Trends in Banking Industry
Mergers, technology, and competition have reshaped banking. This article discusses the major trends witnessed by banking industry:
Mergers & Consolidation:
One of the most significant changes in banking in the last twenty years has been the number of mergers. Mergers are driven by a number of factors, including geographical diversification, increased economies of scale, leveraged investment in technology, and skill and expertise. A merger occurs when one or more banks join or acquire another bank or banks. Mergers increase the size of banks, giving them more resources. Mergers also decrease the number of banks. The prime reasons for mergers are changed competitive climate and the earnings prospects for banks. Merging with or acquiring foreign banks can help banks gain access to new and emerging markets.
Banking is an international business as well and becoming more so all the time. To be successful, the banking industry needs to realize that the effect of globalization is real and irreversible. Technology has allowed instant communication as well as transfer of funds, so barriers of geography apply less than ever. Banks are being pushed beyond geographic boundaries in a search for sustainable growth. Most of the commercial banks actively seek international business, putting together huge investment transactions overseas and engaging in investment banking.
Globalization brings new opportunities within the banking industry, but along with these opportunities come new threats. Even the smallest banks now have to compete with global banks, especially where cross-border activity is more frequent.
As with many industries, technology has changed everything. Perhaps no business has been more affected by the growth of computers and telecommunications than banking. Not only have accounting, auditing, and examining functions been taken over by fast and efficient technology, funds transfer, record keeping, and financial analyses have become instantaneous because of the powerful tools now available.
Online banking allows customers to access their accounts and services 24 hours a day, seven days a week, from anywhere in the world. Gone are the banker's hours of 9:00 a.m. to 3:00 p.m., for consumers want instantaneous access to banking services just as they do from other businesses. They want access to their money at any time. Customers are able to access all their accounts from one secure site. Many banks offer additional online services, such as stock quotes and money management tools. Some banks offer virtual banking only, which saves on overhead.
The use of contactless payment technologies is increasing. This type of transaction is convenient for customers, as it takes less time than making a purchase with cash, or with a credit or debit card. Another example of this trend is the use of prepaid cards.
Automated teller machines (ATMs), networked computers that allow access from around the world, "smart" cards with embedded microchips, and online banking via the Internet are some of the technological innovations changing the face of banking.
Banking is a business, and as with any business, competition is an ongoing challenge. As government regulations have loosened, competition between banks has become fiercer. This fact has resulted in mergers and decreasing numbers of banks, but it has made more services available to consumers, as banks compete to earn customers' financial business. Supermarkets, phone companies, and others are cutting into what has traditionally been the market of banks, and it is having an effect on profitability. Banks compete not only with other banks, but with other businesses that sell financial services, such as credit unions. Banks are more sales oriented than ever; with an emphasis on service, innovation, and marketing that could scarcely have been imagined 30 years ago.
Advances in communications networks make it possible for banks to have their customer service and back-office support teams remotely located. Advancements in technology make it possible to improve service levels and speed up transactions. With the growing popularity of smartphones comes an increasing demand for applications for these devices. Financial institutions are looking with increased interest at creating applications that allow customers to access accounts and banking services on their smartphones. Banks are able to offer a higher level of customization and to integrate different products and services.
The global financial crisis forced governments around the world to reevaluate their financial regulations. The Basel Committee on Banking Supervision, which is made up of central bankers and regulators from countries around the world, has considered various proposals. The Basel Committee formulates broad supervisory standards and guidelines and recommends statements of best practice in banking supervision. One such proposal is raising capital requirements, limiting the ability of banks to pay out dividends and bonuses when capital ratios are too close to regulatory minimums. Another would require banks to build up capital during lending booms.
Banks have made substantial investments in branch technology. These types of investments will continue. It is clear that mobile and online banking is continuing to grow. But what does that mean for the customer’s relationship with the bank across different channels? Technology's changes are not limited to bankers either and consumers' relationships with their banks have changed. To meet the demands of this changing relationship, new products, new delivery systems and different ways of doing business will be needed.