In the ever-evolving landscape of the banking sector, 2024 promises to be a revolutionary one. The sector faces ongoing challenges in managing asset quality, intensified by a customer base whose loyalty are thin with a strong inclination towards instantaneous digital transactions. Despite these challenges, the sector has exhibited resilience.
Blockchain Banking and Digital Currency
Blockchain technology has already emerged as a game-changer and is being used for everything from fraud reduction, securing customer identities to simplifying cross-border payments. The decentralised structure eliminates single points of failure, significantly lowering the risk of data breaches. This will lead to creation of smart contracts, establishing trust, streamlining payments and authenticating transactions. Moreover, blockchain is aptly positioned to enhance a sector that has long awaited modernisation. With the epic rise and fall of cryptocurrencies, banks around the world have started issuing their own digital currencies. These are regulated and at the same time provide customers with flexibility and ease of use. RBI recently issued Central Bank Digital Currencies (CBDCs), which are being piloted across several banks and customers.
Artificial Intelligence
AI is set to revolutionise every facet of the banking sector. From transforming customer service to streamlining back-office operations, AI-powered financial management tools are poised to enhance efficiency. Fintech, driven by generative AI, is set to offer advanced customer interactions, personalised financial planning and bespoke investment strategies. AI-powered algorithms are set to manage investments and generate consistent returns, contributing to the wealth management processes. Automation of back-office processes, including customer onboarding, routine transactions and compliance checks, will continue to drive efficiency and transformation. Traditionally, PSBs have had a large customer base, which can now be leveraged efficiently. By mining vast amounts of digital footprints left by customers on banking as well as other platforms, valuable insights can be gained to enable hyper-personalisation, hyper-customisation and hyper-local actions that enhance the overall customer experience. Not only that, banks are now considering using the Metaverse to enable customers to enjoy banking from their couch!
Sustainable Finance
As one of the world’s largest emitters of greenhouse gases, India requires a budget of over USD 10 trillion to accomplish its net-zero emission target by 2070. As awareness grows, the role of green finance in India will become crucial. The BFSI sector has a pivotal role in effectively financing projects that reduce greenhouse gas emissions, improve energy efficiency or enhance the circular economy. The year is also poised to see the emergence of sustainable financial products that empower customers to ensure that their funds contribute to environmental and social well-being while accruing interest in bank vaults. The first tranche of green bonds was approved in 2022, but it is yet to gain traction among retail investors. The market for Green Social, Sustainability, and Sustainability-linked (GSSS) bonds, which includes green, yellow (solar), and blue (marine) bonds, is gradually expanding. It is a slow and steady process, and this year will see some major leaps.
Customer Retention
The increasing competition from fintech providers and neo-banks, creates a challenges for traditional banks to retain customer loyalty. The current generation, unlike its predecessors, believe in quick money and high returns. The only way to retain them would be to offer higher rates to depositors and lower rates to borrowers, which consequently will strain the margins. This, coupled with customers demanding round-the-clock service, poses some serious challenges.
Rising Cyber Frauds
The escalating frequency and complexity of cyber threats pose a significant challenge, necessitating more investments in cybersecurity. The number of frauds in the banking sector went up to 13,242 according to RBI report on trends and policies of banking in 2022-23. As data breaches become prevalent and privacy concerns intensify, regulatory and compliance requirement becomes more restrictive. With the introduction of digital currencies and tokenisation, the banking experience is poised for a massive change. But managing cyber frauds and cases of phishing in this ever-evolving landscape will prove trying.
Improving Asset Quality
While credit quality as a whole has somewhat normalised to pre-pandemic levels, there is some stress in specific segments. According to CARE Ratings, the share of CASA (Current Accounts & Savings Account) in commercial bank was 41.6 per cent (as of June 30, 2023), as against 44.1 per cent (as of September 2022). When the share of CASA reduces, the cost of funds goes up. With higher costs, banks will have to focus on enhancing asset quality, particularly in the context of evolving economic conditions and technological advancements.
