Table of Contents
Introduction to Banking Industry
Banking industry operates as a network of financial institutions, and it offers various services like cash, deposit, credit, money transfer, and other transactions. Banks use public money (deposit, make loans, and earn profit from them. These loans could be business loans, car loans, personal loans, and mortgages.
The banking industry is comprised of many small parts like; investment banking, retail, corporate, management, and asst. According to an estimate, there has been a significant growth in the retail sector during the period of 2006 to 2011. However, the banking sector is one of the key driving forces of world economies and governments. It holds the largest market share of 43% in Europe. Asian market also has a great potential to grow in this market.
As we know that banks can’t run their operations independently, they must have to follow the laws. Some factors that impact the functionality of the banking industry like; political, economical, social, technical, legal, and environmental.
Here’s the pestle analysis of banking industry;
Political Factors Affecting the Banking Sector
Govt. involvement & regulations
Political influence has a great role in the banking and financial services. Banks used to have great influence and power. But the government has launched a high level of regulations to scrutinize the financial institutions. It is because they acquire a great amount of savings of the public. Therefore, banks should obey the laws of the state.
Critics and the financial analysts say that unnecessary government involvement is not good for the performance of banks. On the other hand, local and federal government has always been involved in the affairs of the banks like forever.
Dual Banking
The federal government and the state have power and authority over the financial institution in the US, and they use the dual banking system for the regulation. Everyone, on the other hand, is very well aware of that why the governments use regulation for the banks. Whether the government should regulate the banks or not, and what level of control there should, simple or strict. The discussion on such questions is never-ending.
Obama administration responded to the financial crisis of 2008 by introducing the Consumer Protection Act and Dodd-Frank act. The terms and provisions of these acts were to reduce the risk in many areas of the banking industry. As a result, many government agencies were given the task to manage the compliance.
Dodd-Frank Act
Many financial analysts have fiercely criticized the Dodd-Frank act, because it has the lower the competitiveness of the US firms, and it is too restrictive. In 2020, the regulatory pressure on the banks and financial institutions is changing because of many factors like less globalization, more trade tension, social, and technological concerns. Banks would have to focus on the customers’ related activities.
We have to accept the fact that government regulations have increased the performance and productivity of banks. Especially if we compare it to the US regulated banks with the European banks, the financial industry of the US is much stronger.
Economic Factors Affecting the Banking Industry
Banks & Economy
Banks and economy of the country have interrelated relations with each other. A healthy economy of the country is good for the financial and banking industry, vice versa. Local or foreign investments are also good for the economy because it would create many job opportunities.
In the case of a mixed economy; where the governments and corporations collaborate to raise funds. But in the 21st century, banks play a very important role in providing loans to businesses and companies.
Interdependent Relation
It won’t be wrong if we say that the banks and the economy of the country can be a good partner. It is because a healthy economy would depend on the smooth running of the banking industry. Banks can’t run their operations if the economy of the country isn’t working.
Developing Economies
In today’s world of technology, most of the businesses are going online. They do most of their personal and business transactions through credit/debit cards of banks. On the other hand, if we look at the growth and performance of the developing countries like India, Malaysia, Nigeria, Hongkong, and Singapore, then banks have played a huge role in the development. Besides creating many job opportunities, banks in such developing countries also support the small businesses.
Social Factors Affecting the Banking Sector
Socio-cultural Trends
As we know the socio-cultural factors have a great impact on the financial industry. The Changing preferences and choices of the people would make businesses and banks to change their planning and brand strategies. If we look at the attitude and behavior of the people in a certain demographic, then you would see that it has changed a lot in recent times. For instance, millennials (people from the 80s and 90s) tend to use debit/credit cards for transactions. Their businesses would prefer to contact for financial assistance and guidance.
Impact & changes
Many things have changed and transformed in the 21st century. Like the millennials prefer convenience and customer service. That’s why you’d see that banks offer a variety of packages and offers to their customers. That’s how the whole picture of the banking sector is changed in the 21st century, where customer satisfaction and orientation have become a major focus.
Technological Factors Affecting the Banking Industry
Online banking
The technological revolution of the 21st century has brought online banking. Now, almost all financial transactions are carried out through online banking. Not only transactions, but customers can also choose and avail various banking services like insurance, cards, and loans through online. Technology and online banking has made the services much easier for the customers’ reach. Every bank has a mobile application, which you can use it either to transfer funds or pay your bills.
Privacy & Security
Online banking and technological development have raised some serious issues like privacy, security, trust, and confidentiality. Personal data has become more fragile than ever before in history. If you know the user name and password of someone, then you can transfer all of their money. Double security and checking systems have reduced the risks to a great extent.
Environmental Factors Affecting the Banking Industry
Factors like eco-friendly and sustainability have become a matter of great significance for the business industry as well. Some banks are also investing a great capital in the development of renewable energy sources. Many banks have taken the step of going without paper transaction, and solar ATMs with rechargeable lithium-polymer battery.
The purpose is to clean the environment, and more efficient use of energy. Some of the banks now publish their annual report in the soft form. It also conveys a good brand images, because it reduces the population in many areas.
Legal Factors Affecting the Banking Industry
Different countries have different laws and regulations for the banking industry, and they impact the financial industry differently. Even though banks contribute a lot towards employment, and they have to face the labor laws.
The US economy has many laws to control and regulate the banking sector like the Dodd-Frank act, Glass Steagall act, Federal Reserve act of 1913, and many other laws. The government has also introduced many other laws for the safety and protection of customers.
Conclusion
After going through the pestle analysis of the banking industry, we have come to realize that the financial industry is important for the economy of any country. It serves and benefits a country in many ways like creating job opportunities, and daily financial transactions. Government control and regulation have been slowing down the performance, but it’s also good for the protection and safety of customers.
