Banking in a changing global landscape
Finance and banking have always been the backbone of global economic growth. All major industries thrive on the back of innovations in banking- wire transfers, cheques, Automated Teller Machines (ATMs) and credit cards, to name a few.
Fast forward to today, we are experiencing another paradigm shift in banking on account of new technologies which promise better experience for customers, robust risk management for banks and regulators and lastly, higher returns for the suppliers of capital. Given this rapid change, it is critical to understand what it entails for the future of the banking sector.
New dimensions have emerged and have challenged the very core of the traditional banking. Globally, banks are facing an increasing competition from non-traditional players, which are taking advantage of digital innovations and technological advancements happening in this sector. Banking structures across the globe are adapting to these emerging disruptions in their own ways. Numerous Financial Technology (FinTech) startups have been formed, significantly expanding the banking and financial services industry. They have also entered the payments and remittance space in the sphere of peer-to-peer lending, crowdfunding, trade finance, insurance, account aggregation and wealth management. Through collaboration with FinTech players, several banks are applying a hybrid model where mobile services interact with banking services to deliver faster and more efficient products and services to consumers.
Banks are not only facing competition from Fintech companies but also from large technology companies (commonly known as “BigTechs”) which are entering into the financial services industry in a many major ways. Building on the advantages of the reinforcing nature of their data-network activities, some BigTechs are venturing into payments, money management, insurance and lending activities. At present, financial services are only a small part of their business globally but given their size and reach, their entry into financial services has the potential to bring about rapid transformation of the international financial sector landscape. It may, of course, bring numerous potential benefits. Using big data, BigTechs can assess the risk situation of their borrowers, reducing the need for collateral. This means that their low-cost structured business can easily be scaled up to provide basic financial services to the un-banked population.
How is Indian banking adapting?
The RBI Governor, Sh. Shaktikanta Das mentioned in a recent speech his views about the future of the banking space in India amidst fast-evolving changes globally. He said that there was a possibility of distinct segments of banking institutions to emerge in the near future.
According to him, the first segment may consist of large Indian banks with significant domestic as well as international presence. This process, he argued, will be augmented by the merger of Public Sector Banks (PSBs). The second segment is likely to comprise several mid-sized banking institutions including niche banks with an economy-wide presence. Further, the third segment may encompass smaller private sector banks, small finance banks, regional rural banks and co-operative banks, which would specifically cater to the credit requirements of small borrowers in the un-organised sector, concentrated mostly in rural/semi-urban areas. The fourth segment would consist of digital players who may also act as service providers directly to customers or through banks by acting as their agents or associates. This reoriented banking system will, of course, be characterised by a continuum of banks and would also include both, traditional players with a strong customer base as well as newer technology-led players.
The way forward
The fast-evolving landscape of the global banking industry will unfold in the backdrop of a strong regulatory and supervisory regime with an increased intensity and a tech-enabled supervision of banks. The challenge before major banks is to make the best use of technology and innovation to bring down intermediation costs while also protecting their bottom lines (traditional baking services).
Further, Artificial Intelligence (AI), Machine Learning (ML) and Big Data are fast becoming central to the innovation and evolution of the global financial services landscape. Besides these, such innovations can also help in fraud detection, identifying better ways of monitoring the use of funds by borrowers and tracking suspicious transactions by processing very large datasets in lesser time.