Challenges Faced by Commercial Banks
Commercial banking has been around for a very long time. Ever since the birth of corporations more than three centuries ago, banks have been providing services to large corporations in one form or the other.
Over the years, the commercial banking model has been relatively stable. Of course, with the passage of time, newer and better technologies were integrated into commercial banks. However, the speed at which these changes were taking place was quite slow.
The recent past has been very different for commercial banking. The past couple of decades have seen a rapid evolution of the banking system and hence it has also created some unprecedented challenges for the banking industry.
In this article, we will have a closer look at some of the challenges being faced by the commercial banking industry.
- Distribution Networks Have Become Redundant: For the past many years, commercial banks have spent a lot of time trying to build distribution networks. A lot of money has been spent trying to create this last-mile connectivity. However, now, the banking business has gone digital.
An extensive network of branches is no longer a key asset but is slowly transitioning into a liability. Commercial banks are now suddenly finding themselves on a new playing field where their previous experiences have been made redundant.
- Data Protection: The new commercial banking model is all about providing banking services that can be accessed 24 by 7 through mobile and internet banking. Building applications that allow for these services to be provided round the clock is a difficult task in itself. However, at the same time, when the services are provided online, the bank has to manage a lot of sensitive data online as well.
In the modern world, hackers have realized that data is the new gold. Hence, hacking attacks are very common. Banks have to spend a lot of their resources on building processes and systems which allow for the protection of sensitive customer data. The real challenge which commercial banks face is allowing the online processing of banking services in a safe and secure manner.
- Changing Business Models: The traditional business model of commercial banks has heavily relied on interest-based income. However, over the years, banks have realized that interest-based income can be seasonal as well as erratic.
Hence, there is a tendency to move towards non-interest-based income. There are pros and cons associated with this transition which have been discussed in different articles. However, the fact that commercial banks are being forced by the market to completely reinvent their business model makes it quite challenging for them.
- Growth of Fintech Companies: In the previous years, the commercial banking system had no real competition. This meant that the banks did face competition from one another. However, the system as a whole never really faced an existential threat. This has changed with the emergence of fintech companies.
Fintech companies are quasi-financial institutions that are allowed to provide all the services that commercial banks do except taking in deposits. These companies have started using technology as a differentiating tool to make loans, provide payment services, and such other services. Therefore, commercial banks now have to compete with these companies as well. This increased competition is eating into the margins of the commercial banking industry.
- Threat From Cryptocurrencies: The commercial banking system is facing another existential threat from yet another ecosystem. Up until now, banks have held a monopoly over payment transactions. This is because payments used to take place in fiat currencies. Hence, the clearing of these payments would always take place via the central banking system. However, over the recent few years, a parallel currency system has come into existence.
This currency system does not need the services of banks for clearing payments. Cryptocurrencies have their own clearing exchanges and payments can be transmitted without intervention by any banking entity. Hence, if the future is more inclined towards cryptocurrencies, then commercial banking is also likely to take a hit.
- Regulatory Compliance: The commercial banking system has become subject to a lot of compliance in the past few years. There are detailed procedures that need to follow while onboarding new customers, giving out loans, taking deposits, transferring payments, and so on.
The competitors of the commercial banking system viz. the fintech industry and the cryptocurrency-based system are not facing so many regulatory hurdles. This is creating a situation wherein commercial banks have a higher cost structure and turnaround time as compared to their competition. The end result is a challenging situation for the commercial banking industry.
- Globalized Competition: Last but not the least, the world has become a globalized place. As a result, commercial banks from various parts of the world are entering other markets. The end result is increased competition.
Commercial banks have to ensure that they provide optimum service levels for an optimum price in order for banks to be able to endure the competition which is being created.
The commercial banking markets in many developed and fast developing countries of the world are becoming saturated. As such, the growth rate is low and commercial banks are forced to cannibalize each other’s market share.
Hence, it can be said that the commercial banking industry is facing a lot of challenges. The entire industry is at the cusp of a revolution. Even the biggest industry experts are not able to predict the direction in which the industry will progress. Hence, it would be fair to say that the challenges being faced by the industry are unprecedented.
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