Today, the modern business is faced with various challenges within the global society. These are the challenges that stand in the way of the success of different business industries or organization. This, in turn, affects globalization of business. Globalization in finance and business refers to global markets’ economic integration. Besides, it is the socio-cultural integration among various countries across the globe. Globalization is crucial as it helps in increasing both the cultural exchange and international trade (Imeson " Pugh, 2012, 17). Therefore, this paper will draw on the four external forces within the PEST framework for critically discussing some of the key political, economic, social, and technological challenges faced by a modern business with a focus on the banking industry in various countries around the world.
Industry Description
The modern industry of banking is a network of several banking organizations that are licensed by the state for providing banking services. Some of the primary functions offered by this sector include transferring, storing, as well as the extension of credit against, or even managing risks that are related to holding different forms of wealth (Aldas, Ruiz, Sanz " Lassala, 2011, 1165). Banking industry offers precise financial bundle services all the time that considerably varies across time, jurisdictions, institutions, and the economic development in addition to information and communication technologies advances.
PEST Framework Analysis
This would include the political, economic, social, and technological challenges facing banking industry across the globe with examples from specific countries.
Political Challenges
American politics pose a significant challenge to the country’s banking industry. For example, bankers across the United States have been complaining that the major risk facing the country’s banking industry is the political interference (Kösedağ, Denizel " Özdemir, 2011, 1533). Besides, the “politicization” of the country’s banks because of takeovers and bailouts poses a significant challenge to the industry’s financial health. For example, politics distorts the lending while rescues have resulted in substantial damage to the banks as it encourages reckless attitudes (Quirk, 2012, 32). Moreover, regulators are worried that there is the likelihood that their support from banks may be withdrawn by banks before they can have the time of rebuilding their financial strength.
There is also an extreme regulation by governments as a result of political interference. For example, the Stephen Hester, the chief executive of Scotland’s Royal Bank posits that the politicization of this bank significantly hampered its recovery and would eventually harm the taxpayers (Young " Duffy, 2012, 2). It is because it would make it more challenging for the government in making a return on its investment. Moreover, politicians have not done much to reign in a banking sector that sought in returning to business as always through paying a tremendous amount of bonuses, but they have just forced taxpayers in injecting billions of money so as to keep banks afloat (Avery, 2017, 98) On the same note, the PwC’s UK banking leader, John Hitchins observes that political interference in the form of regulation is the top risk that poses a significant challenge to the banking industry.
In the United States, President Donald Trump is interfering with the country’s banking industry since he has ordered reviews of the banking policy including rules and regulations that were implemented after the financial crisis of 2008 (Kulkarni, 2009, 6). As a result, this has been criticized by the Democrats who argue that this move lacked substance besides squarely aligning the President with the Wall Street bankers. This signals that banks will have to lose a lot as there will be stiffer regulations that may result in bank stocks being pushed higher.
Also, political interference through government regulation poses a significant challenge to the banking industry in several ways; however, a specific problem depends on the regulation nature. For example, the increased regulation in UK banks resulted to higher workload within the banks since it takes effort as well as time for adapting banking business practices for ensuring that the newly implemented regulations are correctly being followed (Siklos, 2014, 77). In the short run, the increased workload and time as a result of government regulation can pose significant damage to the credit or individual financial companies across the world.
Economic Challenges
The banking industry in the world is the primary driver for global economic development. This is because it offers various types of services including the facilitation of transferring money between different countries as well as bringing together borrowers and savers in an adequately organized structure (DeYoung " Duffy, 2014, 43). Even though crucial to the global economic stability, the banking industry has been experiencing extreme financial challenges, a situation that has resulted in the negative economic performance of most countries across the world. Raza (2011, 43) observes that the primary causes of these financial crises are such as the non-performing loans, poor leadership as well as the global economic trends that are uncertain.
For example, the banking industry in the UK has always been considered mature, the fastest growing as well as largest within the region, thus making it be the financial leader in the area. However, due to economic downturns, this country’s banking industry has been a victim of both domestic and global financial challenges (Ahmed, 2011, 19). Besides, following the 2007-2008 global financial crises, the nation’s banking industry was primarily characterized by significant economic upheaval that resulted in the collapse of several banks, while some of them were also in as well as out of receivership.
Additionally, as a result of the lower global economy, capital planning has been a significant issue for the banks around the world. This is because as the economy is improving gradually with the increase in capital and valuation, most banks are now putting the assessment as well as preparation of capital needs at the forefront as compared to anything else. However, this has not been achieved successfully as banks are not capable of raising capital, use stock as their currency during acquisition, and consider refinancing or pay down of their outstanding debts (Bojinov, 2016, 7). Moreover, this has been facilitated by the fact that banks do not undertake careful consideration in regard to both today’s capital opportunities as well as planning ahead for the changes in the future banking market.
Also, Kachkar, Fares and Noordin (2016) posit that inflation as an economic issue has a significant impact on the banking industry by either lowering or raising their interest rates. When business organizations are experiencing inflation, they will be forced into spending more money so as to operate. It, therefore, implies that these companies will have to pay high prices for raw materials, shipping, and for supplies, which increases the costs thereby making them consider borrowing money for their growth as well as expansion, instead of financing it themselves. As a result, this increases the demand for loans, which can eventually make banks in raising their interest rates. Therefore, as inflation increases business costs, banks make less money when providing loans to such businesses (Karbhari, Naser " Shahin, 2014, 522). It is also because their expenses will go up while income will remain the same, thus resulting in smaller profit margins.
Social Challenges
Banks are facing the issue of trust from their customers, which has been a significant challenge for their performance. For example, about 66% of the American people are still angry with the country’s big banks because of the financial crisis. Most megabank clients argue that they do not trust their banks. Moreover, since the global financial crisis, consumers trust in banks capability in doing the right thing has decreased significantly, particularly in the UK and the US (Imeson " Pugh, 2012, 18). Meanwhile, in some other markets such as China and India consumers are as well having low levels of trust as their faith in the integrity of banks and other financial institutions have also decreased by about 12 percent within the last three consecutive years.
Cross-sell is as well another significant social challenge facing the global banking industry. According to Quirk (2012, 32), about 42% adults from the U.S are primarily interested in keeping their financial accounts and products with a single bank company, but banks have been struggling for long with cross-selling. These banks require a new customer cultivation mindset including expanding their relationship from simple accounts to the investments, loans, as well as business banking.
Customer segmentation and behavior is also a significant social challenge affecting the global banking industry. Banks are evolving at a very slow rate to segmentation of their customers with the purpose of better knowing their customers (Kösedağ, Denizel " Özdemir, 2011, 1532). For several decades, financial and banking institutions have relied on the models of customer segmentation that is established around essential demographic data including income, age, and education, which have often been poor predictors of the actual behaviors of consumers (Avery, 2017, 99). Also, it has become a challenge for the credit unions and banks, especially from the U.S in segmenting their customers by their financial acumen and digital sophistication levels.
Additionally, the issue of loyalty is as well a significant challenge to the banking industry. For example, the wealthier consumers within the United States and the UK give banks lower loyalty scores as compared to those customers of more modest means. Moreover, the affluent clients basically insist on the expert, tailored advice in addition to premium service since what they need is a personal experience (Siklos, 2014, 78). It has also become a challenge for the banks to move affluent consumers from detractor to a promoter because it is roughly six times the economic value to turn mass-market customers into promoters. As a result, this poses a significant challenge to the U.S. and the UK banks.
Technological Challenges
The banking industry, particularly in the UK is faced with particular technical challenges that impact their operation. For instance, there is an increased competition emanating from the financial technology institutions. The financial technology (Fin Tech) firms are always the start-up firms that are using software for providing financial services. These companies are increasingly becoming popular thus disrupting the manner in which traditional banking has been working (Kulkarni, 2009, 7). As a result, this creates a significant challenge for the conventional banks as they are not capable of adjusting quickly to the accompanying changes that are not just in technology, but as well as culture, operations, as well as other industry facets.
Additionally, the use of outdated core information technology systems has been a significant issue to the global banking industry. Failure in investing efficiently in flexible, secure systems capable of enhancing digital as well as mobile banking can lead to a substantial loss for the banks, especially while they are compiling cyber-attacks risks. As observed by Young and Duffy (2014, 44), the multiple legacy systems’ burden to some of the financial institutions as a result of mergers is already causing these banks real challenges. Besides, global banks are facing severe competition from several disruptive innovators who are capable of providing their customers with more affordable and seamless experiences across various banking channels (Ahmed, 2011, 19). Large financial institutions such as World Bank who fail to innovate their systems are at high risk of losing a substantial amount of business. This is particularly the case for such banks struggling with the core legacy systems that are not able of facilitating the type of experience, service, as well as selection of products expected by customers.
Business organizations are in the middle of global industrial revolution, which is primarily driven by the technological influence as well as the internet. However, the banking system and the banks, such as the regulatory global environments are still operating in a different age. This is among the significant challenges faced today by banking technologists, and perhaps not even a single global bank is making an effort of tackling this issue (Imeson " Pugh, 2012, 18). Subsequently, all banks could become no longer relevant in today’s banking industry.
Conclusion
The global banking industry as a modern business is experiencing various challenges that significantly impact its operation. Most of these problems are related to political, economic, social, and technological factors. Political interference has for long posed challenges for the banking industry as some countries’ Presidents are continually ordering for the reviews of the banking policy such as regulations and rules making it harder for banks to earn more profits.
Additionally, because of global economic downturns, the global banking industry has been faced with severe financial challenges, thus leading to a decreased economic performance of most banks across the world. This is caused by the poor leadership, non-performing loans, and the uncertain global financial trends. Moreover, as a social challenge, banks are losing trusts from their customers who keep on questioning the viability of their security. Finally, technological challenge is the most significant issue facing banking industry including the emergence of several financial technology institutions, which disrupts the manner in which traditional banks operate.
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