Challenges faced by commercial banks

Discuss about the Banking Technology of Alternative Investments.

Corporate needs are ever demanding, poor technology infrastructure, inefficient processes, unrelated systems with fewer business characteristics  and functionalities, absence of flawless incorporation, need for services digitization, and ever-evolving regulatory compliance pressure are some of the key challenges faced by Commercial Banks. With a sound perceptive of the challenges and concerns mentioned above (Buchak et al. 2017). The new technologies in commercial banking has involved knowing about the latest trends in the market  and insights. The commercial banking technology offers disruptive and new services and solutions across the entire range of Commercial Banking that includes lending and structured finance, trade Finance & Supply Chain Finance, Payments & Cash Management in-turn helping banks to meet their strategic business and IT objectives.  This also helps in better management of risk and thereby minimizes the volatility in the level of income. The commercial banking technology also enhances Customer experience & loyalty through effective operational services.

So far, the banks are not making much money from their efforts, especially compared to what they have had to spend on technology in recent years. Between upgrades of hardware and software, creating new apps and bolstering cyber security defenses, tech is fast becoming one of the industry’s largest expenses (Gelis 2016).

The U.S. banks collectively spent $62.2 billion on technology last year, according to research firm Celent. Selling technology externally recoups only a tiny fraction of that amount. However, moving tech from the expense line to the revenue line is an important shift for big banks, which are desperately hunting for new areas of growth as regulations have hemmed in traditional profit engines like trading.

The various banks of USA including Goldman Sachs Group Inc, Morgan Stanley and JPMorgan Chase & Co are spinning out or selling a range of tools that pertain to data security, mobile applications and “systems integration,” the process of flattening layers of aging technology (Bunea, Kogan and Stolin 2016).

Fin tech is the fastest-growing sectors in the global financial services industry, with total investment rising from US$100 million in 2008 to more than US$31 billion in 2016. In Australia, the banks has been innovating their service collaborating with the of fin tech startups. The emergence of fin techs banks that are seeks to directly compete with incumbent banks(Bunea, Kogan and Stolin 2016). The ‘Big Four’ banks namely the ANZ, CBA, NAB and Westpac is on the rise in Australia. With the slogan as “Innovate or die”, they grew 190% from 2004 to 2012 to $3.7 trillion in 2016. These banking industries are more competitive, more efficient and provide more customer choice (Lunn 2016). Banks will come under increasing competitive pressure unless they can leverage technology to cut costs and provide more interest.

Latest trends in commercial banking technology

The interest income is the difference between the generated revenue from the bank’s assets and the associated expenses after meeting the liabilities. The fintech reduces the labor charges as no manual operations a takes place, it is done online through technology.

An interest expense is the cost incurred by any business for funds that are borrowed. Interest expense is the expense that is non-operating that is shown on the income statement. It represents interest payable on any borrowings like bonds, loans, debt or lines of credit. Interest expense on the income statement represents interest accrued during the period covered by the financial statements, and not the amount of interest paid over that period (Bofondi and Gobbi 2017).

The non-interest income refers to the income obtained from the deposits and transaction fees, annual find fees, insufficient fund fees and so on. This ensures the liquidity in the operations of the bank and increases efficiency. The commercial banking technology enhances the income as new innovative technology is utilized that increases the efficiency.

A noninterest expense is the operating expense of a bank that are associated with employee salaries and benefits, information technology, rent, telecommunication services, taxes, professional services, marketing, amortization of intangibles and other general operating expenses (Schulte  and Liu 2017). The commercial banking technology has reduced the noninterest expenses with its new trends  of online banking system.

 Firstly, the concept minimizes costs and risks whether device failure, application error, network connectivity issues or operating system errors, the commercial banking technology detects and diagnoses the protocol and finds out the exact issue and automatically taking actions to fix the issue.

It minimizes the needless replacement of parts and expensive technician visits (Santu, Mawanza and Muredzi 2017). If components need to be replaced, the technology automatically dispatches a technician with the right parts and tools to ensure the problem is quickly fixed after the initial call.

The past 30 years has witnessed a development of the information technology. The world of banking has been revolutionized by the ability to utilize technology in banking. The financial and non-financial banking transactions may also be conducted online or through technology. However, there are several problems that the fin-tech banks have to face that includes ethical issues (Bunea, Kogan and Stolin 2016). All international banking institutions now aware of problems caused by hackers, in this process the hacker attacks the computer; they can take any information of the bank by using key logger technology. In the USA, government built a special secret program to handle online banking transactions of terrorists or others like hackers (Kimando and Kimeu 2016). Still there is no any specific laws or ethics for online banking and because of that client happen to face some ethical issues, when they using their online banking facilities. Therefore, clients have to think twice about their privacy issues.

Impact of FinTech companies on traditional commercial banking

Until recently, when compared with retail banking the commercial banking appeared relatively less prone to disturbance. Many innovations are being made since then; there is a drastic increase in the hope from corporate customers and the rise of next-gen technology. The industry regulations are encouraging innovation in banking and giving opportunities to the new market entrants such as online marketplace lenders. Banks are overhauling their back-end processes through digitization and are leveraging data analytics and automation to streamline operations. Application Programming Interfaces are being used to connect with third parties such as FinTechs to collaborate and resolve long-standing customer pain points, including slow payments and settlement cycles as well as complex and paper-based trade finance processes. Commercial banking is expected quickly evolve faster in the coming months and years (Bunea, Kogan and Stolin 2016). This report shares trends likely to affect commercial banking ecosystem dynamics in 2018.

The impact of the online fraud in the commercial banking technology is undeniable. The primary impact is the direct financial loss (Du, Worthington and Zelenyuk 2016). The rise in the in fintech banks and innovation in the operations with the technology has increased the rate of risk of fraud and crime to a great extent. The various impacts that crime and frauds have on the banks are as follows:

 Loss in reputation: The security problems directly affect the reputation of the company. It affects the relationship between the partners and the investors and the loss of the new clients.

Loss in trust: The online fraud, hacking, and breach of the financial information of the bank are the major risks. The third party involved in it has to face a loss in the goodwill and the trust of the individual for the banking company is lost (Karim and Chowdhury 2014).

Loss of income: All of the former, indirectly or directly, leads to income loss, somehow impacting theorganizations profit or loss. The online fraud has an effect on the financial sector far beyond immediate income loss, since the lower income, effects due to reputation loss  and trust manifest themselves in the short, medium, and long term starting from when the incident of fraud occurs (Bunea, Kogan and Stolin 2016).

Conclusion

Fin techs are a new trend in the commercial banks that innovates in the banking industry and sharpens their focus on customer satisfaction. Banks face a number of challenges and for the smooth functioning of the operations new trends of banking has evolved. The collaboration with the technology has created a new platform for smooth function of the banking.  The banks have to make sure what fin techs are doing and respond accordingly. The banks constantly innovative the operations and become less competitive and more symbiotic, or pursue a mix of these strategies that fit their unique capabilities and market positions.

References

Bofondi, M. and Gobbi, G., 2017. The Big Promise of Fintech. European Economy, (2), pp.107-119.

Buchak, G., Matvos, G., Piskorski, T. and Seru, A., 2017. Fintech, regulatory arbitrage, and the rise of shadow banks(No. w23288). National Bureau of Economic Research.

Bunea, S., Kogan, B. and Stolin, D., 2016. Banks Versus FinTech: At Last, it’s Official. Journal of Financial Transformation, 44, pp.122-131.

Dietrich, A. and Wanzenried, G., 2014. The determinants of commercial banking profitability in low-, middle-, and high-income countries. The Quarterly Review of Economics and Finance, 54(3), pp.337-354.

Du, K., Worthington, A.C. and Zelenyuk, V., 2016. Asset Diversification and Efficiency: Evidence from the Chinese Banking Sector.

Gelis, P., 2016. Why FinTech Banks will rule the world. The FinTech Book: The Financial Technology Handbook for Investors, Entrepreneurs and Visionaries, pp.235-237.

Karim, R. and Chowdhury, T., 2014. Customer satisfaction on service quality in private commercial banking sector in Bangladesh. British Journal of Marketing Studies, 2(2), pp.1-11

Kimando, L.N. and Kimeu, M., 2016. Factors influencing the adoption of mobile banking technology by bank customers in Machakos town.

Lunn, B., 2016. Banks Partnering with FinTech Start?ups to Create an Integrated Customer Experience. The FinTech Book: The Financial Technology Handbook for Investors, Entrepreneurs and Visionaries, pp.241-244.

Santu, T.V.C., Mawanza, W. and Muredzi, V., 2017. An Evaluation of the Agency Banking Model Adopted by Zimbabwean Commercial Banks. Journal of Finance, 5(2), pp.58-66.

Schulte, P. and Liu, G., 2017. FinTech Is Merging with IoT and AI to Challenge Banks: How Entrenched Interests Can Prepare. The Journal of Alternative Investments, 20(3), pp.41-57.

Wang, K., Huang, W., Wu, J. and Liu, Y.N., 2014. Efficiency measures of the Chinese commercial banking system using an additive two-stage DEA. Omega, 44, pp.5-20.