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Recent trends in banking in developing countries

Recent trends in banking in developing countries

A combination of economic forces, shifting demographics, and technological developments is causing a significant upheaval in the banking sector in developing nations. Traditional paradigms are being upended by these movements, which also present exciting fresh opportunities for financial inclusion and economic expansion. Some key trends are briefed below:

Banks are now able to safely exchange consumer data with third-party financial service providers, thanks to open banking Application Program Interfaces (APIs). As a result, new financial services and solutions that are customized to meet particular needs are emerging within the financial ecosystem, encouraging cooperation and innovation. With so many different financial requirements unmet, emerging nations stand to benefit greatly from this trend.

In developing nations without official identity paperwork, traditional KYC (Know Your Customer) practices can pose a barrier to financial inclusion. Technologies for biometric authentication, such as iris and fingerprint scanning, present a viable remedy. These technologies can be leveraged to offer secure and trustworthy identification by utilizing mobile phones and local infrastructure, giving previously excluded groups access to financial services.

Due to a number of factors, including high operation costs and geographic limitations, traditional brick-and-mortar banks are finding it difficult to reach significant portions of the unbanked population in developing nations. But the advent of mobile banking and fintech is altering the landscape. Millions of people are now using mobile money platforms (esewa, mobile wallets, etc) which provide basic financial services such as credit, savings and payments via mobile phones. In rural areas, this "branchless banking" has a particularly positive effect, empowering people and small companies, which were historically excluded from the financial system.

Developing nations are placing increasing importance on sustainable banking practices. Banks are moving beyond traditional profit-focused models, now integrating environmental, social and governance (ESG) factors into their strategies. This reflects a recognition that responsible finance is crucial for long-term economic success and tackling global challenges like climate change and inequality.

As the information technology and communication technology penetration increases, cybersecurity threats also rise rapidly. Developing nations generally lack the strong infrastructure and knowledge necessary to effectively combat cybercrime. Building a safe digital financial ecosystem requires cooperation with regulators and significant investments from banks and fintech firms in security measures.

Many people in developing nations lack credit history, which is a prerequisite for many traditional credit scoring methodologies. The creation of new credit scoring models is made possible by the rise of alternative data sources, such as utility bills and usage habits of mobile phones. For the underbanked and unbanked communities, these models can more precisely evaluate creditworthiness, making loans and other financial products more accessible.

The technological prowess of big tech firms (e.g. Apple with Apple Pay, Google with Google Pay, etc.) is fueling a significant transformation in the financial services sector. This transformation opens doors for innovation but also raises concerns such as data privacy, increased regulatory complexity, competition for traditional banks, etc. Balancing innovation with fair competition and fostering a diverse financial ecosystem are crucial challenges for policymakers.

The Banking Landscape in Developing Countries: Financial inclusion, economic expansion, and social development have enormous potential thanks to the changes reshaping the banking sector in these nations. Governments, authorities, banks, fintech firms, and civil society must work together to navigate these developments, though. In developing nations, the financial sector can adapt to meet the needs of all, creating a more sustainable and inclusive future. 

This can be achieved by tackling issues like cybersecurity, encouraging responsible innovation, and maintaining fair competition. In addition with advancement in artificial intelligence(AI) which empowers banks to unlock hidden insights, predict risks and personalize services, propelling them into a future of smarter finance and happier customers and from fraud detection to streamlined operations, AI automates tasks, frees up human expertise and fuels efficiency, driving cost savings and a competitive edge in the banking landscape. For the industry, it is crucial for unlocking a promising future.