Assignment: 3
Business models of banking in future
FIN-523: Financial Institutions & Markets

Prepared for:

Mohammad Sohail Mustafa CFA

Associate Professor
Bangladesh Institute of Bank Management

Prepared by:
Bishwajit Chakraborty
ID: 2018-3-95-002
Department of MBA

Date of Submission: 12 september 2020

Business models of banking in future
Crisis is a threat and an opportunity at the same time. The Covid-19 pandemic has brought much
of the economic activity, including financial institutions around the world to a stop, making a
global recession appear inevitable. If policy makers don't act fast enough, it could send financial
markets from a drawdown to a meltdown. Banking is undergoing a significant change and all
current business models are under scrutiny. Digitization is the most significant of several
universal trends and disruptive new entrants may fundamentally change the competitive
environment. We have identified potential scenarios for the banking of the future and believe
that now more than ever, banks need to choose a strategic business model and adapt it in
accordance with the prevailing scenario. In light of these choices, banks must take action today
to be prepared for tomorrow.

Governments, central banks and policymakers worldwide are engaged in damage control of the
economic losses at the moment and preparing to confront the forthcoming economic crisis with a
monetary and fiscal policy of expansion such as profit/interest-rate cuts, liquidity injections, tax
relief, and industry bailouts, etc. This crisis is not simply about liquidity. It is primarily about
solvency, at a time when large segments of the global economy have come to a complete stop.

The financial sector in Bangladesh suffers in managing non-performing loans and we assume
that such loans may increase during and after Covid-19 outbreak. And it is the peak time for
every bank to assess and reassess overall lending portfolios and monitor the invested portion
carefully. Disorganization in NPLs management can pessimistically affect the fund flow of the
bank i.e. liquidity pressures and credit crunch. Also, it eats earnings of the banks.

In addition, a 6.00% deposit rate and 9.00% lending rate mount additional pressures on financial
sector in Bangladesh during Covid-19 pandemic in view of the cost of funds, classified loans,
overhead cost, regulatory issue, etc. as procuring deposit at 6.00% is still challenging and
subsequently banks are producing lean earnings. For example, if a bank earns lower earnings due
to lower profit rate, it will declare lower dividend to investors which will impact on the stock
market negatively and subsequently international rating of the bank will be lower as banks earn
lower compared to previous year which will increase reimbursement charges and downsize
international ratings of the banks. Also, it will also negatively impact on government revenue
collection which may augment government borrowings and national debts. We have seen that the
majority of the banks records negative growths in terms of profits and few banks records
operational losses for the first half of 2020 in comparison with first half of 2019. The market rate
of demand and supply will be determined by the market itself. New technologies are radically
changing the traditional banking business model. From the way banks interact with customers to
the way banks manage their middle and back office operations, technological innovations are
challenging traditional processes across the entire value chain. Banks choosing “trusted advisor”
as their business model will focus on exploiting economies of scope and gaining a high share of
their client’s wealth. The key value proposition of “trusted advisors” is building upon clients’
trust and going beyond pure investment or transaction advisory services. We envisage an open-
architecture product portfolio encompassing proprietary and third-party products as a pre-
requisite for credibly offering advisory services truly focused on client needs. Furthermore, the
“trusted advisor” bank distinguishes itself through offering tailored services based on a deep
understanding of clients’ needs beyond financial matters. Extending the offering into value-
added services, such as concierge services, financial education or working seamlessly with real
estate agents, corporate finance advisors, and philanthropy experts enables such banks to deepen
the client relationship and increase client loyalty.

As such, few recovery actions should be taken i.e. forming contingency team with specific tasks
to attain strategic goals for a sustainable future in banking sector of Bangladesh:

* Banks need to have strategies and be ready to face the upcoming banking challenges to ensure
economic sustainability. Measures should be there to address contamination risk, to prepare for
probable infrastructural changes through technology adaption, to assess credit portfolios and
payment services, to review current and forthcoming liquidity status, to use stimulus packages, to
finance liquidity injection into the economy, to take care of reputation risk and to build trust and
confidence. The buying back of government securities, reduction in repo rate, reduction in cash
reserve requirement and increase in investment/advance deposit ratio of banks can act as
liquidity injections in the market.

* In line with, monetary, fiscal, and financial policies should aim to cushion the impact of the
Covid-19 shock and to ensure a steady, sustainable recovery once the pandemic is under control.
A continuous international coordination will be essential to support vulnerable countries, to
restore market confidence, and to contain financial stability risks. We have no way but to
consider two key issues to recover financial sectors; firstly, to help protect the world’s most
vulnerable economies, and, secondly, for the long term, to strengthen the eventual recovery of
the economy.

Decentralized currencies, e.g., leveraging block chain technology and mobile money solutions
provide compelling alternatives to traditional value transferring systems by streamlining
intermediation processes. Driven by competitive pressure from these innovations, the future of
value transfer will be more global, more transparent, faster and cheaper. Contrarily, the seamless
integration of payment transactions into the purchase process (for example Amazon 1-click or
Uber) reduces touch points between payment providers and customers, making it harder for
payment providers to differentiate themselves from the competition.

* Due preparations should be ensured to accelerate economic recovery in the post Covid-19
situation where the board and top management will have critical roles to play. Crisis
preparedness would be a key to stability. A watch group should be formed to assess data and
make the bank ready to work out a reliable situational analysis when needed.

* Making an allowance for growth and sustainability of a bank depends not only on the policy of
the bank itself but also the overall growth of the different wings of the economy. As most income
generating sectors in Bangladesh are at risk and under threat to lose of businesses, banks have
the possibility to face a critical situation ever.

* Customers gain trust in new banking players with attractive offerings, as process outsourcing
makes it easier for new banking players to enter the market without significant infrastructure,
and existing banks fail to adopt new technologies sufficiently quickly because they are held back
by decades-old legacy systems. New banking players leveraging Finance 2.0 ideas thereby
overtake established banks.

* A number of disruptors, from automated wealth management services to social trading

platforms, have emerged to provide low- cost, sophisticated alternatives to traditional wealth
managers. These solutions cater to a broader customer base and empower customers to have
more control over the management of their wealth. At the same time, new providers such as Eco
Financial Technology simplify process outsourcing, leading to improved levels of efficiency and
reducing the advantage of larger wealth managers in terms of economies of scale.

* The adaptation of technology would be necessary in managing Covid-19 uncertainty and in

ensuring business continuity. Online-based education and training platforms to continue with the
capacity development programmers can limit cost of the banks and reduce contamination risks as
well. People do not need banks, they need banking. As such, it is high time to ensure that every
client is under the umbrella of virtual banking i.e. innovation in technology.

* Banks need to make the full use of capital and liquidity buffers with restrictions on dividends
to rebuild the process. Indeed, where the bank capital adequacy is affected, supervisors should
take targeted actions such as asking banks to submit credible capital restoration plans.
Authorities may even need to step in with fiscal support either direct subsidies or tax relief to
help borrowers to repay their loans and finance their operations or in credit guarantees by
government. Economic stimulus packages should be disbursed to affected industries, traders,
enterprises, and individuals based on banker-customer relationship and there is a higher
probability of non repayment of loans i.e. credit risk. The government may provide credit
guarantees to make a great success of the stimulus packages.

* Covid-19 significantly worsens both profit/interest income and non-profit/non-interest income

of banks and financial institutions. It may also augment NPLs to a reasonably high extent which
can lead to capital adequacy and solvency challenge significantly. As such, management of the
banks entails importance in capital adequacy and solvency indicators. 

* Covid-19 can create an opportunity to support clients and affected communities and can
improve the reputation and image of banks and vice versa i.e. increase reputational and country
risk. Digital marketing and reaction in the number of banks employees in the current context are
also important indicators as many are isolated by the way of social distancing.

* Alternative lending platforms leveraging peer-to-peer models are transforming credit

evaluation and sourcing of capital, as well as, narrowing the spread between deposits and
lending. Eventually, this reduces the dependency on banks as financial intermediaries. At the
same time, increased demand for flexible and alternative banking solutions paves the way for the
rise of virtual banks and the creation of customer-facing enhancements leveraging standardized
application interfaces, for example provided by specialized providers
Conclusion

The susceptibility of the banking industry may make the existing condition deteriorate and may
prolong a financial revival. Liquidity crisis, non-performing loans, run of banks, unplanned
operational expenses and non-recovery of invested portion can lead to banks in a negative
deposit growth, and subsequently, prompt a drop-down. Innovation in the products and services,
most importantly, innovation in technology across the enterprise should be ensured to remain
sustainably better in the market. In order to prepare for the future, banks should assess their own
capabilities compared against those of their peers and thoroughly assess their strengths and
weaknesses. Next, a deep understanding of the recent developments and trends in the financial
industry needs to be developed and shared across the organization. Current uncertainties dictate
that we must consider varying scenarios for the future, against which each business area needs to
be assessed. Irrespective of which scenario will materialize, banks should start preparing for the
inevitable—imminent changes facing the industry. At board level, it is now time to conduct open
and honest discussions about the likely scenarios and the most suitable business model in each.
Once business model choices are made, strategic options can be derived based on SWOT
analyses that account for uncertainty. The necessary changes to prepare for the future require the
full attention and commitment from the top and need to be initiated now.