Traditional banking globally is changing. Will Pakistani banks pay attention?

I am amused to see the frequent advertisements showcasing one bank or the other winning awards like “Bank of the Year”. For one, it is rather well-known how underhanded means are used to win some of these accolades. And even if these awards are genuinely won, it is often done following conventional methods of doing business.

Traditionally, if a bank is well-capitalised, generates a decent deposit base and has economies of scale, then it should be able to do well – until now.

My hypothesis of the traditional industry structure being unable to withstand emerging changes is based on watching consumer needs and technology evolve over the last decade or so. 

Products such as checking and savings accounts, outdated processes for lending (or more like non-lending), and even corporate advisory remain completely indistinguishable from one bank to the other. Imagine promoting “free cheque books” as a feature of your service in this day and age! 

But let me come to the faux pas of the Pakistani banking industry in a bit. First, let us look at the international arena. 

Global banking heading towards specialisation

The biggest change in the global banking industry is driven by the introduction of new technology, which has seriously challenged the economies of scale model built on bricks and mortar. A bank’s size used to be an advantage in reaching customers, aggregating services and building loyalty. But not anymore. In the last 10 years or so, hundreds of digital banks have appeared along with payment platforms, wealth management providers, venture capital firms as well as e-commerce retailers bundled with consumer finance options.

All of them have raised the bar for customer expectations. Consumers now demand much more from their financial services providers and are likely to seek specialised services from differentiated organisations. A working example is the number of unicorn fintechs – estimated at 274 companies in 2022, each valued at over $1 billion! Their collective valuation was then more than $1 trillion.

At the same time, traditional banks face declining revenues and profits and consequently trade at an “accelerating discount” to other industries in the world’s largest stock markets. This means that global investors are not making rosy predictions for the future profitability and sustainability of the existing business model.

With the era of monolithic banking under serious threat, the important question is: what will replace it? 

With the aggressive move towards a “zero cash” economy, the developed world is unlikely to need cash storage and related services. A bank account will still be required along with credit and debit cards, which could be competed for by traditional banks and fintechs.

Investment, project finance and personal wealth advisories are already becoming areas which are offered by specialised firms. The trends in housing and commercial mortgages point towards the increasing presence of developers who can combine selling, renting and operating real estate projects. REITs are already quite common in the developed world and hold sizable real estate portfolios. Marketplaces for automobiles offer combinations of leasing and maintenance, while e-commerce financing, both for B2B and B2C segments, is rapidly making headway. 

Besides these industry-specific trends, there are wider social and technological changes driving change. Data, for instance, is now regarded as the new oil, implying data ownership to be much more valuable than any product or service. And if cryptocurrencies can break the shackles of the regulatory frameworks, they will be able to neutralise the raison d’etre for a bank. 

In other words, it is unlikely that a traditional bank offering the entire universe of financial services under its umbrella can compete with specialised providers, who are much nimbler and are likely to be far ahead in technology adoption as compared to the giant banking bureaucracies. 

The evolution of banking globally seems to be heading towards specialisation of one kind or another. This is why future banking stock valuations are probably building the break-up of traditional banks into smaller and more efficient platforms of the particular service they choose to compete in.

Banks losing talent

Banks are also losing the war for talent. The best students from my school class or even my graduate school class (in the late 80s) started their careers with international banks and have pretty much stayed with that profession, even if they switched to local banks. 

This is hardly true anymore with the best students being lured by technology firms, start-ups, consulting and the development world.

According to EY, “young people today have a sceptical view of the banking sector, regarding it with disinterest or even distrust. For various reasons, a career in banking might not be as appealing as it once was…this would drain the supply of inbound talent to the sector and pose business continuity and financial risks to banks around the world.”

“You can’t put tomorrow’s talent in yesterday’s jobs,” says a senior EY executive in the USA. 

Pakistani banking industry

Let us now look at the situation in our homeland. But let us also look at it from a longer-term perspective, and not at local banks’ annual or quarterly reports, which make for fancy numbers these days.

Unfortunately, banks have never been a widespread source of capital for businesses in Pakistan. This negative trend has only been enhanced over time. From their inception when the norm was lending to the politically powerful, to the 21st century when the main borrower from banks is the state itself, the journey remains far removed from banks ever being providers of capital for economic growth.

Blame it on the reforms brought about at the start of the decade or loan conditions from external lenders, but banks in Pakistan have taken risk aversion to an extreme. As anyone who has ever tried to borrow from Pakistani banks would know, you need to provide foolproof securities in addition to unlimited personal guarantees to qualify for a loan! The basic point is that it is nearly impossible for a common person to borrow from Pakistani banks. 

Banks in Pakistan have insisted upon bricks and mortar driven growth, with the number of retail branches and deposit generation being major achievements for bank management. I am sure our local bankers would have understood that technology does not recognize geographical boundaries and will be here sooner than later. Yet, they continue to follow the same decadent business models.

Where do Pakistani banks go from here? Of course, this question first applies to the country itself, where is that going? But since we are not discussing the country, I would like to imagine that banking industry leaders will understand the global trends far better and be able to reform their business before someone else does it for them. Some of the country’s leading business houses have now been in banking for a few decades. They can surely see how their core businesses have suffered by remaining stuck in the past.

Pakistani banks, not too dissimilar from their global counterparts, need to choose the sectors they will specialise in, build talent in the same area, redefine their purpose and restructure their organisations into smaller more efficient units.

But most of all, whatever strategic direction they choose, it must be from the perspective of becoming facilitators of business and entrepreneurship in the country. 

However, as all things Pakistani go, I am always reminded of Tolstoy’s famous line from War and Peace “Nothing was ready for the war which everyone expected”.