Trade war between US and China is giving jitters to investors worldwide though the global economic recovery is stronger and well synchronised with the monetary policy stances of world economies. The Federal Reserve Bank has decided to raise the interest rate after the recovery in the US was in line with the expectations. The US protectionist stance is threatening the relevance of WTO and globalisation. There is high uncertainty in the world markets about how much the trade war would intensify.
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Globally, there is little support to US tariffs and retaliations by countries are under consideration. With global economic recovery now stronger and more synchronised, monetary policy authorities in advanced economies have started to, or are gearing up to, normalise their monetary policy stance.
Relevance of Indian financial institutions
India, in line with the global uncertainties, rising inflation and crude oil prices, increased its repo rates. India has observed 8.2 per cent growth rate in Q1 of 2018 and has a comfortable position of Forex reserves of over $400 billion. Fiscal deficits remain within the targeted level of 3.5 per cent. India had produced record 284.83 million tonnes of food grains in 2017-18 crop year. The stock markets are also at an all-time high with Sensex higher than 38,896 (28th August 2018) and Nifty above 11,780 points (28th August 2018). The banking sector has been resilient to the global financial crisis.
India, however, continues to struggle with the ever-rising burden of Non-Performing Assets in the banking sector. Indian banks’ gross non-performing assets (NPAs), or bad loans, stood at Rs 10.25 lakh crore as on 31 March 2018. This accounts for 11.8 per cent of the total loans advanced by banks. Given the alarming condition, the government announced Rs 2.11 lakh crore bank recapitalisation plan for state-run banks.
The global and domestic scenario puts a serious pressure on financial institutions to perform and advance credit to sectors to propel growth. They need to continuously upgrade themselves by 2030. Consumers will need banking services, but they may not turn to a bank to get them or the definition of a bank may change for people as the technological advancements change the paradigm of banking. As the sharing economy takes over like in case of Ola, Ubers, Airbnb, the paradigms of financial services too is likely to change. Sharing economy in the banking space would mean decentralised asset ownership using information technology to find efficient matches between lenders and borrowers domestically and across the border rather than approaching a bank as an intermediary. Online platforms already provide information and financial services at doorstep to consumers.
Revolution in digitalisation of payments
Financial institutions in the present era initiate transactions on their own capital or borrowed sum putting themselves at risk. However, there is continuous development of ecommerce platforms that enable individuals to raise funds and seek credit lines from retail investors. Apple is believed to have filed a patent application for “person-to person payments using electronic devices” which could allow iPhone users to transfer money. In countries like ours where bank branch penetration is very low in rural areas, banks would seek alternative distribution channels to act as intermediaries. The developments of India’s Post Payment bank clearly indicate a revolution in digitalisation of payments though there existed private players like Airtel and Paytm. Drawing from the example of Kenya, M-PESA handles deposits and payments using customers’ cellphones and a network of agents. Financial institutions in the present world should seriously consider sharing economy opportunities such as partnerships with digital intermediaries or even end users to ensure reduced cost of services to the end consumer.
The trend of Blockchain Technology
The next major technology which is likely to be a big disruptor is the blockchain technology. The blockchain is a decentralised ledger of all transactions across a peer-to-peer network. With the help of this technology, participants can transfer value across the Internet without the need for a central third party. Blockchain Technology could make the financial services industry’s infrastructure much less expensive and its uses are infinite from financial transactions to automated contractual agreements. Blockchainare relatively less expensive as they remove the overhead of centralised third party that authenticates the transaction. These transactions could include transferring digital or physical assets and verifying the chain of custody. Trust is the biggest challenge for this technology. The impediment in accepting the technology involves the knowledge whether public ledger can be hacked, role of crypto currencies and crypto products being asset class and their legality in countries, and regulatory challenges in accepting this technology. The relevance of large physical structures relevance of financial institutions comes into question.
The rapid rise of non-financial competitors
In recent years, the banking sector has seen a rapid rise of non-financial competitors which do not perform the traditional role of banks. It is through alternative payment methods such as smart cards and contactless payments built into mobile operating systems that the banking has reached to everyone in real time. Banks would want to manage the security, user experience, and customer connectivity while monetising the data. Digital wallets are another set of innovations which the bank would have to deal with. The more digital a bank goes with a wallet there is likely to be greater real time connectivity for seeking valuable information about the consumer which can be linked to other product streams.
Financial Institutions would also have to deal with a new demographics known as millennial who would be targeted through digital channels. The new customers of the banks are found to build wealth by owning small businesses, investments or real estate; in their behavioral approach they use social networks for content, product reviews, opinions and referrals. Financial Institutions would have found new ways to target these new groups of customers who would in their buying and selling habits, be very different from traditional consumers. Bank alone is not affected by the digital revolution but other financial services have also been revolutionised in the process. In life insurance and healthcare services, much is changing in the underwriting processes, becoming more collaborative with wearable computing. Data mining and analytics would hold the key for propelling businesses.
With digitalisation, there is easier comparison and faster switching which makes relationship brief and highly competitive. If financial institutions do not offer customised services in mortgage, insurance, investment and banking then they would lose customers, market share and finally their mainstream business. Today, countries like the US are using Artificial Intelligence to provide more personalised services based on big data. Customer Analytics is likely to be driver for greater customer engagement and satisfaction.
The problem of cyber threat
Financial institutions in this fast pace changing technology paradigms is challenged by cyber threats where we find that central banks of countries like Bangladesh have lost tens of millions of dollars to hackers. Under similar threats of security recently SBI blocked six lakh debit cards. Even the Nirav Modi scam where there were no cyber threats but with connivance of bank staff, the security was breached for several years in SWIFT codes and granting LOU’s to Nirav Modi’s company. This needed thorough investigation. It further exposed the heavy reliance of banks on technology and automated systems which could pose such large threats to the banks and the banking system at large. The challenge for financial institutions is to balance security with customer convenience.
While investing heavily on technology that protects from cyber crimes, the machinery should not lose focus on gaining grounds with domestic and international consumers.