Eight Major Financial Challenges of Banking Sector
Banks have tried every recipe in the book to secure their business post-Global Financial crisis in 2008. Because of it, the banking sector faces unprecedented development as the industry moves towards digitalization. Although the introduction of Financial Technology (Fintech) has led to much-needed modernization in the banking sector, there are banks today that still hold onto traditional models.
As a result of innovation, Fintech has reached a new summit and is threatening the traditional banking sector. From increased competition to keeping old customers, banks face a new category of challenges each day. Many experts believe that the conventional branch-based model is becoming obsolete. Banks need to start adopting the digital medium to meet the increasing demands of customers of ‘easy access and use’ to remain at the top of their game.
Before the banking sector gear up to increase profits, mitigate risks, and create brand loyalty, they must know some of the significant financial hurdles challenging their goals.
1. DEVELOPING NEW AND RELIABLE SOURCE OF REVENUE
Developing a reliable source of revenue is a necessity in the face of the fickle customer base. Customers, nowadays, expect a diverse range of product and service offers. If, as a bank, you do not meet their expectations, then you can bid them goodbye.
One thing that banks can do is to have exponentially experienced employees. Accountants can come in quite handy in this scenario. They assist businesses, make ideal investment decisions, and help enterprises to qualify for loans. Thus, banks need competitive and talented candidates who have recovery ideas and solutions. Financial management is a task that will require a team of account executives, chartered accountants, tax specialists, and treasurer.
You must be wondering what is an accounting degree, and the overall demand in the banking sector? A degree in accounting helps you gain skills to record and analyze transactions; thereby, enabling them to determine the firm’s financial health. Expert accountants provide the management team with information. It allows banks to remain solvent and healthy.
1. UNCERTAIN ECONOMIC ENVIRONMENT
Although technological advancement and innovation always triumph over economic conditions, change in political and environmental settings sometimes cripple technology in its effort to stabilize the uncertain economic situation. The banking industry does not operate in isolation and depends on everyday economic activities to churn profits. An unfavorable economic environment can become a financial challenge for the banking sector.
Covid-19 pandemic is one of the most prominent examples of how unseen changes can rattle the world’s economic condition. Unpaid leaves, salary cuts, and job loss have made investors cautious of investing. It has directly impacted banks who rely majorly on issuing loans to investors to finance their economic expansion.
2. NONPERFORMING LOANS
Innovation has penetrated the banking industry in recent years. The core purpose of banking is still credit risk management. One of the reasons customers take up banking offers is to have their credit profile managed by banking experts. However, nonperforming loans can raise financial challenges for the banking industry.
Suppose that banks fail to assess the credit history of the customer and the portfolio itself. Or they used an antiquated business model when analyzing credit risk. It can lead to the accumulation of nonperforming loans, a decrease in banks’ assets, and increased loan losses. All of these elements will lead to financial distress.
3. INCREASED COMPETITION
Financial industry companies are at the forefront by giving intense competition to banks. Via payment transfers, applying for small loans, and other initiatives, the Fintech industry is penetrating the banking sector. Goldman Sachs predicts Fintech to accumulate $4.7 trillion in annual revenue by offering unique services.
The current generation has a much better understanding of technology. This fact usually makes up the client base for financial services. These clients are tech-savvy, smarter, and more informed. Hence, they expect convenience and personalization out of their financial service experience.
With the competition so high and Fintech consuming a large chunk of revenue streams, the banking industry must develop similar or better services. Otherwise, they are on the verge of facing the worst financial set down.
4. ADOPTING DIGITAL PLATFORMS
Have you ever transferred payment through your mobile or viewed an updated e-statement on your cell phone? If the answer is yes, then you are a part of the growing Fintech industry. It is impossible to talk about the banking sector without mentioning financial technology. Because if banks are willing to protect their user base, they must realize the importance of Fintech.
The digitization of banks seems to be driving the evolution of customer choice. According to IBM’s research, more than 60% of the respondents felt that boundaries between industries got blurred due to digitization. To say afloat, banks must adopt a digital platform aside from mainstream media to attract customers. Introducing mobile apps is not enough anymore.
5. REGULATORY COMPLIANCE
After the 2008 financial crisis, the banking sector is on the radar of credit unions and governmental regulatory agencies. Banks and other credit agencies fall under heavily regulated industries in the world. Banks are now required to pay regulatory fees or face hefty violation charges if they fail to follow regulations. It often puts financial strain on already-struggling banks.
To comply with various regulations, banks have to make a significant investment in products and services. And that is how they can expand their existing customer base.
6. CHANGING BUSINESS MODEL
The banking industry faces financial restraints in the form of hefty regulatory charges. But the challenges do not end here. To meet the ever-growing interests of stakeholders, banks often have to change the business model.
Inflated cost of capital, low-interest rates, declining return on equity, and decreased property trading are the main characteristics of a changed business model. All these are likely to affect a bank’s profitability adversely. Therefore, banking institutes are scrambling to cut losses and stabilize profitability.
7. RETAINING EXISTING CUSTOMERS
As a millennial or a Generation Z, do you feel committed to a particular bank with limited options? Or are you looking for services that are fast, customer-friendly, and inexpensive? If your answer is yes, then the banking sector will find a challenge retaining its customer base.
Almost a decade earlier, the banking sector was ruled by a few since people had limited choice. But today, customers are ready to substitute banks with financial service companies for better alternatives. It is now much more difficult to retain existing customers. And if the bank is unable to keep customers or get new on board, this will pave the way for financial challenges.
Continuous changes in technology and innovation have far-reaching consequences. The unpredictable political and economic setting demands the banking sector to remain on their toes if they want to beat the odds. Even though financial challenges have been damming in recent times, security and strategic challenges are only adding stress on banks worldwide.
All in all, this wraps our list of significant financial challenges dawning upon the banking sector. Yet, acknowledgment of problems and constraints is just a step closer to recovery. To save their fall from grace, banks must integrate innovative technology into their products and services.