Banking sector faces operational challenges

The history of institutional banking can be traced back to Assyrian traders who organised trade financing through documented transactions of payments. Later the Venetian merchants emulated and improved the system and evolved syndicated finances for expeditions that resulted in the beginning of Merchant Banking, discovering of new lands and documenting of cargo by Bills of Lading. These bills were authenticated by merchants and discounted at various known ports of Mediterranean the North Sea.
Later-day banking evolved when the various crowns of European Kingdoms, found it to be essential to regulate overseas trade as it involved acquisition of colonies and ensuring of revenue to be received. Royal charters were issued to various entrepreneurs to organise finances for expeditions to acquire new colonies. It was after World War II, the idea of nationalising private financial organisations became, according to leading European planners, as essential as winning the War.  
The Romans, great builders and administrators in their own right, took banking out of the temples and formalised it within distinct buildings. During this time moneylenders still profited, as loan sharks do today, but most legitimate commerce, and almost all governmental spending, involved the use of an institutional bank. Julius Caesar, in one of the edicts changing Roman law after his takeover, gives the first example of allowing bankers to confiscate land in lieu of loan payments. This was a monumental shift of power in the relationship of creditor and debtor, as landed noblemen were untouchable through most of history, passing debts off to descendants until either the creditor's or debtor's lineage died out. The Roman Empire eventually crumbled, but some of its banking institutions lived on in the form of the papal bankers that emerged in the Holy Roman Empire and with the Knights of the Temple during the Crusades. Small-time moneylenders that competed with the church were often denounced for usury.
 "Banks have come a long way from the temples of the ancient world, but their basic business practices have not changed. Banks issue credit to people who need it, but demand interest on top of the repayment of the loan. Although history has altered the fine points of the business model, a bank's purpose is to make loans and protect depositors' money. Even if the future takes banks completely off your street corner and onto the internet, or has  shopping for loans across the globe, the banks will still exist to perform this primary function" (Andrew Beattie, Evolution of Banking).
 Times are changing, and today's digital world is having widespread effects on an array of consumer behaviours, including how we handle our finances. Electronics and mobility are key trends for financial institutions to keep track of, but consumers aren't ready to sever all ties with their local bank branches just yet.
According to Nielsen (An uncommon sense of consumers) data from a custom study conducted in November 2013, the vast majority of U.S. consumers (82 per cent) have entered the digital arena, stating that they banked online at least once in the last 30 days. The high percentage speaks to the prevalence of the digital world in consumers' lives, especially when compared against the 68 per cent of people who said they had visited a physical branch in the same period.
"Banking is today an integral part of our everyday life: At home, at school, at office, at business, on travel everywhere we counter some aspect of banking. The significance of banking in our day-to-day life is being felt increasingly. What are the institutions, so inevitable in the present day set-up? How do they transact? How did the concept emerge? These are some of the simple queries that do not surface in our minds but are lurking deep down. Money plays a dominant role in today's life. Forms of money have evolved from coin to paper currency notes to credit cards. Commercial transactions have increased in content and quantity from simple banker to speculative international trading. Hence the need arose for a third party who will assist smooth banding of transaction, mediate between the seller and buyer, hold custody of money and goods, remit funds and also to collect proceeds. He was the "banker". As the number of such mediators grew there is need to control. Such mediating agencies gave birth to the concept of "banks" and "banking". With the exception of the extremely wealthy, very few people buy their homes in all-cash transactions. Most of us need a credit in form of loans, to make such a large purchase. In fact, many people need financial support from Bank to fulfill the financial requirement. The world as we know it wouldn't run smoothly without credit and banks to issue it."
A MIXED AND AMBIGUOUS POLICY FRAMEWORK: Bangladesh as an emerging nation is experiencing transition in all sectors - from politics, governance, commerce, industry to financing and banking. Although colonial administration left some practices of private banking which continued through Pakistan era in competition with nationalised banking, but Bangladesh as a new nation adopted a socialist view and brought all major manufacturing and financial organisations under state control, apparently in line with ideological commitment made by political leaders at that time. Since then lot of changes have taken place but as in each sector, Bangladesh could never decide upon adopting either the free market policy or a totally state-controlled economy. A mixed and ambiguous policy framework evolved to allow both free- marketers and state monopoly to concurrently work under discrete direction of the bureaucrats without any political purpose. While state monopolies had no control over their expenditures and no accountability, rogue free-marketers manipulated without cooperating with national priorities. These two agents of political force victimised the banking system which could only survive by continual financial support from the state. It was the root cause of economic and financial disaster in the seventies which lingered onto the mid-80s.  Bangladesh was rescued by International Monetary Fund (IMF) and by massive aid programmes led by the World Bank which compelled Bangladesh to phase out state monopoly and to allow private investments in all major sectors, including Banking.
But  not until 1990, did the bureaucrats allow full-scale inclusion of private sector investments in the financial institutions, major manufacturing in steel mills, cement plants, LPG etc., which resulted in major participation by the private entrepreneurs in national economy. As no tradition of capital mobilisation existed in Bangladesh, like the public sector managements, the private entrepreneurs as well, took it for granted to use bank's borrowing as capital and risk of not recovering the investment was never foreseen. Banks kept accumulating a huge amount of bad debts and the central bank only required provision for capital reserve of the bank and allowed the banks to operate when they were almost functionally bankrupt. Bank's issued capital accounted for only 10-30 per cent of the total deposits it received and owners of the banks who are mostly private entrepreneurs took advantage of depositors' money to carry on with their own businesses and investments. As there were no insurance protection for the depositors, central bank had no option but to keep all these banks on float or risk the whole system to fall apart.
Economic upturn, particularly in developing nation, fundamentally depends on savings by the general public for which genuine and efficient banking system is essential. Rural savings is a catalyst factor in agro-production which will lead to major trading and to profit by both traders and banks who are engaged in supporting the traders. However, the risk lies mostly with traders while banks are protected from any failure due climate change, poor harvesting, political disruptions and raptures in international trade. All these factors are generally and theoretically protected by insurance schemes and by governing laws of limitations. In Bangladesh, both farmers and traders are vulnerable to all sorts of calamities, political mismanagement and ill-conceived preferences and incentives which are ultimately passed on to banks as bad debts. Laws protecting the traders and banks are operationally inadequate and easily manipulated for any one's advantage.
All private banks are owned by private business houses and mostly used to cater for the need of the owners and depositors, particularly small depositors, have to rely on management's ability to protect their return. Although some legal obligations are now in place to protect the depositors but in reality it is not applied.
RURAL BANKING: National development priorities demand rural banking with more efficiency and new products to be offered, but private managements of the new banks prefer to operate in the urban areas where more predictable customer behaviours offer consistent profile and predictable return. It also connects easily with international players in complementing products and services that allow banks to operate in the global arena. Authorities, on the other hand, developed specialised banking for facilitating agro-based production and rural activities. But these specialised institutions lack resources, competent management and clear mandates.
Consumer services otherwise are limited to traditional credit offering and savings facilities only. Trade financing and equity investments by most local private banks are done without clear economic perspective and thus has little impact on national priorities.     
Local banks are usually not allowed to deal with foreign currencies or to enjoy line of credit from international banking system. Foreign exchange transactions are regulated by archaic regime of the 50s with little or no change and not applicable at all in present-day perspective. Banking like all other economic activities are encouraged to convert into digital mode in offering services, but no skills in these field  have been developed and most of the products offered are rudimentary credit related with risk-free support and secured by property. No provisions for entrepreneurs' risk or venture capital are taken into consideration. A facade of modernisation developed without having any real product or service made available to customers. Technology adaptation has not changed the mindset; only an outward display at a wasteful cost is at play to establish Bank's cosmetic identity.
RETAIL BANKING INDUSTRY: Globally, however, powerful forces are transforming the retail banking industry. Growth remains elusive, costs are proving hard to contain and Return on Earnings (ROE) remains stubbornly low. Regulation is impacting business models and economics. Technology is rapidly morphing from an expensive challenge into a potent enabler of both customer experience and effective operations. Non-traditional players are challenging the established order, leading with customer-centric innovation. New service providers are emerging. Customers are demanding ever higher levels of service and value. Trust is at an all-time low.
GLOBAL TRENDS: Against this background, 70 per cent of global banking executives believe it is very important to form a view of the banking market in 2020 - to understand how these global trends are impacting the banking system in order to develop a winning strategy.
Executives are divided as to who will be the primary beneficiaries of these trends. Just over half (54 per cent) believe that large banks will be the winners in 2020. The other half (46 per cent) see smaller banks capturing share through increasing differentiation. Executives are also divided as to the threat posed by non-traditional new players: 55 per cent believe they pose a threat to traditional banks while 31 per cent believe they present innovative partnership opportunities. Executives also differ in their views by geography. For example, fewer US executives think it important to form a view of the industry in 2020 (61 per cent) than executives in the emerging markets (79 per cent). And many more US executives view non-traditional new market entrants as a threat (71 per cent), than executives in Asia (42 per cent), where more view them as an opportunity (44 per cent) for partnering and prospering together. This divide between developed and emerging market thinking is a theme throughout the surveys so far. With these questions and concerns, it is to consider how global macro-trends will impact the retail banking industry (Retail Banking 2020: Evolution of Revolution).
The demands on global transaction banks for technology investment have never been greater. Over and above, the need to invest in solutions to meet changing regulatory requirements, banks must also invest just to remain competitive. But with so many areas to invest in, they have revisited the way in which they develop their technology. Gone are the days when banks would build their own proprietary systems. Today global transaction banks are increasingly working with technology vendors to deliver corporate solutions in order to reduce costs and free their internal resources for more value-added services. "Banks are really starting to invest in replacing their core platforms, and there's a strong focus on the concept of a payment hub, which interfaces more easily with the bank's internal systems as well as with clients," says Cindy Murray of Bank of America-Merrill Lynch.
It is evident that most customers still value face-to-face interaction in banking, with the 'branch location' being one of the main factors considered when customers choose a bank. Plus, a great branch experience provides the best chance to turn a customer into a promoter.
However, it is also clear that today's customer likes to conduct their financial activities quickly, easily, and at a time that suits them. This is where being able to offer a multi-channel approach becomes of paramount importance and potentially a big detractor for any prospective customers of banks that do not offer such services. For instance, Google Research has shown that 46 per cent of people switch channels whilst managing their finances online. Customers are increasingly using multiple channels to gather insight before making informed purchases.
Instead of offering customers the ability to transact through various separate channels, banks need to provide a seamless customer experience that allows a single transaction to occur across multiple channels at a time suited to the customer which will enhance the user experience.  Regardless of where a banking interaction starts - whether it is in branch, mobile or online, a customer should be able to switch channels throughout to receive a consistent and compelling experience.
DIGITAL TECHNOLOGY: Digital technology has changed the way we will bank forever. Recent research conducted by Experian has found that almost two-thirds (65 per cent) of UK adults now own and use a Smartphone, and almost half of UK adults (47 per cent) own and use a tablet. Of those that own a Smartphone or tablet, almost half (45 per cent) use either device to check their online bank balance, while over a quarter (27 per cent) has used their device to transfer money to another person via an online banking app.
The British Banking Association released a report in March that shows customers of the five biggest retail banks have:
* Downloaded more than 12.4 million banking apps.
* Used their mobile phones for 18.6 million transactions a week in 2013 (up from 9 million in 2012).
* Made nearly 40 million mobile and online internet transactions a week in 2013.
* Had 28.4 million contactless debit and credit cards issued
* Signed up more than 457.7 million SMS balance alerts and other text messages during 2013.
Continually improving technology provides an opportunity for banks to engage with their customers across multiple channels and to offer a great deal of customer services in the digital age. The pressure is on for banks to react to on-going technological changes and provide customers access to their financial information, when and where they want, and through the channel of their choice. This pressure also comes with its own set of problems, particularly amongst the bigger banks that have their roots still firmly dug in to legacy systems which restrict new developments.
Banking and technology are inextricably linked, with the very essence of a bank - from balances, transactions and customer information - existing in a bank's data centre. More than ever before, technology is shaping the next evolution in banking, whilst also constraining its progress. Redefining how banks approach technology development over the coming years will be the key to their success. This is a decision beyond just the CEO, but one for the Board, investors and customers. (Derek Garriock is head of business solutions at Experian).
In Bangladesh, like everything else, banks have begun adopting technology for digital conversion without any skill-base and customer preference. Although a very large number of the population have very quickly got used to mobile telephone, more than 85 per cent of them do not need to use it for any banking service. There are some services offered for mobile phone money transfer locally but the total volume and overall impact of it on banking system are negligible.
 Setting up a bank is costly, time-consuming, heavily regulated and not easy. As a result, the dynamic, start-up culture that drives innovation in many other sectors is less prevalent within banking and financial services. Banks are continuing to spend money on branches, but they are dramatically changing their role to become centres for sale-oriented advice rather than service-oriented transactions, driven by the rapid growth of digital banking. The nation as a whole needs to upgrade itself, upgrade lifestyle of the citizens for which, to be employed is vital, as only then it will be necessary and profitable to avail the technology offered and along with it the advancement we all aspire.
Writer is an economist, business consultant and President of Bangladesh Myanmar Chamber of Commerce & Industry (BMCCI). kbahmed1@gmail.com