Challenges Facing Banks in 2021

Many were concerned how the banking industry would adapt during the pandemic. Being forced to go virtual with relatively untested operating models was a big ask. Some teething problems were experienced but overall operations continued smoothly. Catching many by surprise as to how agile the banks have been. The banking sector is going to experience transformation due to changing business models, disruptive technologies, FinTech’s and increased compliance processes.

Other challenges for banks in 2021 include financial crime, recovery & resolutions planning, operational resilience, negative interest rates and ending free banking. Below is a short summary on each.

 ·      Financial Crime – financial crime increased significantly since the start of the pandemic. A survey by Global Economics Crime highlighted 56% of UK businesses were impacted by fraud or corruption. This figure being the highest in history recorded by the survey. 2020 saw ￡2 trillion of fraud.

·      Recovery & Resolutions planning – with the financial landscape still facing a tough period banks are required to draft recovery plans. This is preparation for financial difficulties and restoring their viability during periods of financial distress. Sales of businesses, raising capital and the cessation of dividend and coupon payments are recovery options.

·      Operational resilience - banks are under increased pressure to upgrade aging legacy systems. Board members and senior executives are researching investment into digital platforms, automation and artificial intelligence to stay competitive. IT systems with weak operational resilience can put banks at risk. 

·      Negative interest rates - negative interest rates penalise consumers and businesses for keeping savings in their bank accounts. Their value decreasing over time. Not only is this a security risk, but withdrawal of assets from financial institutions reduces liquidity and the ability for banks to lend. Results in high costs for banks but most importantly curtails profit. Negative interest rates impact on the interest margin therefore decreases profitability.

·      Possible end of free banking – as profit margins are squeezed it could mean the end of free banking in the future. This links to the negative interest rates and the cost to the banks. If interest rates continue to drop, banks may try to boost returns by ending free banking.

There is no doubt that the banking sector is facing a challenging 2021. Improvements to operational resilience and reducing financial crime figures would account for a successful year.