Nowadays many ask whether it is the end of traditional banking era. In reality there were number of remarkable milestones over the past decades like for example when we mention the introduction of telephone and internet banking, and EPOS machines way back in late 1980s beginning of 1990s, global financial crisis and also the explosion within Financial Technologies(FinTech) that led to a drastic change within the operations of traditional banks.
One should also add that traditional banks are also facing number of obstacles like when mentioning the current low interest rate environment due to benchmark rates that are close to zero and in some occasions also ranging within the negative sphere. These kind of hurdles will affect the profits of traditional banks which are highly dependent on interest income. Other obstacles being faced by traditional banks are the level of liquidity within the economy which is considerably high and also the increase in regulations within the industry.
Traditional banks are well known to serve as depositors institutions, enhance the deposits, offer loans and also manage the checkable deposits portion of economy’s money. Banks have originated through the well known traditional banking services, when they have started to offer current or deposit accounts.
Traditional banks are also engaged to control the circular flow of funds within the financial markets. Modern banks that evolved throughout the last few decades have started to offer number of different services that were missing within the traditional banking context, and number of clients that were primarily unsatisfied with those renowned common banking practices, have started to opt or ask for more developed services.
Key factors that led to a transformation within the traditional banking industry:
- Regulation which is considered as one of the key factors that led to a drastic change within the traditional banking is there to protect further both the banks and public’s resource which will ultimately allow them to have more confidence in using more banking services.
Regulation within the banking sphere is the process of implementing or enhancing existing restrictions. Regulations will lead to have pricing issues being addressed, will allow geographic market penetration and will also give the opportunity for banks to start offering new products and services. This shows how regulation may in some occasions will lead to innovation.
With the introduction of PSD2 and GDPR which are payments and data privacy laws, Banks are being allowed, with the permission of their customers to have access to existing personal and transactional data that would be held by the current banking partner. This makes it easier for customers to switch between banks/payment service providers.
- Financial Innovation played an important role in the evolution of the financial service industry and this has led to a change within the character of the traditional banking services. The mentioned financial innovation consists of the process of changing instruments, institution, and operating policies.
It also includes introduction of new securities and financial market, new products and services, a new organisational form and also a new system on how the service is to be delivered. One should also add that such innovations will also decrease the costs for the banks in the long run.
- Advances in technologies contributed further for the transition from traditional banking to modern banking. One should agree with the fact that technology was essential in the banking transformation as it brought an impact on the efficiency and productivity of their services. Technology enabled banks to handle more clients and transactions at the same time, meaning that they have drastically increased their revenues and ultimately reduced their costs. Due to advances in technology some banks also increased the scope of global market, which ultimately resulted in a competitive advantage.
- Financial Technology (FinTech) and consumer expectations were also part of the transformation within the banking industry. Banks have continued to play an important role in the client experience by working together with FinTechs which has led to an improved customer retention resulting in an increase in their revenues.
Collaboration with FinTechs helped the banks to start transferring funds and information in a timely manner. Traditional banks are still considered as more secured place where to keep deposits, however customers’ expectation is continuously changing. Banks are forced to shift their policies and also to be more flexible in order to be able to meet clients’ needs and wants and they should be in a position to offer the same services that FinTechs are currently offering on the market.
Conclusion
In 2020 when there was the COVID 19 outbreak, banks and financial institutions responded quite well to the crisis which was not on their radar. The fact that majority of the branches had to close, banks had to create or enhance their digital capabilities like for example starting end-to-end digital account opening, offering lending facilities and to also be in a position to offer loans to small businesses.
Things that before seemed to be impossible for banks, had to change within a matter of days. Given that such transformation happened unexpectedly in itself it was not fast enough and is still far from completion. FinTechs on their own, sometimes are considered as a threat for banks, however one should bear in mind that Banks can take opportunities from these fast-emerging scenarios.
Although FinTech companies may be more innovative and more responsive to customers’ needs, experienced market players like traditional or evolved modern banks would still have their own strengths. They have the power of already existing clients and they have their own longstanding industry knowledge together with some good reputation within the market. Traditional banks with their transformation into more modern banking can reach different customers of different ages and from other part of the globe.
Traditional banking services are mostly used or requested by older generations, while younger generations are putting more pressures on Banks to innovate further and keep the pace with technological advances, financial innovations, deregulation and regulation which will ultimately drive the traditional banking era into a more modern banking era.
Disclaimer: The above-mentioned article is simply based on independent research carried out by Dr. Werner and Partner and cannot constitute any form of legal advice. If you would like to meet up with any of our representatives to seek further information, please contact us for an appointment.
