them. However, this data is not effectively utilised as many banks use legacy technology systems which were installed decades ago and are not compatible with today’s technology.