Research Paper on Banking Industry in 21st Century

Introduction

The banking industry is among the sectors of the economy that have been most affected by the recent changes in the technology as has been witnessed in the wake of the 21st century. The improvement of technology has enabled the growth of several platforms that to perform the same role as the traditional banking system albeit with much cheaper and faster alternatives, leading to the decline of commercial banks dependency by the masses. Furthermore, there is a wide array of internal factors that have led to the decline of the demand for the services of commercial banks as existed in the previous years. However, the external factors affecting such banks are the ones that pose the greatest threats when it comes to the existence and success of the commercial banks since unlike the former, the banks have little or no control over them whatsoever and are thus forced to adapt to the freshly cropping up trends in order to keep track with the dynamism of the market. These factors include political, economic, social, technological, environmental and legal parameters that in one way or the other draw the traditional customers away from the commercial banks and therefore reduce their marketability. It is for these and many other reasons as we are going to discuss that commercial banks find themselves struggling to keep pace with the changing trends and stay competitive while at the same time keeping the consumers happy.

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Political Factors

Political factors no doubt play a big role in the declining popularity of the use and adoption of commercial banks the world over. Changing trends in the global political scene have in the past inflicted a heavy toll in the profitability and reliability of commercial banks to deliver value and stay competitive in the market at the same time without losing out to other competing financial institutions providing the same services as they do. Political pressures arise due to several different causes and manifest themselves in one form or another either directly or indirectly affecting the performance of the commercial banks. Trade restrictions, tariffs, government regulations, and corruption are some of the political factors that have the highest impact on the performance of such banks as seen below ("Federal Reserve Banks Solicit Input on Improving the Future U.S. Payment System", 2019).

Trade restrictions such as the imposition of trade barriers could have a tremendous impact on the performance of commercial banks in the areas where they are applied. Policies restricting trade between economic blocks, for example, may impact the exchange rates offered by the banks in the affected areas. This situation implies that companies may find themselves switching over to more friendly alternative means of sourcing for funds to finance their activities, leaving the banks struggling to retain their existing client base through means that may impact their profitability to keep up with the other competitors (Feng, 2011). Furthermore, restrictions on the entry of foreign banks entry to the market limit capital flow and therefore lead to a reduction of the productivity of the affected zones.

Trade tariffs imposed on commercial banks and other businesses also affect the trade volume and subsequently the liquidity of cash-flow. Non-market friendly trading tariffs for example such as Trump's tariffs on China's goods in the United States affect banks that finance trade in such countries, leading to trade losses in the markets they dominate and ultimately killing off potential trading partners. As a result, the banks might need to lay off the market share and thus a drop in revenues for the banks.

Increased government regulations on the bank's operations also affect the loans volume available through the banks negatively, leading to decreased trading opportunities. Regulations touching on reserve ratios and capping of equity rates as well as liquidity and leverage ratios such as the Dodd-Frank and Base III policies in the US are predicted to affect the lending capacities of the banks and thus a loss in market shares to other unrestricted banks in other parts of the world .Furthermore, unethical practices such as trans-national corruption as has been witnessed in recent times often lead to a decrease in bank profitability thus affecting the overall stability of the banking system. Bad governance systems that allow for corruption thus deny the banks the market profitability that is key to their survival, making it precarious to do business in such environments ("Federal Reserve Banks Solicit Input on Improving the Future U.S. Payment System", 2019).

Economic Factors

Banks generally do well in excellently performing economies, and thus unfavorable economic conditions are detrimental to the commercial banks business interests in such areas. Economies that restrict the interest rates charged by banks for their loans, for example, lead to reduced profitability for the banks. These conditions thus create an unfriendly business environment for the banks which have to grapple with the high cost of doing business to cover up the extra expenses as such.

Additionally, anticipated and actual inflation rates hinder the ability of the banks to maximize their investment as the capital invested through assets and liabilities often mature at different rates. An unstable economy is more likely to experience rapid and often unpredictable inflation rates, making it hard for commercial banks to operate in such areas, sometimes even generating losses for the banks and a general reduction in its asset base.

Unemployment also plays a big role in the challenges faced by commercial banks in global economies. Increased Unemployment generally increase the bank's credit risk as well as a reduction in the loan uptake from the general population. This in effect reduces the bank's overall performance in such markets and thus a reduction in the banking stability. Doing business in such conditions eventually become too expensive for the banks and they might end up registering losses eventually.

Another major factor that affects banking stability is the exchange rate fluctuations in the economy. An unstable economy is also bound to experience wide and varied fluctuation rates in its currency base. The impact this has on commercial banks is an increase in the credit risk and may lead to a failure by the banks to achieve their financial goals, making it expensive to do business.

High debt to income ratios is also another major factor that decreases the commercial bank's profitability due to low loans and credit uptake. The maintenance and running costs in such an economy are bound to be high and thus hurt the bank's business in the area. This also has the potential to lower the loans interest rates in an attempt to tap into a wider market, making it unfavorable for long term operation ("Federal Reserve Banks Solicit Input on Improving the Future U.S. Payment System", 2019).

Social Factors

Social and cultural factors reflect how the community approaches things, and as such Commercial banks are bound to be subjected to the social and cultural settings of the areas they wish to set up their operations. For a commercial bank to be successful in setting up operations and efficiently running their activities in the countries they wish to operate; they would need to understand how their intended customers carry on their activities and thus design their system to fit their interests easily. For the commercial Bank of America or the Commercial Bank of China which aim to set up its operation and increase its operations in the African continent as they have in the recent times, various aspects of the native population and their cultures would have to be taken into consideration. These include the lifestyle, cultural beliefs as well as the social arrangement s that make up the society. In recent times, for example, trends in the ways of life have been changing the world over. How people conduct their trade and businesses has rapidly transformed in the past three decades and would have to be taken into consideration if a successfully operating system is to be set up in those new markets. ("Payments Industry Leaders Launch U.S. Faster Payments Council", 2019) People in Africa are more open to business and are better educated than they were a few decades ago for example. The chances of taking up the services offered by the bank in these areas would, therefore, be higher with the right marketing conditions since people are more informed and are likely to adopt the services they deem beneficial to their lifestyle at the moment.

The growth of the millennials today has resulted in a cropping legion of the population with lesser and lesser cultural ties as compared to the years prior. These groups of the population have grown to develop different approaches to doing things, and the understanding of their interests would be beneficial to the banks if they aim to tap into their market. As such, the Commercial Bank of China would need to understand these needs and design a system that would work well for them lest they lose out to other competitors in the market given the dynamic tastes an innovative spirits of these millennials.

Of critical importance also is the society's class distribution. The understanding of these factors would be critical in the creation of policies that favor the interests and capabilities of all the members and thus improving inclusivity. This would allow the Banks operations and services to be adopted by a wider customer base and therefore enhance success.

Another social factor that is crucial for the design of a comprehensive system is the analysis of the social demographics. In understanding this factor, the banks would have an edge in deciding the kind of product to be marketed in those markets and therefore tap into its potential.

Technological Factors

Perhaps more than anything else in this list, technology has greatly changed how the societies of today operate, rather very drastically too. The spread and adoption of various technological advances have been witnessed all around the globe. Commercial entities like the Wells Fargo for instance dominate the transport and logistics aspect in the world today. This is in line with other technological improvements in the world today, where everything has been placed at the fingertips of the consumer, never minding how many thousands of miles away they are from the service providers themselves (Gustner, 2019). Key among those are the emerging payment systems that are more efficient and user-friendly giving the consumer a variety of choices to pick from. To stay ahead of the competition, however, the company would have to innovate further to catch up with emerging industry giants such as PayPal and Mpesa Express, which feature faster payment methods and which are available for use with handsets such as the smartphone. The faster payments method adopted in late 2018 is just one among the innovations the company could take on in other parts of the world ("Payments Industry Leaders Launch U.S. Faster Payments Council", 2019).

In gearing towards innovation, however, these companies have to look at the impacts of their innovation about the overall costs and aim towards establishing a more research-based program that would enhance the sustainability of the projects they invest in. Thus the companies have to focus on understanding better the technological needs of their target customers and the shifts in demand in order not to be left lagging behind and with accruing costs to deal with ("Federal Reserve Banks Solicit Input on Improving the Future U.S. Payment System", 2019).

Privacy and security is also another major concern especially in the digital age where small glitches have the potential to be very costly in t...