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It’s no news that a healthy banking system is necessary for economic growth for any country, this is because a healthy banking system helps accelerate economic growth and poverty alleviation, while poorly-functioning banks can impede economic progress.

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Over the years, the banking industry has undergone challenges and these challenges seem to be unending as they range from massive competition from Fin Techs, changing business models, mounting regulation and compliance pressures, and disruptive technologies.

In addition, the proliferation of smart phones and internet access around the world has fundamentally shifted consumer preferences, and has become a challenge for most banks as well, thereby forcing traditional institutions to rethink the way they do business.

Increasing Competition

One of the major challenges facing the banking sector is the increasing competition that arises from FinTech. FinTech is software that serves to displace some of the most profitable offerings of a traditional bank-like financial advising, loan alternatives, payment processing, and money transfers. In addition, FinTech includes very disruptive financial innovations like crypto-currency, which threatens the underpinning of the banking industry as a whole.

This has become a major challenge for the banking industry because as FinTech companies continue to innovate and challenge the status quo of the banking industry, there may be a groundswell of consumer adoption that will throw the industry into further peril.

This challenge has forced many financial institutions to seek partnerships and/or acquisition opportunities as a stopgap measure. With the wide spread of technology, it is easier for customers to switch banking provider with immediacy, making it harder to retain customers.

In order to maintain a competitive edge, traditional banks must either learn from Fin Techs, which owe their success to providing a simplified and intuitive customer experience or collaborate with them to provide maximum satisfaction for their customers.

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Corporate Governance

Corporate governance refers to the rules, processes or laws by which businesses operate, the banking industry also operates under the corporate governance and good corporate governance practices ensures that a company’s board and management always act in the best interest of the company and remain accountable to the company’s shareholders. On the other hand, poor corporate governance has poised as a major challenge in virtually all areas of the financial sector,making it more important for banks to be held to the highest standards of corporate governance.

Like many things in Nigeria, with poor corporate governance practices, corruption and fraud has found a home in the banking sector. In addition, financial mismanagement or misconduct by the executive management of Nigerian banks has become a major threat to the growth of the banking industry.

Tougher Banking Regulations

Asides from the general government rules and regulations, banking regulations have become stricter with lots of guidelines and regulations.The need for market transparency means that banks need to demonstrate compliance, governance, and ensure that they are protected when conducting business with customers and other organizations.

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However, faced with severe consequences for non-compliance, banks have incurred additional cost and risk (without a proportional enhancement to reduce the risk) in order to stay up to date on the latest regulatory changes and to implement the controls necessary to satisfy those requirements.

This means that in order to overcome the challenges that come with non-compliance, banks need to adopt a culture of compliance within the organization, as well as implement formal compliance structures and systems.

Varying Business Models

Another major challenge of the banking industry arises from the cost associated with compliance management; this cost has forced many banks to change their banking system, models and generally the way they do business.

The increasing cost of capital combined with sustained low-interest rates, decreasing return on equity, and decreased proprietary trading are all putting pressure on traditional sources of banking profitability and yet customers need to be satisfied not forgetting the fact that the shareholder’s expectations also remain unchanged.

These factors all together have led many institutions to create new competitive service offerings, rationalize business lines, and seek sustainable improvements in operational efficiencies to maintain profitability.

Featured Image Source: Industry Global News24
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This article was first published on 30th April 2022


Grace Christos Is a content creator with a proven track record of success in content marketing, online reputation management, sales strategy, and so much more.

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