New challenges in Banking

by W. A. Wijewardena, Deputy Governor, Central Bank of Sri Lanka

It has been customary for writers on banking to compare a bank with a laundry. This comparison, based on the external outlook, goes as follows: both have counters, people working behind counters, clients visiting the place and handing their assets over the counters and those people behind the counters to use those assets safely and return them to the clients as promised.

Today, this comparison does not do justice to what a bank actually does. The function it performs in the contemporary society is more akin to the divine role played by God Murugan with His multi-head and multi-hand personality.

Just like God Murugan is a god for all seasons, for all people and for all purposes, a modern bank should have solutions for all types of problems which their clients are faced with. Such problems usually range from economic to financial and even to personal.

Hence, its foremost challenge has been to acquire the capacity to serve its clientele efficiently. Efficiency here means the provision of its services in time, in the demanded quality and in the required volume at competitive prices.

A modern bank is, therefore, required to have an adequate outreach capability to serve all those clients in places where they live. The strategy adopted by banks in this connection has been to expand their services both vertically and horizontally.

In terms of this strategy, while expanding geographically, it got itself fitted with various specialised divisions within a bank to tackle different types of problems.

This administrative structure, though helpful to meet current challenges, entailed high costs on banks, raising both sustainability and viability issues. It also could not provide a satisfactory solution to the physical limitation problem which has placed an effective barrier to its further expansion.

Hence, this banking model is inadequate to meet, in its present form, the new challenges faced by banks.

ICT Revolution and Banks

The examination of the evolution of banks in the last 50 years or so reveals that no other industry has benefited from the advancements in information and communication technology (ICT) as the banking industry.

Banks were the very first institutions that employed the enormous processing power of modern computers and advanced communication equipment to provide a wide range of services to their customers.

The wide spread application of ICT helped the banks to cut costs and overcome geographical barriers. It helped the banks to convert themselves to universal banking, a system that provides all financial services to customers under one roof.

A bank today is, therefore, a combination of both human resources and ICT. It produces all its service products by appropriately mixing these two resources. But the new challenges faced by banks require them to focus more on ICT than on other inputs for producing their services.

This is because the types of services which their customers seek and the speed at which they should be produced cannot be provided efficiently and effectively without the application of ICT.

Challenges posed by globalisation

Benefiting from the advancements in ICT and the opening of economies to free trade, the globalisation process has now encompassed the whole world in an unprecedented manner. This has forced the world's nations, irrespective of whether it was to their liking or not, to plan for a seamless integration into the globalised economy and derive benefits of globalisation.

Thomas L Friedman, in his best-selling publication, The World Is Flat, has argued that globalisation has in fact flattened the world creating a level playing field for everyone. The end-result of this inevitable development has been the creation of a huge single financial market with no barriers for financial flows and trading in financial products.

This would mean that the traditional nation state with its well-guarded territorial borders could continue to be only a pure political assembly.

It could effectively limit the free flow of human capital in physical form from one country to another. But, the nation states would not be able to restrict the free flow of the products of human capital across the borders.

With modern ICT, human intelligence and competence can be obtained from any part of the world without the human capital moving from country to country in physical form. This technique, popularly known as outsourcing or off-shoring, is extensively utilised by the banking industry.

Apart from the free flow of the products of human capital, financial services too move across the borders today without a major hindrance. This has, indeed, given birth to what is known as the development of the globe-wide single financial market that we experience today.

This globe-wide single financial market will benefit the world in a number of ways.

* The competition in the market will increase several-fold raising the quality of products and lowering their prices. All users of financial services, whether they are sovereign states, corporate entities or individuals, will immensely benefit such quality improvements that have occurred without causing price increases.

* The competition also spawns innovation forcing the financial industry to allocate more and more resources for research and development (R & D). This is because the markets always pose industries to new challenges and the best way to meet such challenges lies in generating innovations.

A large industry can always spare a high volume of resources for this purpose than a small industry. A case in point is the globally expanded pharmaceutical industry.

to be continued