7 Challenges Faced By Traditional Banks In Today’s World

Since the financial crisis of 2008, the entire banking landscape has been undergoing a steady change. Its return on equity (ROE) has fallen from an overwhelming 15.2% in 2007 to a meager 9% in 2017. Even its tier-1 capital ratio, which is a major indicator of systemic safety, has hovered between the narrow span of 9% to 13%.

These plummeting numbers have pushed the traditional banking structures to look for avenues that harbor the potential to induce wide-ranging resilience, efficiency and acceptability.

As a result, the global banking industry has begun to coordinate with various financial regulators so that its fundamentals can be strengthened and its vitals can be consolidated in the most effective way. This coordination has taken a variety of forms like:

• Development of new partnership models
• Movement towards digital transformation
• Improvement of customer experience
• Provision of feature-rich services
• Infusion of flexible supervisory standards

Nonetheless, this sudden move has started exposing banks to a variety of new problems which, if left unaddressed, can arrest any prospects of future growth.

Compiled here is a list of the principal challenges which the conventional banking architecture is facing in the modern, competitive world:

1. Slow Digital Transformation

The traditional banking systems have been incredibly slow in undertaking digital reform. Their online footprint has largely been limited to offering basic services like deposits, transfers, credit applications and bill payments. This has resulted in banks being unable to reap the benefits of next-gen IT solutions in totality. As per a report by Massachusetts Institute of Technology (MIT), going digital can reduce the costs of banking by a massive 60–80%!

However, a slow movement towards the digital environment has made it impossible for banks to function viably in the contemporary scenario.

2. Impediments Of Legacy Infrastructure

Legacy infrastructure, composed of core banking solutions (CBS) and old data sets, are still being used by many banks across the world. There was a time when this infrastructure could provide a modicum of stability and security, but with more agile and modular alternatives trickling in, the space for these hackneyed systems has gradually begun to shrink. The monolithic CBS, for example, is so well-integrated into the banking structure that changing any one of its parts can cause a harmful effect on the other parts.

Consequently, banks prefer to remain risk-averse and skip the adoption of innovation completely.

3. The Emergence Of Disruptive Banking Models

Be it payments, investments, mortgage or personal lending, the emergence of disruptive banking models has begun to substitute every single service from the traditional value chain. Customers don’t have to stand in long queues, submit tedious documents or deal with complex systems anymore. Instead, they can simply register with a prominent Fintech player and avail state-of-the-art services coupled with an enriching customer experience at the click of a single button!

Therefore, unless banks start reevaluating their strategies, their competition with such Fintech institutions is bound to become heavily one-sided.

4. Strict Regulatory Standards

Every conventional bank has to comply by the regulatory standards which have been set by its supervisory authority. For instance, Indian banks are required to maintain a capital-asset ratio, a cash reserve ratio and a statutory liquidity ratio. Similarly, European and North American banks are supposed to follow regulations like PSD-2 and MiFID. In case banks fail to obey these regulations appropriately, a hefty cost of misconduct is levied on them. In fact, it has recently been estimated that globally, banks are paying about $270 billion every year, merely to meet their regulatory obligations!

While bearing these expenses might not be a tough task for large banks, smaller banks can find such costs debilitating.

5. Invasion By Tech Giants

Quite like their Fintech counterparts, a number of tech giants too have begun to invade the banking landscape. With their quick, efficient and user-friendly services, these tech players are slowly bringing about a change in the way people tend to invest, save, borrow or pay. Be it Google, Facebook, Microsoft, Alibaba, Apple or Amazon — their financial propositions powered by ultra-modern technology has brought banking to the customer’s doorstep. In this venture, these players are further being assisted by the inclusive, transparent and accessible Neobanks.

To counter this technological invasion, banking networks are left with no option but to try and leverage the power of digital partnerships.

6. Costs Of Maintaining A Brick And Mortar Branch

As compared to a digital bank, a brick and mortar branch incurs a plethora of inherent costs. These include:

• Cost of land or lease
• Staff salaries
• Employee training
• Capacity management
• Customer service
• Overhead costs
• Maintenance costs
• Costs per transaction
• Cash distribution costs

And these are just the tip of the iceberg! If brick and mortar branches intend to experiment with an innovation strategy, they would further need to bear the costs of technological adoption. Moreover, they would also be required to track staff-customer interactions so that a better customer experience can be constantly delivered.

Over time, this would significantly raise the total amount of capital that a physical branch requires in order to operate feasibly.

7. Improper Customer Engagement

One of the major outcomes of the 2008 crisis was that a number of people lost faith in the existing banking system. As a result, banks began to expand their bouquet of services so that they could attempt to regain this lost trust.

However, in an age where accessing information, comparing products and airing grievances has become extremely easy, banks need to avoid every slippery slope that they are likely to come across. They must deal with customer issues on an immediate basis while guiding them towards a seamless and unimpaired banking process.

The Way Forward

As each one of the aforementioned challenges unfold, the only plausible solution for the traditional banking architecture lies in a quick adaptation to the modern world. Not only do banks need to redesign their existing innovation strategies but they also need to embrace new technology with open arms.

This adoption should not merely be restricted to service delivery. Instead, it must occupy all prominent fronts like customer perception, resource use, regular operations and business models. Furthermore, partnering with fintech players and Neobanks like Open can prove to be a good idea. Such collaborations tend to be a win-win situation for all the players in the ecosystem and it can equip banks to trigger a better digital journey.

Clubbing both of these solutions and using them to tread the choppy financial waters is the only way to help traditional banks retain their strengths and overcome their weaknesses without fear or favor.