​What is a Bank?

Imagine there are two different groups of people who do not meet. The first group, we called them “savers”, has surplus cash but do not have any productive ideas. The second group, we called them “borrowers”, has ideas such as buying houses or starting a new business but lacks cash. 

Banks connect both the “savers” and “borrowers” and channel funds from “savers” to “borrowers”. In return for providing the fund, “savers” would receive some returns in the form of interest with minimal risk. “Borrowers” can execute their productive ideas by providing a fee known as interest payment. Without banks, the first group will be sitting on a pile of money while the second group will have to defer executing their ideas. As such, banks play an important role in the economy by acting as a financial intermediary. 

Banks have grown tremendously in the past decades and now offer extensive products and services such as financial advisory, bancassurance and wealth management.

​What is Banking?

Banking is any business activity conducted by a bank. In the past, banking was straight-forward with customers saving their monies in the bank or getting loans from them. 

Today, there are many types of banking activities such as retail, corporate, investment, and wealth management. Each type of banking serves very specific clients and provides unique products and services to address vast customers’ needs.  

To provide these products and services to the public, a bank will need to acquire licenses which are typically issued by the appropriate authorities. 

Did you know?   The word "bank" originates from the Italian word "banco" which simply means bench. The bankers in Italy during the 1400's and 1500's conducted their banking businesses on a bench.

Why is Banking Important to an Economy?

Banks play an important role by making funds available for productive ideas by financing economic activities such as setting up a new factory, constructing a new building, exporting goods to other countries, or even buying a car.

These economic activities will have a multiplier effect within an economy by generating economic growth. This virtuous cycle can help to increase the income and living standards of the people. 

Building and Maintaining Confidence in Banking

While banks provide funds to the “borrowers”, the real source of funds comes from the “savers”. Thus, it is important for banks to build and maintain public confidence in banking.

Internally, banks exercise self-regulation by strengthening corporate governance, ethical behavior , risk management, and compliance. As a sector, a supervisor and regulator is required. 

In Singapore, the Monetary Authority of Singapore (MAS) which is the central bank plays the role of supervisor and regulator to ensure a sound and progressive financial services sector.

How Banking is Changing in the Digital Age

The face of the banking industry has changed tremendously in the past few years. To keep pace with a more dynamic economy amidst digital transformation, the banking industry needs to respond to these drivers of change. 

The future of banking is driven largely by:

• technological advancement
  
• changing consumer preferences
• regulatory responses
  

These three drivers are not independent. They are inter-connected. 

The development of a new technology that enhances customer’s experience will in turn affect regulations. For example, advances in data analytics that help a bank to personalize the consumer’s banking experience will need to collect a lot of data from the consumer, thus creating a need to regulate how data collected is being used. 

Technology Advances are Changing Banking 

Advancement in technology has changed and will continue to change banks and banking. 

FinTech, a combination of two words “finance” and “technology”, has disrupted the banking industry in various ways such as: 

• Blockchain technology has the potential to make financial transactions more transparent, resilient and efficient. Banks are studying the use of blockchain technology for trade finance and payments. 
• Automated channels of banking are adopting Virtual Reality (VR) and Augmented Reality (AR) to improve customer experience. 
• Digital initiatives which involve the use of Artificial Intelligence (AI), Machine Learning (ML) and data analytics allow banking products to get more personalized and holistic to consumer’s experience.  
  
  
  

Consumer Preferences are Changing Banking

Consumer preferences are largely driven by demographic changes and the expansive possibilities brought by technological advancement. 

Millennials are less likely to go to a bank branch to access banking services. This has led to a proliferation of digital platforms where consumers can purchase financial products and services as well as conduct transactions online. 

Digitalization can help the banks to customize touchpoints to enhance customer experience and adapt to customer preferences. 

Impact on Regulation

Banking regulations will need to evolve as banks use more technology and transform their business processes to meet customer preferences. 

Some of the key threats identified are misuse of data and cybersecurity. Controls addressing data protection and securing the banking network to prevent cybersecurity incidences will become more important going forward.

As a result, banks are increasingly exploring the use of authentication technology such as biometrics, facial recognition, voice recognition, and RegTech to protect consumers and the banks. RegTech is the management of regulatory processes within the financial industry through technology, for example to facilitate customer due diligence processes. 

Did you know?   The Monetary Authority of Singapore (MAS) in June 2019 announced the issuance of licenses of up to five digital banks.