Retail banking prospects and challenges in Bangladesh, part-I

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Across the globe, financial services industry has undergone rapid changes and transformations in recent years. In addition to the global financial turmoil, the transformation is attributable to various factors including rapid advances in information technology, the evolving macroeconomic environments, geopolitical changes, etc. Against this backdrop, how do we see the future of retail banking? What factors shall shape things in this sector in future? These are questions worth pondering by the banking sector stakeholders.
During the post crisis years, across the world and in Europe, authorities took initiatives for strengthening supervision on financial stability as well as relying heavily on creating liquidity through quantitative easing. The high social cost for the failure of banking institutions has forced authorities to strictly supervise and regulate them. However, such strict supervision and regulation have generated unwanted consequences as well.
We are observing the emergence of different business models in the post-crisis banking industry worldwide. The first category is Regionally Active Banks that typically focus on a particular geographical area, are strong in retail banking and do not get engaged in so-called global businesses. In the post-crisis era, seemingly this has become the most favored model. Anchored in a specific country or region, these banks are uniquely placed to help their communities- evaluating local risks and providing financing solutions to local customers, industries. Their closeness to the local or regional communities creates stable, loyal customer bases amongst depositors and business houses. These banks consciously avoid the complexity of running complex business portfolios or complying with different national supervisory regimes that are required for internationally active banks. Rather, the regionally active banks focus more intensely on their core competencies.
The second category is Mono-line Internationally Active Banks; banks having global presence but focused on specific businesses - for example, 'pure-play' investment banks or global wealth managers. Some of them have consistently followed this model since their inception; others have repositioned themselves after abandoning universal banking aspirations.
The last category is Universal Active Banks - institutions which combine worldwide presence with a full range of banking products and services; including having a significant participation in investment banking. Before the financial crisis, many large banks aspired to this model; as it turns out post-crisis, only a small number still do.
The unwanted consequence that has taken shape and which has continued to develop rapidly during last couple of years is the emergence of less regulated or unregulated alternative financial intermediaries often referred as "shadow banking". Shadow banks invest and trade on their own capital, and also perform many of the traditional banking functions. They are not deposit taking institutions, and therefore, mostly remain outside the realm of strict regulatory framework. Although they significantly contribute to the economy by providing large amount of capital and investing in projects considered too risky by traditional banks, shadow banking also poses systemic risk which more or less affects traditional banking sector through creditor banks.
The ongoing global initiatives to strengthen 'financial stability focused supervision' are necessary; however, doubt remains whether these will be enough to avert future recurrence of instability, unless we reorient the ethos and objectives of financial markets and institutions to socially responsible directions; seeking longer-term gains from inclusive financing for all productive initiatives of all population segments. In absence of this orientation, even financial sectors in developed advanced economies are failing to respond to financing needs of small businesses including startups of creative, innovative entrepreneurs, creating financial exclusion and prolonging the post global crisis economic slowdown. At Bangladesh Bank we have chosen to take catalyzing role in reorienting our financial sector's goals and ethos in socially and environmentally responsible direction, guiding the sector in mainstreaming CSR in corporate goals and objectives and launching a comprehensive well orchestrated financial inclusion campaign in which banks and financial institutions are participating with spontaneity and enthusiasm. This is meaningfully helping attainment of the inclusive growth and poverty eradication goals of our Government's near and longer term national development plans; by upholding healthy output and employment growth in Bangladesh economy even in the backdrop of ongoing global slowdown.
Anyway, the retail banking services which banks have to provide in the future will be significantly different from what we were familiar with in the past. The new retail banking business model will be shaped by several developments that have taken place in the financial and economic world, and in Bangladesh, to be more specific.
Bangladesh went for an open banking policy in the early eighties. The reform introduced competition into the banking industry to make it more efficient in delivering complex and sophisticated banking services to the economy. Over these years, we have observed the steady development of a banking network spreading all over the country providing financial services in competition with each other. In the recent past, numerous new technological advancements were introduced to the country's banking system. The adoption of advanced ICT that connected the branch network of the respective bank digitally helped all banks to elevate themselves to a system of centralized banking. Meanwhile, Bangladesh Bank upgraded the payments infrastructure by introducing Automated Clearing House (BACH). The Bangladesh Electronic Funds Transfer Network (BEFTN) and Real Time Gross Settlement (RTGS) system came into being to simplify the bank-to-bank clearing process. E-Payment Gateway would follow these developments in near future.
Another important aspect of retail banking is the change in the age profile of the customer base. The current generation is different from earlier ones by knowledge, aspirations, patience and love for modern technology. Since modern technologies enable them to have instant interaction with others, they expect similar service standards from everybody else. The access to internet by the customers enabled them to compare financial products and services. They are much more informed and have to be handled accordingly. Hence, the banking industry needed to adopt itself in order to service this new breed of customers. Banks are now increasingly using digital technologies and, there has been a remarkable change in delivery of services, marketing tactics and the usage of banking services by customers. Banks are now increasingly using short message services (SMS) and internet banking to keep the customers updated about account information and also inform them about new changes that have taken place in their respective banks.

The writer is Deputy Governor,
Bangladesh Bank

Source: http://dailyasianage.com/news/4498/retail-banking-prospects-and--challenges-in-bangladesh-part-i[/size][/center]