The banking industry is continually searching for new ways to embrace technology and has mostly succeeded. But every new development brings challenges and obstacles. 2020 was arguably the toughest year in a long time, but do not expect the pressure to ease up in 2021.
Here are the main challenges facing the banking industry right now.
Banking industry challenge #1: Fintech regulations
The fintech industry always seems to be on the cusp of a compliance catastrophe, as the fast-paced nature of a world built on innovation strives to keep up with changing banking regulations.
Staying compliant with regulations is standard procedure in the banking industry. But it is particularly pertinent for fintech because it doesn’t have the same streamlined compliance processes as traditional banks. The banking industry faces harsh levels of regulatory scrutiny, with new legislation rolled out frequently designed to curb criminal activity.
Ensuring compliance in fintech requires more than just following the rules. Despite fintech’s advances in technology, it remains a relatively new industry still trying to build trust with its customers. Even the slightest regulatory issue can cause damage to customer trust, so staying on the right side of the law is essential.
And banking regulators won’t be letting up anytime soon. Recent developments such as Payment Services Directive 2 (PSD2), the EU’s General Data Protection Regulation (GDPR) and the Know-Your-Customer (KYC) guidelines are the latest in a long line of regulations that banks and fintech companies must follow to keep heads above water.
Banking industry challenge #2: Cloud migrations
The banking industry fullyembraced the cloudin 2020. Much of it may have been a necessity caused by the COVID-19 pandemic, but cloud migrations have been inevitable for a long time, as more companies understand the efficiency and flexibility of the cloud. Standard Chartered, Opel Bank, and HSBC are three big banks that committed to the cloud last year.
Cloud migration offers the banking industry plenty of benefits — cost-effectiveness, greater flexibility, better allocation of resources — but it isn’t without challenges. Banking information is about as sensitive as it gets, and both banks and the consumers using them are always going to be afraid of a data breach. An IBM study found that a data breach can cost a company between $145 and $154 per account, a number that can rise exponentially when banking data is involved. For many banks, the risk of committing fully to cloud providers is just too big.
The usual fears about regulation and compliance also abound, but old-fashioned reticence may pose the biggest challenge to the banking industry embracing the cloud. An Accenture study from late 2020 found that only 45% of companies were ‘very satisfied’ with the outcomes of their cloud use. It seems that some banks aren’t ready to accept the loss of total control that comes with migrating their data and resources to the cloud.
Finally, banks and fintech companies live in fear that cloud providers will not immediately respond to critical issues such as system errors and log-in problems.
Banking industry challenge #3: Data management
This is a time of unprecedented data. The banking industry is flooded with information from a variety of sources. As Ed Maslaveckas (CEO of fintech company Bud Financial) states, “Your bank has the deepest and most personal dataset about you that any institution has. You might think Facebook or Google are scarily accurate, but the data points they have are a fraction of what your bank has.”
Which makes it surprising that the banking industry falls behind other sectors when it comes to data management. Financial data grows increasingly complex every day, but the nature of the industry demands simple management options. Unfortunately, the banking industry remains content to store data rather than deeply analyze it. While data should be at the forefront of solving problems, it remains largely dormant in the hands of banks.
Rob Casper, chief data officer at JP Morgan Chase, summed it up perfectly: “Volume is not a viable data strategy. The most important objective is to find those business problems and then dedicate your data management efforts towards them.”
Until fintech and the banking industry solve the issue of lukewarm data analysis, they will remain vulnerable to poor decision-making and missed opportunities for growth.
Banking industry challenge #4: The user experience
With all the regulations, cloud migrations, and hot fintech trends, banks sometimes neglect the actual customer. Bill Gates said: “Banking is necessary, but banks are not.” While that viewpoint may ruffle some feathers, it is important to remember the message at the heart of it. Banks exist to serve customers, not the banks themselves.
As such, banks and fintech companies should always aim to deliver a smooth and engaging user experience. Banks need to make sure their websites and applications have a clean design and are easy to use. People are still understandably sensitive about managing their money in a digital environment, so ensuring a positive user experience should be a top priority for every financial institution.
Banking industry challenge #5: Staying ahead of the curve
The fintech and banking industries depend on innovation. But what happens when the well runs dry?
Keeping up with the Joneses could become an albatross around the necks of fintech and banking companies. This is an industry established on agility and fluidity. So straddling the line between consistency and innovation will be an ongoing challenge in fintech and banking alike.
While the banking industry challenges outlined in this article may seem daunting, they are nothing the industry hasn’t faced before. By embracing cloud migration, changing legislation and the evolution of fintech, the banking industry is armed and ready for any obstacles that will come its way.
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