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.