Top Current Challenges in the Banking & Financial Industry

In the intricate world of finance, the stakes are high, and the challenges in banking are plenty. Recent statistics have sent shockwaves through the industry, highlighting a surge in cyber threats and the escalating cost of data breaches.

In the first half of 2020, financial institutions experienced a staggering 238% increase in cyberattacks, according to VMware. As if that weren't enough, IBM and the Ponemon Institute's revelation that the average cost of a data breach in the financial sector reached $4.45 million in 2023 adds another layer of complexity to the landscape.

These numbers, though attention-grabbing, only scratch the surface of the multifaceted banking challenges in our tech-driven age. Cybersecurity threats, regulatory demands, and the ever-evolving digital landscape are just a few of the hurdles that financial institutions must navigate.

Traditional banks, with their long history, offer a wide range of services, from savings and checking accounts to loans and credit cards.

But wait, here come the neobanks! These are the new kids on the block, operating entirely online and focusing on making banking easy and flexible. They've gained popularity, especially among younger folks who prefer digital banking. However, traditional banks aren't sitting still — many are launching their digital platforms to keep up.

Open banking is another remarkable trend. It started in banking but is spreading like wildfire — soon it'll be ‘open everything’: finance, government, healthcare, you name it. People want control over how their personal data is shared, and open banking is making that happen. And speaking of cool tech, blockchain, originally the backbone of cryptocurrencies, is now making waves in banking, medicine, and even government.

Let's take a closer look at the evolving landscape of the banking industry and the trends that are set to shape its future:

Neobanks in transition

Neobanks and fintechs shook up the traditional banking scene with fresh ideas and technology. However, their journey is facing headwinds. With the era of easy financing fading, many neobanks are struggling to stay afloat. Profitability remains elusive, and without easy funding, they face banking issues. Meanwhile, traditional banks are regaining ground, potentially leading to adjustments in service fees. (Source)

Loans growth: a cautious approach

Looking ahead, the forecast for loan growth appears modest. Economic conditions and higher borrowing costs are influencing this outlook. Banks are playing it safe by maintaining restrictive credit lending policies. Recent surveys indicate tightened credit standards across various product categories, reflecting concerns about the economic outlook and potential shifts in collateral values. (Source)

Reinventing risk management

Fast forward to 2025, and risk management in banks is undergoing a significant transformation. Regulatory requirements are expanding, driven by reduced tolerance for errors and evolving business practices. Simultaneously, customer expectations are on the rise, fueled by technological advancements. Banks are gearing up to tackle new risks such as cyber threats, demanding the development of new skills and tools to navigate this changing landscape. (Source)

Here are some of the most highlighted banking industry challenges faced by the finance sector:

Increasing competition

In today's financial landscape, competition is the name of the game. A decade ago, fintech startups stormed onto the scene with their innovative approach to fintech software development, armed with cool tech and fresh ideas that tore down barriers to entry. Their secret weapon? User-friendly experiences that made traditional banking seem outdated.

Fast forward to today, and the game has evolved. From waving a smartphone at a grocery checkout to managing spare change on digital wallets, fintech has become an integral part of our daily lives. These digital disruptors are not just changing the game; they're rewriting the rules.

Payments, deposits, lending, wealth management — fintech is everywhere, offering seamless, end-to-end experiences that focus on one thing: your convenience. For traditional banks, the challenge is real. To stay in the game, they need to think outside the box, engage users in new ways, and put the customer at the center. It's a race to meet changing expectations without being weighed down by old tech.

Fraud

Fraud poses a growing challenge for the finance sector, and with advancing technologies, it's becoming trickier to tackle. In a recent survey by KPMG, over half of respondents globally reported an increase in both the volume and total value of external fraud. From 2015 to 2018, different types of fraud became more prevalent, including identity theft, card-not-present fraud, and authorized push payment scams. These trends indicate a complex landscape that demands attention.

A cultural shift

In finance, things are changing big time! We're in the middle of a cultural shift, like when your favorite game gets a major update. The big deal here is that money stuff is no longer just about banks with buildings; it's gone digital. Now, we can do banking on our phones, use contactless payments, and even explore this cool thing called blockchain. It's like the financial world is getting a high-tech makeover.

But it's not just about tech; it's also about putting you at the center. Banks are realizing we're not all the same. So, they're making things personalized, like having apps that get you and services tailored just for you. It's all about making your financial life easier and more fitting for the modern world.

Regulatory compliance

In the world of finance, it's not just about managing money; it's also about following a set of rules as well. The financial services industry is like a tightly regulated game where organizations must stick to a set of complex rules to stay in the good books. Over the past few years, some banks got into trouble because of not-so-great lending and not following the rules. This led to people trusting them less and cheering on newer, more innovative players.

Staying on the right side of the rules is no walk in the park. The regulations keep changing, and banks need to update their policies all the time to play by the latest rules. Consumer laws, in particular, can be a huge puzzle for banks. They have to juggle between different laws and keep track of all the changes happening around them.

But that's not the only challenge. Banks also need to manage different risks like credit, liquidity, and market risks. It's like walking on a tightrope — they need to handle these risks carefully while still making money.

Changing business models

Big changes are happening in banking, and it's shaking up how we get our money stuff done. The traditional way banks work is facing challenges from new ideas that are all about giving us better services.

Embedded finance is like having financial software services seamlessly integrated into everyday activities. Take Uber's payment system or Afterpay's innovative approach to consumer credit — these disruptors are not only changing how we pay but also reshaping the trust dynamics with traditional banks.

Adding to the mix, tech giants like Google are making their move into financial services. Although Google paused certain plans, the idea of integrating financial services into our daily routines received a thumbs-up. This dual impact from fintech innovators and big tech players is remodeling the banking landscape, emphasizing adaptability and innovation as the new benchmarks for success.

Rising expectations

The rise of 'big tech' has set the bar high for instant solutions, and this expectation has seeped into the banking world. Giants like Google and Amazon have accustomed consumers to fast, personal, secure, and always available solutions, shaping new standards for the banking industry.

Challenger banks, with their quick and easily accessible services, have fueled the surge in instant banking expectations. An Accenture report delves into what customers now prioritize for a better banking experience. Key factors include benefits for sharing personal data, automated digital support, protection of personalized data, personalized advice, expanded product offerings, and easy branch access.

A survey of 2,000 banking customers reveals a significant demand for instant solutions, with 43% expecting to set up their bank accounts instantly. Surprisingly, less than half of traditional and challenger banks are meeting this expectation, leaving a noticeable gap in the market. Higher earners, in particular, are keen on a better online experience, with 31% willing to switch banks for it, and 20% considering a switch for improved customer service. Traditional banks, by seizing this market gap, have a golden opportunity to distinguish themselves from the competition.

Customer retention

Holding onto customers is a strategic art when it comes to banking. Personalization stands as a crucial pillar — understanding each customer's unique needs and preferences leads to tailored services that build lasting connections. This personalized touch makes customers feel seen and valued, fostering loyalty.

The digital realm plays a significant role in customer retention. A seamless online experience, facilitated by user-friendly interfaces and efficient mobile banking apps, is now an expectation that the majority of us hold. Providing customers with hassle-free digital services not only keeps them engaged but also contributes substantially to long-term retention efforts.

Moreover, going beyond basic banking services and offering value-added perks, like exclusive rewards and financial advice, creates a sense of loyalty. Proactive problem resolution, accompanied by quick responses and transparent communication, further enhances the customer experience.

Outdated mobile experiences

Ever tried using a mobile banking app that feels like a blast from the past? Yep, outdated ones can be a bit like that. First off, the look and feel matter a lot. If the app is clunky and confusing, it can be a hassle to check your balance or pay bills. We all want a banking app on our phone that's super easy to use, like a helpful friend guiding us through our finances.

Now, let's talk about security. Outdated apps might not have the latest tricks to keep your info safe. And who doesn't worry about their money's safety? Updating the app to have top-notch security features is like giving it a superhero cape — it makes you feel more protected and confident.

A whopping 97% of millennials are actively using mobile banking applications, showcasing a strong preference for managing their finances on-the-go. Interestingly, the trend extends beyond the younger generation, with 89% of all consumers acknowledging their reliance on mobile banking apps for a variety of financial tasks. This widespread adoption of mobile fintech applications signifies a fundamental change in the way people engage with their money.

Cybersecurity and authentification breaches

Cyber threats against banks are on the rise, posing risks to our financial security. Cybercriminals, like high-tech villains, are using tactics such as banking trojans and ransomware to target financial institutions. By December 2022, a staggering 566 breaches globally exposed over 254 million records from banks and insurance companies.

Ransomware attacks, a type of cyber extortion, surged from 55% in 2022 to a concerning 64% in 2023, nearly doubling the rate seen in 2021. As more people shift from cash to electronic transactions, banks are rolling out user-friendly apps and web portals. While these innovations aim to make banking easier, they also bring unique risks, making cybersecurity more crucial than ever.

Antiquated applications

Some banking applications are now starting to feel a bit outdated. These old-school apps, if not updated, can pose challenges for both banks and customers.

Antiquated applications often come with clunky interfaces and slow performance, making it a hassle for users to manage their finances. Today, people expect smooth, user-friendly experiences and old applications can fall short, affecting customer satisfaction.

Outdated applications may lack the latest security features, leaving them vulnerable to cyber threats. As technology evolves, so do the methods of cyber attackers. Keeping applications up-to-date ensures that the latest security measures are in place, safeguarding sensitive financial information.

New technologies bring exciting possibilities, from enhanced features to improved efficiency. Antiquated applications can benefit from embracing technological advances like biometric authentication, real-time updates, and interactive features.

Continuous innovation

Continuous innovation is the engine driving progress for banks. Specifically, this means banks are diving into cutting-edge technologies. Think of it like upgrading to the latest and greatest gadgets. Banks are exploring artificial intelligence for smarter processes and blockchain for secure and transparent transactions. These tech advancements aren't just buzzwords; they're tools that make banking smoother, safer, and more convenient for everyone.

User-centric design is another key player in the innovation game. This isn't about just looking good; it's about making banking easy for you. Banks are always tweaking their apps and websites, focusing on things like simple navigation and quick access. It's all aimed at giving you a good experience, whether you're checking your balance or paying bills.

Adopting AI

In the banking world, adopting artificial intelligence (AI) isn't just a trend; it's a game-changer, opening doors to a host of benefits.

AI in banking starts by getting to know you better. By analyzing your data, banks use AI to understand your preferences and needs. This isn't about robots taking over; it's about providing personalized customer service. AI tackles your questions and concerns in real-time, offering customized financial advice, targeted product suggestions, and even proactive fraud detection. It's like having a personal assistant in your pocket, guiding you through the banking journey.

AI and machine learning become the guardians of your finances. They work tirelessly behind the scenes, identifying fraudulent activities and plugging loopholes in the system. This isn't just about minimizing risks; it's about making your online finance experience safer. Reports suggest that around 80% of banks recognize the potential benefits of AI, and the impact is staggering, with the potential additional value reaching up to US$1 trillion, according to McKinsey.

Imagine having a banking assistant available 24/7. That's the magic of chatbots, one of the practical applications of AI in banking. Unlike humans with fixed working hours, chatbots are always on duty, ready to assist. They not only provide immediate responses but also learn from your usage patterns, getting smarter with each interaction.

Leveraging social media to increase foot traffic

Social media is all the rage in the 21st century and the finance sector cannot uphold its traditional approaches if they want to be seen by target consumers. With trends like user generated content on the rise, banks can use the power of social media to increase foot traffic to their physical locations.

Crafting compelling content on social media is like an open invitation to potential customers. Share visually appealing posts, exclusive promotions, or behind-the-scenes glimpses of your business. When your content resonates with your online audience, it sparks interest and prompts them to explore your physical location, translating digital engagement into real-world visits.

Utilize the power of location-based promotions on social media platforms. Platforms like Instagram and Facebook allow businesses to create targeted ads specifically for users in their geographic vicinity. By offering exclusive deals or discounts to local customers, you incentivize them to visit your physical space, capitalizing on the immediacy of social media to drive foot traffic.

Navigating the challenges in the banking industry becomes simpler with our dedicated IT solutions for banks. Whether you're a startup, neobank, or fintech disruptor, EPAM Startups & SMBs is here to support you every step of the way.

Streamlining online operations

For startups and SMBs, we offer reliable custom core banking solutions to enhance operations and customer experiences. Our systems are designed to be highly accessible, ensuring smooth day-to-day activities. With our support, you can strengthen your online presence and meet the expectations of today's tech-savvy customers.

Mobile banking made easy

In response to the mobile trend, we make mobile banking app development accessible. Tailored for startups and SMBs, our services empower you to create user-friendly mobile apps. We aim to provide a seamless and convenient mobile banking experience, aligning with the preferences of on-the-go customers.

Security and support you can count on

Security is our priority. From preventing intrusions to safeguarding against malware, our solutions ensure robust protection for your data. Our experienced team also provides critical IT support to optimize performance, minimize downtime, and resolve issues promptly. With us, you not only simplify IT infrastructure management but also ensure a secure and compliant environment.

In wrapping up our journey through the challenges in the banking and financial industry, it's clear that the road is both demanding and promising. The rise in cyber threats, the call for tech adaptation, and the complexity of regulations present hurdles, but they're also gateways to innovation.

Challenges aren't stop signs; they're opportunities to innovate. In this era of constant change, embracing innovation is key. Whether you're a startup, a fintech trailblazer, or a traditional bank, adapting to change is not just a necessity but a pathway to thriving in a dynamic landscape.