Banking

Losses are inevitable in banking, but minimizing them is a top goal of any bank. What can be learned from recent losses suffered from financial dealings with two companies, Archegos Capital and Greensill Capital, to steer clear of similar avoidable blows in the future? Shadow banking and transparency are two areas to consider seriously.

In the banking industry, there is little question that COVID-19 forced digital adoption at an unparalleled rate. Years-long timelines for preplanned digital transformations were suddenly condensed into a matter of months — as “shelter in place” mandates forced consumers across the globe to move their financial activities online. 

Millions of existing and potential bank customers spend a significant amount of time on social-media platforms, and banks, like other businesses, are meeting them there to interact and improve their product and service offerings. The number of banks with plans to exploit this opportunity to engage with customers is increasing, which is understandable as social media offers firms the chance to gain a granular understanding of who their customers are.

We are witnessing an evolution. Banking is changing in so many ways – the move away from cash, and even cards, the urgent uptake of online banking, and a growing interest in personal investing. The slow and steady pace of the industry has been accelerated more in the last year than in the entire decade prior.

The Wells Fargo brand transitioned from top-notch to tarnished over the past decade after one of the United States’ leading banks became a case study in customer abuse. Under new leadership, the bank is diligently striving to meet the requirements placed on it by regulators and is experiencing renewed customer and shareholder trust; its fortunes may be reversing after a damaging period of highly publicised scandals and resulting disciplinary measures.

Digitisation has strengthened the trend toward a cashless system, with central banks exploring the feasibility of central bank digital currencies. Spearheaded by The Bahamas with its release of the sand dollar, many central banks are in various stages of releasing their own cryptocurrencies. Although China is the dominant leader in CBDC development, other central banks are catching up. CBDCs share some of the attributes of popular cryptocurrencies but not all.

India’s banking system has been plagued by shadow banking since the 1990s, when non-banking financial companies sprouted up and grew, creating a financial crisis that is as unique as the country itself. NBFCs perform the same functions as traditional banks but under the radar of regulation, creating the potential for disruption. Recent failures of NBFCs that have spread to the broader economy have prompted regulators to adopt a stricter stance.

The pandemic has accelerated existing digitalisation trends in banking, giving banks more justification for not only closing branches but also consolidating. Many European banks struggled over the past decade to meet capital requirements introduced after the financial crisis. Consolidation through mergers and acquisitions is well underway, with the blessings of governments and regulators that view it as a means to streamline the financial sector and strengthen its profitability and resilience.

Much has been written about how retail banking has appropriated digitalisation to improve customer experience and gain market share, but investment banking has also adopted digital processes to step up their performance and market share, largely in response to shifting client demands and snowballing competition from alternate providers. As their monopoly hold on investment banking withers, what do incumbents need to do to stay in the race as the frontrunners?

Frontline banks are fluid, responding to and better yet anticipating customers’ evolving requirements and preferences. The pandemic has accelerated the need for banks and consumers to interact with each other through digital channels. To compete in an increasingly competitive market, traditional banks must provide tailored solutions, cooperating with specialized partners to achieve specific goals. Banking-as-a-platform has become the new norm in the industry and the only way to keep up.