The banking sector is under pressure from regulators and lawmakers who are concerned about the risks and impacts of the industry’s practices on the economy, consumers, and the environment. In recent months, several initiatives have been launched or proposed to address some of the most pressing issues facing banks, such as climate change, financial inclusion, consumer protection, and cybersecurity. Here are some of the main challenges and solutions that banks are facing in 2023.
Banks and Climate Change: A Green Transition
One of the most significant developments in the banking sector is the growing awareness and action on climate change. Banks are increasingly expected to align their activities with the goals of the Paris Agreement and to disclose their exposure and contribution to climate-related risks and opportunities. According to the Forbes article “What’s the Problem, and Why Is Harming Banks the Solution?”, banks are facing a dilemma: how to balance their profitability and competitiveness with their social and environmental responsibility.
Some of the solutions that banks are adopting or considering include:
- Setting net-zero targets: Many banks have committed to achieving net-zero emissions by 2050 or sooner, either for their own operations or for their financed emissions. For example, Bank of America has pledged to reach net-zero greenhouse gas emissions in its financing activities, operations, and supply chain by 2050.
- Joining industry initiatives: Banks are also participating in various voluntary initiatives and coalitions that aim to accelerate the transition to a low-carbon economy. For instance, the Net-Zero Banking Alliance, launched in April 2021, is a group of 53 banks from 27 countries that have committed to aligning their portfolios with net-zero emissions by 2050.
- Incorporating climate risk into decision-making: Banks are also integrating climate risk into their governance, strategy, risk management, and reporting processes. This involves assessing the physical and transition risks that climate change poses to their assets, liabilities, and customers, and taking actions to mitigate or adapt to them. For example, HSBC has announced that it will phase out financing for coal-fired power and thermal coal mining by 2040.
Banks and Financial Inclusion: A Social Mission
Another challenge that banks are facing is how to promote financial inclusion and access for underserved and marginalized groups, such as low-income households, women, minorities, and rural populations. Financial inclusion is not only a social goal, but also a business opportunity, as it can help banks expand their customer base, increase loyalty, and reduce costs. According to the World Bank, about 1.7 billion adults remain unbanked globally, and more than half of them are women.
Some of the solutions that banks are implementing or exploring include:
- Leveraging digital technologies: Banks are using digital platforms, such as mobile banking, online banking, and digital wallets, to reach and serve customers who lack access to traditional banking services. Digital technologies can lower the barriers to entry, reduce transaction costs, and enhance convenience and security. For example, JPMorgan Chase has launched Finn, a mobile-only bank that targets millennials and offers features such as automatic savings, budgeting tools, and personalized rewards.
- Partnering with fintechs and non-bank actors: Banks are also collaborating with fintechs and other non-bank actors, such as telecoms, retailers, and nonprofits, to leverage their expertise, networks, and data to offer innovative and inclusive financial products and services. For instance, Wells Fargo has partnered with Green Dot, a fintech company that provides prepaid debit cards, to offer a low-cost checking account called EasyPay that does not require a minimum balance or charge overdraft fees.
- Adopting inclusive policies and practices: Banks are also adopting policies and practices that aim to foster a culture of diversity, equity, and inclusion within their organizations and among their stakeholders. This involves ensuring fair and transparent pricing, products, and processes, as well as providing financial education, literacy, and empowerment programs. For example, Citi has launched a $1 billion Action for Racial Equity initiative that supports minority-owned businesses, homeowners, and communities, as well as advancing anti-racist practices within the bank.
Banks and Consumer Protection: A Trust Issue
A third challenge that banks are facing is how to protect and empower consumers in an increasingly complex and digitalized financial landscape. Banks are facing heightened scrutiny and expectations from regulators and consumers who are concerned about the privacy, security, and fairness of their financial data and transactions. According to the Forbes article “Security In Open Banking: Concerns And Solutions”, banks are facing a trade-off between offering more choice and convenience to consumers and ensuring their safety and satisfaction.
Some of the solutions that banks are applying or considering include:
- Complying with regulations and standards: Banks are complying with various regulations and standards that aim to protect consumers’ rights and interests, such as the General Data Protection Regulation (GDPR) in the European Union, the Consumer Financial Protection Bureau (CFPB) in the United States, and the Payment Services Directive 2 (PSD2) in Europe. These regulations and standards require banks to obtain consumers’ consent, respect their preferences, and safeguard their data and transactions.
- Investing in cybersecurity and fraud prevention: Banks are investing in advanced technologies and systems, such as artificial intelligence, biometrics, and blockchain, to enhance their cybersecurity and fraud prevention capabilities. These technologies and systems can help banks detect and prevent cyberattacks, identity theft, and money laundering, as well as verify and authenticate consumers and transactions. For example, Barclays has introduced voice recognition technology that allows customers to access their accounts and services without passwords or security questions.
- Engaging and educating consumers: Banks are also engaging and educating consumers about their rights and responsibilities, as well as the risks and benefits of using different financial products and services. This involves providing clear and timely information, guidance, and feedback, as well as offering tools and resources that help consumers make informed and responsible financial decisions. For example, Bank of Montreal has launched a Financial Literacy Hub that provides online courses, videos, podcasts, and articles on various financial topics.
