Trends in the Banking Industry - Case Study Example

Trends in the Banking Industry

Introduction

Over the last ten years, the world of financial services has been faced with massive changes. That is particularly evident in the banking industry, which has seen innovations, 9/11 attacks, multiple bank fiascos and scandals. The 9/11 attacks almost collapse the banking system in the United States, but the industry survived and recovered only to be hit by the global financial crisis in 2008. These attacks changed everything in banking as well as politics, warfare and travel. Economists and financial specialists feared the future of the banking industry because the weeks that followed saw the collapse of AIG and the fall of Lehman Brothers. The challenges facing the banking industry in the post 9/11 period are more of process and operations than policy and management. The banking industry has marshalled technology capabilities and resources to meet all these challenges. These events and outstanding technological innovations have shaped the modern banking industry.

Discussion

In the financial world, the agency problem refers to the conflict of interest in relationships where one party is looked upon to act in the best interests of the other party. However, the problem occurs when the agent who is supposed make the decisions that would serve the principal is motivated by self-interest and the agent’s best interests differ from the best interests of the principal. In the banking industry, the agency problem refers to the conflict of interest between the management and stakeholders of a company (Burger, 2011). The manager is usually the agent of the shareholders, and he/she is supposed to make decisions that maximize the wealth of the shareholders. However, there are managers with the interest of maximizing their own wealth. During the financial crisis, the agency problem is rampant as managers seek to maximize their wealth, as they fear for the collapse of the banks among other financial institutions.

There are without a doubt numerous changes and trends in the banking industry in the past ten years. Most of these changes are as a result of industry and government responses to various problems that have faced the industry. The purpose of this paper is to highlight some trends in the banking industry over the last ten years, and how they relate to agency problems involved in the recent financial crisis.

The first trend that has revolutionized the banking industry is the growth of data management. Banks had been working for years, and they had collected large amounts of data about customers, financials, channels and risks. There was growth for the need for technologies that would organise and analyse the data. In 2001, data mining took a negative connotation whereby sources and volumes of data and information expanded. The last decade has seen the increased use of the phrase ‘big data,' which has been both an opportunity and burden for banking institutions. The need for the banking industry and the government to efficiently manage and analyse data has escalated over the last years. Financial institutions have been faced with a severe shortage of professionals with the right skills for data management (Ghosh, 2014).

Today, financial institutions are realizing the full potential that big data provides in the delivery of customer value, management of risk, and profit maximization. Institutions in the banking industry have been using and interpreting customer data for a long time, but big data creates game-changing opportunities for financial institutions. All the large piles of unstructured customer data that financial institutions have today provides potential in analysing consumer spending, reducing risks, complying with the changing regulations and supporting revenue growth. In the past, data collected from transactional products such as trade and supply chain services, payment services, cash management services, payables and receivables used to sit around untouched in their data warehouses. However, the last ten years have seen the development of innovative data mining and predictive analytical tools that allow banking institutions to mine the large amounts of internal data to detect patterns and gain comprehensions in the behaviour of the customers (Simpson, 2015).

The second trend experienced in the banking industry over the last ten years is the issue of security, privacy and fraud, which has been an unholy alliance. These three issues have posed great challenges to data management and execution of transactions in the banking industry. The last ten years have seen increased concerns about how much information is too much (Rash, 2013). Advancement in technology has seen an increase in bank frauds because of frequent attacks on customers’ personal information. The introduction of mobile and internet banking has been a new trend in the banking industry but has been affected by security and privacy issues.

Cybercriminals have been targeting people’s personal information by using sophisticated software that steals personal data that they use to access customer’s bank accounts and make unauthorized transactions (Konidala et al, 2012). The banking industry has been afflicted by lack of trust on behalf of the customers, as there have been cases where bank employees have conspired to defraud the consumers. The single-factor authentication method that uses usernames and passwords has been vulnerable to fraud and phishing. However, banking institutions have embraced technology that requires multifactor authentication method. Additionally, they have conducted consumer educations with respect to privacy and security where they teach their customers on how to stay safe when conducting banking transactions.

The third trend is globalization and increased banking among the people. The last ten years have seen an increase in banking among the people. Prior to the 9/11 attacks, there were poor and marginalized people with financial needs but lacked banking services. There were groups of specialists who argued that disenfranchisement and poverty were among the factors that drove people to embrace terrorism and increased resentment of the United States (Arie, 2013). However, the last decade has seen the emergence and growth of mobile money, microloans, microfinance and other financial services that have steered people in impoverished and emerging economies to reliable and secure financial resources (Burger, 2011). The result has been an improvement of lives and economies, which has in turn added value to the global banking industry. The last decade has been the age of globalization (Harrison Jr., 2002). The key to success and survival of banks is to foster strategic partnerships that provide them with a chance to be competitive and provide diverse services to their consumers.

The last decade has seen increased regulation of the banking industry as a response to the various financial crisis. The government passed various acts to deliver the country from impending financial crisis. For instance, after the 9/11 attacks, the government responded by signing the Patriot Act. The Patriot Act affected the banking industry because terrorists had an easy time opening bank accounts in the United States and they easily obtained credit cards using false social security numbers (Dolar, & Shughart, 2012). The act held the financial institutions accountable for verification of the identity of people who seek to open bank accounts. Banks were required to obtain customer identification, taxpayer identification for domestic customers and government-issued documents for noncitizens. Banks are sanctioned by the act to know their customers and scrutinize their transactions (Dolar, & Shughart, 2012). The last ten years have been bracketed by other regulations such as The Sarbanes- Oxley Act of 2003 and the Dodd-Frank Act of 2010.

The Sarbanes-Oxley Act of 2003 was passed by the Congress to protect the public and the shareholders from fraudulent practices, accounting error in financial institutions and improve the accuracy of company disclosures. Nonetheless, this act has affected the profitability in the banking industry. There are banks that are requesting the Congress to amend the act and relief them from certain provisions of the act. Public financial institutions have lower profitability under this new regulation when compared to private institutions (Garneau & Shahid, 2009). The Dodd-Frank Act of 2010 was passed after the financial crisis of 2008 whose scale and severity had not been experienced in generations. It left millions of Americans citizens’ unemployed and caused loss of trillions in wealth. The Dodd-Frank Act was signed by President Obama to ensure that such financial crisis would never happen. This regulation prevented excessive risk-taking that caused the financial crisis. The Act established government agencies to monitor the performance of companies including financial institutions that are too large to fail as a way of preventing the widespread economic crisis (Rao, MacDonald& Crawford, 2011). These regulations have installed into the banking industry some common themes of accountability and transparency.

The last decade has been characterised by the trend of the recreation of data centres. After the 9/11 attacks and the financial crisis of 2008, banking institutions received a wake-up call. They had ignored the locations and provisioning of their respective data centres that would have been secure, safe and accessible (Green and Reinstein, 2004). There have been remarkable innovations and reinventions in data centres and data management in general especially with the implementation of cloud strategies, SaaS, virtualization and energy saving strategies. Today, banks are saving money and operating more efficient data centres, and they enjoy operational flexibility, something that was inexistence ten years ago.

The establishment of data centres also resulted in the emergence of global financial services centres in emerging markets in the Middle East, Asia and Africa. Over the last decade, the definition of the financial services centre has broadened with London and New York still the dominant financial centres (Morriss & Henson, 2013). Nonetheless, there is massive competition from new players in markets that are diverse such as Hong Kong, Sydney, Dubai, Johannesburg and Sao Paulo. Technology has made it easy and possible to make transactions anywhere at any time. Politics, economics and regulations have also played a role in the establishment and effectiveness of financial centres at different corners of the world.

Another significant trend in the last decade is the emergence of mobile and mobile banking. Ten years ago, they were referred to as cell phones and their coverage was limited. Some of these phones did not work well. Today, mobile communication is universal, and it is the fastest growing platform for banking communication and transaction. Mobile banking is the result of increased use of mobile phones. Mobile phones are no longer for a small part of the society; they are redefining the manner in which people live on a global scale (Durkin, Mulholland & McCartan, 2015).

Over 2 billion people on earth own a mobile phone. It is speculated that by 2020, 70% of the world’s population will own a mobile phone (Tran & Corner, 2016). The proliferation of mobile phones in the society has changed. People are now using their mobile devices to check their balances, transfer funds and even apply for loans. Mobile banking has experienced rampant consumer growth, but the banking institution is trying to adapt and determine how mobile devices will fit in the banking industry. Mobile banking has provided numerous opportunities that will revolutionize the banking industry. There different changes in the banking industry that will be championed by mobile banking. The noticeable change is the end traditional brick and mortar banking style. Progressively more people are using their mobile devices to conduct financial transactions; they have minimised their use of banking touch points (Harrison Jr., 2002).

Integration of social media into the banking industry is a trend that characterises the last decade. Today, it is hard to imagine how it would have been like if social media platforms such as Facebook and Twitter existed during some of monumental times in the last decade such as during the 9/11 attacks. In the modern world, financial institutions actively use social media networks to interact with their customers and communicate everything from bank closures and new credit card offers (NIȚESCU, 2015). Social media revolution is here and it is transforming the daily behaviour of the customers and their expectations as financial partners.

The modern world is a social world and customers in the banking industry re demanding to be heard, valued and understood. If banking institutions want to drive sustainable, profitable, stronger and mutually beneficial relationships in the new social world, they must learn more about their customers and listen when they speak. Social media networks have changed how financial institutions interact with their customers. Leading financial institutions in the United States have already responded to this trend by evolving into social banks that embrace transparency and use a two-way interaction via social media to meet all customer expectations (Burger, 2011). Social banking institutions are now pursuing mission appropriate engagement with their clients by aligning their social efforts with their core business strategy and brand image. Social media is building the organisational capabilities required to process customer insights and adopts change management plans that let financial institutions react in meaningful ways.

Conclusion

In conclusion, looking at these trends, it is almost easy to forget the sense of dislocation and uncertainty in the banking industry following the financial crisis of 2008 and the 9/11 attacks. The banking industry in the United States has not only survived but also expanded and evolved. The last decade has seen an increase in convergence between commercial banks and investment activities as a result of deregulation of the banking industry. Today, financial institutions are competing directly in private placements, bonds underwriting, market operations and financial advisory work. These trends have brought greater diversification in the modern banking industry. Banks are now entering into investments that were challenging ten years ago. These trends have made financial institutions important entities in the global business community.