Financial industry challenges are largely generational. The late 1800s were marked by notorious gangs that plundered banks throughout the American Wild West. The 1900s witnessed women struggling to enter the male-dominated banking industry. And now? Well, now we have digital banking.

The long-held promise of digital technology to transform financial institutions has not been broken. It just hasn’t been fully kept. The digitization of the financial industry was supposed to solve problems. And it has. It has also created some new ones in the process.   

We will now examine some of the challenges that is been experienced by financial companies in emerging economies.

• What are the Challenges for the Financial Services Industry?
• What are the Emerging Issues in Financial Management?
• How Does Finance Affect the Economy?
• What are the Problems in Banking Sector?

What are the Challenges for the Financial Services Industry?

1. Cyber-crime In Finance

Data breaches involving financial service firms increased by 480% from 2017 to 2018. With each attack costing financial institutions millions, innovative solutions are needed if we are to avoid a repeat of the lawless days of the Wild West.

Whatever cybercrime solutions emerge to protect financial services, blockchain technology must be the foundation. Period.

Read Also: The Negative Impact of Microfinance in Developing Countries

As more and more institutions adopt distributed ledger technology (DLT), blockchain will become the de facto solution to keeping financial data secure while at rest.

Integrating DLT with existing financial infrastructures poses some serious obstacles that must be overcome. Even so, we are past the point of asking whether blockchain is the holy grail of financial data security. It is.

2. Regulatory Compliance In Finance

The ever-changing regulatory environment poses a constant challenge for financial institutions of all types.

Regtech is an emerging industry that can help ease the burden of compliance. By using the latest FinTech technologies to address regulatory compliance, RegTech startups are bridging the gap between regulators and the financial service industry.

Automated reporting, automated audits, and process streamlining are only a few of the benefits offered by RegTech applications.

3. Big Data Use In Finance

Big data provides both opportunities and obstacles for financial service providers. Tapping into social media, consumer databases, and even news feeds can help banks better serve their customers, while better protecting their own interests.

But sorting through torrents of unstructured data for useful information is no small undertaking. It requires powerful data analytics technology if institutions are to reap a benefit.

Fortunately, data analytics solutions are emerging with the potential to transform asset management, trading, risk management, and other financial services.  

4. AI Use In Finance

Industry experts believe that AI will transform nearly every aspect of the financial service industry. Automated wealth management, customer verification, and open banking all provide opportunities for AI solution providers.

But that’s all been said before. So why should we expect AI to keep that promise now?

Powerful advances in deep learning technology are paving the way for AI. In fact, if you have been alerted by your bank of suspicious activity on your account, you have likely already benefited from AI.

The challenge that financial services face is learning how to benefit from the power of AI, without being victimized by it. In R&D labs across the world, that question is being pondered at this very moment.

5. Fintech Disruption Of The Financial Service Industry

Those pesky little FinTech companies that appeared less than a decade ago have not gone away, as many in the banking industry had hoped. On the contrary. Many have matured into formidable rivals for customers and the cash they bring to the table.

Realizing that partnering with these tech-savvy startups might be more prudent than opposing them, 64% of financial service leaders say they plan to collaborate with FinTechs in the future. Wise move.

6. Customer Retention In The Financial Services Industry

Competition for financial service clients has never been fiercer. While brand loyalty may not be dead, it is definitely on life support.

What matters to most customers in this year is greater personalization, more automated services, and easier access to services. Institutions that can deliver all three will capture their share of the market.

The key to not losing the battle is recognizing that customers are less concerned with brand familiarity than getting the services they want. Providing customers those services is key to client retention.

7. Employee Retention In The Financial Service Industry

Today’s financial service companies not only find it difficult to attract customers, but they are also finding it difficult to attract employees.

A lack of qualified talent to fill new IT roles, and a millennial workforce that shuns long-term employment, are leading factors in finding good help.

Institutions that want to attract and retain a qualified workforce must change their philosophy. No longer is it enough to offer good pay and benefits; workers now expect employers to nurture a culture that is accommodating to the values and lifestyles of the employee.

Change is necessary if stable and qualified workforces are to be achieved. But don’t expect it to come easy.

8. Blockchain Integration In Finance

We talked earlier about blockchain as a key component in the battle against cybercrime. But data security is not the only application for blockchains in the financial sector.

Far from it, cases across the globe are already proving the value of blockchain in a wide variety of banking and investment applications. From solving challenges faced by investment banks to helping customers make safer payment transactions, the list is growing daily.

Having said that, industry-wide adoption of blockchain is unlikely to occur until we reach a tipping point in the maturity of the technology.  When that will happen is anyone’s guess.

9. Customer Experience In The Financial Services Industry

CX isn’t just a buzzword, it is one of the most important issues facing firms in the financial services industry.

Banking customers, today, expect banking to be mobile, with a la carte services, and they don’t care if the bank is a FinTech no one ever heard of.  

Changing old-age traditions will take time and money, but mostly open mindedness.

10. Crossing The Digital Divide In Financial Services Marketing

Success in the era of digital banking means more than having a mobile app. It means digitizing your entire brand. How do you do that? You shift your advertising campaigns from conventional ad media to digital channels. Which is another way of saying you reach your target audience where they are today, rather than where they were yesterday.

Of course, social media exposure is necessary, but you need more than a Facebook ad. You must tap big data and AI to help locate potential customers, and to deliver customized offers in real-time.

What are the Emerging Issues in Financial Management?

The financial landscape is changing and the crowd is uniquely suited to help banks and other financial institutions solve some of the challenges they face. In this article, we look at five tech trends and how they’re changing how financial institutions interact with their customers.

CDW recently published an infographic on its FinTalk blog about the top tech trends that are impacting the financial sector. The five trends that they discussed are data analytics, digitization, security, mobility, and regulatory challenges.

We wanted to discuss not only what each of these challenges were, but how the crowd is uniquely suited to help banks and other financial institutions solve some of these problems.

Data Analytics

In this case, CDW means data analytics about customers and their behaviors. Using data analytics can help improve the customer experience, increase speed and efficiency, and find a competitive edge. In this case, crowd data that addresses any of these subjects is the data that should be analyzed that will improve these key areas of performance.

Digitization

We’re talking about an omnichannel digital presence here. The boundaries between banks and their customers are becoming increasingly fluid. For example, what if in the future, you can automatically make a purchase directly from the Hulu commercial your watching? How will banks support that level of functionality. Asking both employees and customers about their behaviors will help prioritize your digital efforts.

Security

Cyber security is paramount in every industry, but perhaps none more so than the financial industry where privacy is crucial. Oftentimes, IT organizations will reach out to the crowd to ask for ideas about vulnerabilities or new technologies to help them stay current.

Mobility

Mobile continues to dominate all industries as the most common customer touchpoint. Did you know that AllState’s mobile app idea came from one of their lawyers in a crowdsourcing initiative? It’s possible for anyone to share ideas and wireframes about how to improve mobile experience.

Regulatory Challenges

According to CDW 57% of global financial services executives believe regulation has enabled the growth of their business. Sometimes your employees have the best ideas about out how regulatory challenges impact your business.

With all of these challenges, it’s no surprise that 87% of bank executives think that innovation is important to their organization. What’s interesting though is that most of these trends turn up in other industries, as well, which means the crowd can help solve these problems across verticals. In fact, sometimes reaching into an adjacent industry is the best place to find a solution.

How Does Finance Affect the Economy?

The functioning of an economy depends on the financial system of a country. The financial system includes banks as a central entity along with other financial services providers. The financial system of a country is deeply entrenched in society and provides employment to a large population. According to Baily and Elliott, there are three major functions of the financial system:

Credit Provision

Credit supports economic activity. Governments can invest in infrastructure projects by reducing the cycles of tax revenues and correcting spends, businesses can invest more than the cash they have and individuals can purchase homes and other utilities without having to save the entire amount in advance. Banks and other financial service providers give this credit facility to all stakeholders.

Liquidity provision

Banks and other financial providers protect businesses and individuals against sudden cash needs. Banks provide the facility of demand deposits which the business or individual can withdraw at any time. Similarly, they provide credit and overdraft facility to businesses. Moreover, banks and financial institutions offer to buy or sell securities as per need and often in large volumes to fulfil sudden cash requirements of the stakeholders.

Risk management services

Finance provides risk management from the risks of financial markets and commodity prices by pooling risks. Derivative transactions enable banks to provide risk management. These services are extremely valuable even though they receive a lot of flak due to excesses during the financial crisis.

Savings-investment relationship

The above three major functions are important for the running and development activities of any economy. Apart from these functions, an economy’s growth is boosted by the savings-investment relationship. When there are sufficient savings, only then can there be a sizeable investment and production activity.

This savings facility is provided by financial institutions through attractive interest schemes. The money saved by the public is used by the financial institutions for lending to businesses at substantial interest rates. These funds allow businesses to increase their production and distribution activities.

Growth of capital markets

Another important work of finance is to boost the growth of capital markets. Businesses need two types of capital – fixed and working. Fixed capital refers to the money needed to invest in infrastructures such as building, plant and machinery.

Working capital refers to the money needed to run the business on a day-to-day basis. This may refer to the ongoing purchase of raw materials, cost of finishing goods and transport of finished goods to stores or customers. The financial system helps in raising capital in the following ways:

Fixed capital – Businesses issue shares and debentures to raise fixed capital. Financial service providers, both public and private, invest in these shares and debentures to make profits with minimal risk.

Working capital – Businesses issue bills, promissory notes etc. to raise short term loans. These credit instruments are valid in the money markets that exist for this purpose.

Foreign exchange markets

In order to support the export and import businessmen, there are foreign exchange markets whereby businesses can receive and transmit funds to other countries and in other currencies. These foreign exchange markets also enable banks and other financial institutions to borrow or lend sums in other currencies.

Moreover, financial institutions can invest and reap profits from their short term idle money by investing in foreign exchange markets. Governments also meet their foreign exchange requirements through these markets. Hence, foreign exchange markets impact the growth and goodwill of an economy in the international markets.

Government securities

Governments use the financial system to raise funds for both short term and long term fund requirements. Governments issue bonds and bills at attractive interest rates and also provide tax concessions. Budget gaps are taken care of by government securities.

Thus, capital markets, foreign exchange markets and government securities markets are essential for helping businesses, industries and governments to carry out development and growth activities of the economy.

Infrastructure and growth

The economic growth depends on the growth of infrastructural facilities of the country. Key industries such as power, coal, oil determine the growth of other industries. These infrastructure industries are funded by the finance system of the country. The capital requirement for infrastructure industries is huge.

Raising such a huge amount is difficult for private players and hence, traditionally, governments have taken care of infrastructure projects solely. However, the economic liberalization policy led to the private sector participation in infrastructure industries. Development and Merchant banks such as IDBI in India help fund these activities for the private sector.

Trade development

Trade is the most important economic activity. Both, domestic and international trade are supported by the financial system. Traders need finance which is provided by the financial institutions. Financial markets, on the other hand, help discount financial instruments such as promissory notes and bills.

Commercial banks finance international trade through pre and post-shipment funding. Letters of credit are issued for importers, thereby helping the country to earn important foreign exchange.

Employment growth

Financial system plays a key role in employment growth in an economy. Businesses and industries are financed by the financial systems which lead to growth in employment and in turn increase economic activity and domestic trade. Increase in the trade leads to an increase in competition which leads to activities such as sales and marketing which further increases employment in these sectors.

Venture capital

Increase in venture capital or investment in ventures will boost growth in the economy. Currently, the extent of venture capital in India is less. It is difficult for individual companies to invest in ventures directly due to the risk involved. It is mostly the financial institutions that fund ventures. An increase in the number of financial institutions supporting ventures will boost this segment.

Balances economic growth

The growth of different sectors of an economy is balanced through the financial system. There are primary, secondary and tertiary sector industries and all need sufficient funds for growth. The financial system of the country funds these sectors and provides sufficient funds for each sector – industrial, agricultural and services.

Thus, finance plays a key role in the development of any economy and no economy can run successfully without a sound financial system.

What are the Problems in Banking Sector?

The banking industry is undergoing a radical shift, one driven by new competition from FinTechs, changing business models, mounting regulation and compliance pressures, and disruptive technologies.

The emergence of FinTech/non-bank startups is changing the competitive landscape in financial services, forcing traditional institutions to rethink the way they do business. As data breaches become prevalent and privacy concerns intensify, regulatory and compliance requirements become more restrictive as a result. And, if all of that wasn’t enough, customer demands are evolving as consumers seek round-the-clock personalized service.

These and other banking industry challenges can be resolved by the very technology that’s caused this disruption, but the transition from legacy systems to innovative solutions hasn’t always been an easy one. That said, banks and credit unions need to embrace digital transformation if they wish to not only survive but thrive in the current landscape.

1. Increasing Competition

The threat posed by FinTechs, which typically target some of the most profitable areas in financial services, is significant. Goldman Sachs predicted that these startups would account for upwards of $4.7 trillion in annual revenue being diverted from traditional financial services companies.

These new industry entrants are forcing many financial institutions to seek partnerships and/or acquisition opportunities as a stop-gap measure; in fact, Goldman Sachs, themselves, recently made headlines for heavily investing in FinTech. In order to maintain a competitive edge, traditional banks and credit unions must learn from FinTechs, which owe their success to providing a simplified and intuitive customer experience.

2. A Cultural Shift

From artificial intelligence (AI)-enabled wearables that monitor the wearer’s health to smart thermostats that enable you to adjust heating settings from internet-connected devices, technology has become ingrained in our culture — and this extends to the banking industry.

In the digital world, there’s no room for manual processes and systems. Banks and credit unions need to think of technology-based resolutions to banking industry challenges.

Therefore, it’s important that financial institutions promote a culture of innovation, in which technology is leveraged to optimize existing processes and procedures for maximum efficiency. This cultural shift toward a technology-first attitude is reflective of the larger industry-wide acceptance of digital transformation.

3. Regulatory Compliance

Regulatory compliance has become one of the most significant banking industry challenges as a direct result of the dramatic increase in regulatory fees relative to earnings and credit losses since the 2008 financial crisis.

From Basel’s risk-weighted capital requirements to the Dodd-Frank Act, and from the Financial Account Standards Board’s Current Expected Credit Loss (CECL) to the Allowance for Loan and Lease Losses (ALLL), there are a growing number of regulations that banks and credit unions must comply with; compliance can significantly strain resources and is often dependent on the ability to correlate data from disparate sources.

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

Overcoming regulatory compliance challenges requires banks and credit unions to foster a culture of compliance within the organization, as well as implement formal compliance structures and systems.

Technology is a critical component in creating this culture of compliance. Technology that collects and mines data, performs in-depth data analysis, and provides insightful reporting is especially valuable for identifying and minimizing compliance risk.

In addition, technology can help standardize processes, ensure procedures are followed correctly and consistently, and enables organizations to keep up with new regulatory/industry policy changes.

4. Changing Business Models

The cost associated with compliance management is just one of many banking industry challenges forcing financial institutions to change 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. In spite of this, shareholder expectations remain unchanged.

This culmination of factors has led many institutions to create new competitive service offerings, rationalize business lines, and seek sustainable improvements in operational efficiencies to maintain profitability. Failure to adapt to changing demands is not an option; therefore, financial institutions must be structured for agility and be prepared to pivot when necessary.

5. Rising Expectations

Today’s consumer is smarter, savvier, and more informed than ever before and expects a high degree of personalization and convenience out of their banking experience. Changing customer demographics play a major role in these heightened expectations: With each new generation of banking customer comes a more innate understanding of technology and, as a result, an increased expectation of digitized experiences.

Millennials have led the charge to digitization, with five out of six reporting that they prefer to interact with brands via social media; when surveyed, millennials were also found to make up the largest percentage of mobile banking users, at 47%.

Based on this trend, banks can expect future generations, starting with Gen Z, to be even more invested in omnichannel banking and attuned to technology. By comparison, Baby Boomers and older members of Gen X typically value human interaction and prefer to visit physical branch locations.

This presents banks and credit unions with a unique challenge: How can they satisfy older generations and younger generations of banking customers at the same time? The answer is a hybrid banking model that integrates digital experiences into traditional bank branches.

Imagine, if you will, a physical branch with a self-service station that displays the most cutting-edge smart devices, which customers can use to access their bank’s knowledge base.

Should a customer require additional assistance, they can use one of these devices to schedule an appointment with one of the branch’s financial advisors; during the appointment, the advisor will answer any of the customer’s questions, as well as set them up with a mobile AI assistant that can provide them with additional recommendations based on their behavior.

It might sound too good to be true, but the branch of the future already exists, and it’s helping banks and credit unions meet and exceed rising customer expectations.

Investor expectations must be accounted for, as well. Annual profits are a major concern — after all, stakeholders need to know that they’ll receive a return on their investment or equity and, in order for that to happen, banks need to actually turn a profit.

This ties back into customer expectations because, in an increasingly constituent-centric world, satisfied customers are the key to sustained business success — so, the happier your customers are, the happier your investors will be.

6. Customer Retention

Financial services customers expect personalized and meaningful experiences through simple and intuitive interfaces on any device, anywhere, and at any time. Although customer experience can be hard to quantify, customer turnover is tangible and customer loyalty is quickly becoming an endangered concept.

Customer loyalty is a product of rich client relationships that begin with knowing the customer and their expectations, as well as implementing an ongoing client-centric approach.

In an Accenture Financial Services global study of nearly 33,000 banking customers spanning 18 markets, 49% of respondents indicated that customer service drives loyalty. By knowing the customer and engaging with them accordingly, financial institutions can optimize interactions that result in increased customer satisfaction and wallet share, and a subsequent decrease in customer churn.

Bots are one new tool financial organizations can use to deliver superior customer service. Bots are a helpful way to increase customer engagement without incurring additional costs, and studies show that the majority of consumers prefer virtual assistance for timely issue resolution.

As the first line of customer interaction, bots can engage customers naturally, conversationally, and contextually, thereby improving resolution time and customer satisfaction. Using sentiment analysis, bots are also able to gather information through dialogue, while understanding context through the recognition of emotional cues. With this information, they can quickly evaluate, escalate, and route complex issues to humans for resolution.

7. Outdated Mobile Experiences

These days, every bank or credit union has its own branded mobile application — however, just because an organization has a mobile banking strategy doesn’t mean that it’s being leveraged as effectively as possible.

A bank’s mobile experience needs to be fast, easy to use, fully featured (think live chat, voice-enabled digital assistance, and the like), secure, and regularly updated in order to keep customers satisfied. Some banks have even started to reimagine what a banking app could be by introducing mobile payment functionality that enables customers to treat their smartphones like secure digital wallets and instantly transfer money to family and friends.

8. Security Breaches

With a series of high-profile breaches over the past few years, security is one of the leading banking industry challenges, as well as a major concern for bank and credit union customers. Financial institutions must invest in the latest technology-driven security measures to keep sensitive customer safe, such as:

Address Verification Service (AVS)	AVS “checks the billing address submitted by the card user with the cardholder’s billing address on record at the issuing bank” in order to identify suspicious transactions and prevent fraudulent activity.
End-to-End Encryption (E2EE)	E2EE “is a method of secure communication that prevents third-parties from accessing data while it’s transferred from one end system or device to another.” E2EE uses cryptographic keys, which are stored at each endpoint, to encrypt and decrypt private messages. Banks and credit unions can use E2EE to secure mobile transactions and other online payments so that funds are securely transferred from one account to another, or from a customer to a retailer.
Authentication	Biometric authentication “is a security process that relies on the unique biological characteristics of an individual to verify that he is who he says he is. Biometric authentication systems compare a biometric data capture to stored, confirmed authentic data in a database.” Common forms of biometric authentication include voice and facial recognition and iris and fingerprint scans. Banks and credit unions can use biometric authentication in place of PINs, as it’s more difficult to replicate and, therefore, more secure. Location-based authentication (sometimes referred to as geolocation identification) “is a special procedure to prove an individual’s identity and authenticity on appearance simply by detecting its presence at a distinct location.” Banks can use location-based authentication in conjunction with mobile banking to prevent fraud by either sending out a push notification to a customer’s mobile device authorizing a transaction or by triangulating the customer’s location to determine whether they’re in the same location in which the transaction is taking place. Out-of-band authentication (OOBA) refers to “a process where authentication requires two different signals from two different networks or channels… [By] using two different channels, authentication systems can guard against fraudulent users that may only have access to one of these channels.” Banks can use OOBA to generate a one-time security code, which the customer receives via the automated voice call, SMS text message, or email; the customer then enters that security code to access their account, thereby verifying their identity. Risk-based authentication (RBA) — also known as adaptive authentication or step-up authentication — “is a method of applying varying levels of stringency to authentication processes based on the likelihood that access to a given system could result in its being compromised.” RBA enables banks and credit unions to tailor their security measures to the risk level of each customer transaction.

9. Antiquated Applications

According to the 2017 Gartner CIO Survey, over 50% of financial services CIOs believe that a greater portion of business will come through digital channels, and digital initiatives will generate more revenue and value.

However, organizations using antiquated business management applications or siloed systems will be unable to keep up with this increasingly digital-first world. Without a solid, forward-thinking technological foundation, organizations will miss out on critical business evolution. In other words, digital transformation is not just a good idea — it’s become imperative for survival.

While technologies such as blockchain may still be too immature to realize significant returns from their implementation in the near future, technologies like cloud computing, AI, and bots all offer significant advantages for institutions looking to reduce costs while improving customer satisfaction and growing wallet share.

Cloud computing via software as a service and platform as a service solutions enable firms previously burdened with disparate legacy systems to simplify and standardize IT estates. In doing so, banks and credit unions are able to reduce costs and improve data analytics, all while leveraging leading edge technologies.

AI offers a significant competitive advantage by providing deep insights into customer behaviors and needs, giving financial institutions the ability to sell the right product at the right time to the right customer. Additionally, AI can provide key organizational insights required to identify operational opportunities and maintain agility.

10. Continuous Innovation

Sustainable success in business requires insight, agility, rich client relationships, and continuous innovation. Benchmarking effective practices throughout the industry can provide valuable insight, helping banks and credit unions stay competitive.

However, benchmarking alone only enables institutions to keep up with the pack — it rarely leads to innovation. As the cliché goes, businesses must benchmark to survive, but innovate to thrive; innovation is a key differentiator that separates the wheat from the chaff.

Read Also: Foreign Investment and its Effects on Economic Growth in Developing Countries

Innovation stems from insights, and insights are discovered through customer interactions and continuous organizational analysis. Insights without action, however, are impotent — it’s vital that financial institutions be prepared to pivot when necessary to address market demands while improving upon the customer experience.

Financial service organizations leveraging the latest business technology, particularly around cloud applications, have a key advantage in the digital transformation race: They can innovate faster. The power of cloud technology is its agility and scalability. Without system hardware limiting flexibility, cloud technology enables systems to evolve along with your business.

Conclusion

According to a recent survey, only 7% of financial companies have implemented a cloud-based technology stack. The reluctance to adopt technological solutions is understandable. After all, banking did quite well for hundreds of years without them.

But the digital banking revolution has begun, and it will not end till the last institution has crossed the digital divide.