Chapter 15 - Emerging Trends in Global Banking



MODULE 14 – Emerging Trends

Introduction

In this Module, we will discuss regional economic agreements such as the North American Free Trade Agreement (NAFTA) for furthering international trade in relation to the IB system. We will touch upon the roles of investment, technological innovation and the Internet in the future of the IB system in relation to globalization. We will discuss the cultural and ideological differences that create challenges for economic cohesiveness among nations, thus globalization. We will elaborate on the future of the IB system and the new tools it needs to employ in order to stimulate the international capital market, hence globalization. Finally, we will discuss the future survivability of international banks and the services that they offer for the future needs of the international financial market.

Objectives

Upon successful completion of this module, the student should be able to:

• Elaborate on regional economic agreements such as NAFTA.

• Elaborate on variables such as investment in technology and the Internet, and their impact in achieving future financial possibilities of the IB system.

• Examine ideological and cultural differences and their hindrances toward globalization, hence operation of the IB system.

• Discuss the future of the IB system and new strategies that it needs to employ in light of globalization in order to be successful.

• Discuss the future financial services compatible with the needs of international clientele offered by the IB system.

Advancements in telecommunications (Internet), an increase in interdependencies for resource allocation, and regional pacts amongst nations, such as the North American Free Trade Agreement (NAFTA), are bringing people of the planet together as if we are all living in the same neighborhood. However, isolationism, protectionism, patriotism, nationalism, and fanaticism that are embedded into the different ideologies are major obstacles for the eventual cohesiveness that is needed for globalization of human affairs to come to fruition. At the end of the day, the ripple effect of these obstacles may hinder the operation of the financial market and economic system, hence IB. Economies of scale, as a result of technological innovation, increases competitiveness in any industry, especially banking, and there are issues that the banking system needs to contemplate in order to survive in the globalization process. The bottom line is that any industry in today’s world needs to be prepared for the future trends in the fields of finance and economics as a result of rapid globalization.

NAFTA could be a very good example of how many differences have to be overcome by three nations in order to improve trade relations. For example, in the case of Mexico, the issue of illegal immigrants is an obstacle to fully understanding the positive effect of trade on the economies of both nations, the US and Mexico. The agreement was supposed to remove barriers for trade and investment. How much of this has been realized since 1994 when the agreement was enacted is anybody’s guess. As we speak, the US is trying to erect a fence in many areas of the US-Mexico border to prevent illegal immigration. Can this fence further improve trade and investment relations between two nations? Realistically, the answer would be no. Can this compromise NAFTA? According to proponents of NAFTA, it was supposed to create jobs in the US, and was supposed to improve economic conditions of its members by achieving a higher level of GDP for all three nations. To that end, many tariffs and quotas on commodities such as agriculture were eliminated. Did it fulfill its promises? Opponents are claiming that not only did it not fulfill its promises; in addition its effect was counterproductive, especially for the US. According to some politicians, the agreement should be abolished altogether. Obviously, the success or failure of the agreement will have a great impact on cross-border lending, and consequently the operation of the banking system that is supposed to facilitate it. For further information, please see Footnotes #1, #2, and #3.

Investment in research and development by the banking system in acquiring advanced technologies in order to be competitive in offering future financial services to world wide customers is a must. The engine of globalization cannot be stopped, thus it compels financial intermediaries to be focused on due diligence in utilizing information technology.

Full-fledged utilization of the Internet to provide financial services to worldwide clients will improve the economic condition of the IB system. The IB system can offer online banking services worldwide, such as balance inquiries, transfers of funds, and many other financial services available through the Internet. For further information, please see Footnote #4.

As mentioned before, globalization poses significant challenges to the competitiveness of international banks, and hence their operation and profitability. Some of these challenges are created as a result of the economic, financial and political unification of nations in a particular region of the planet. Cultural and ideological differences can be major obstacles for international bankers. A good example is the European Union that is experiencing the said challenges. The sovereignty issue is threatening the unity that was originally intended to be achieved. The final passage of the constitution of the European Union is in limbo, the currency issue is being questioned by the British, and there are more challenges for entry into the Union by the countries of the former Soviet Union, especially Turkey, a Muslim nation. In light of the mentioned differences, finding a new source of revenue, dealing with a variety of risks, such as political and operational risk, mergers and acquisitions, and consolidation are some of the challenges facing international banks in this globalization era.

A good example of ideological differences that wreaked havoc on the European continent was the Balkan war that was waged in the 90’s, and we are still experiencing the residue of the conflict that originated from ideological differences almost a thousand years ago. So, full-fledged unification of European nations devoid of ideological and cultural differences is at a standstill. Obviously, this impasse is affecting the financial system of the region, hence the operation of the banking system. We can also mention the principle of the Islamic banking system that virtually contradicts the entire banking practices of western Europeans and North Americans by opposing the collection and payment of interest, which is the cornerstone of the western financial system. For further information, please see Footnote #5.

Furthermore, challenges are posed in the area of universal banking and how these services are offered in the competitive and dynamic theater of globalization. This includes the investment services segment of the IB operation, which introduces a host of challenges such as attracting wealthy clients who are no longer satisfied with the antiquated investment services that have been provided through the traditional banking system. In the age of globalization, this traditional approach is no longer applicable, and the banking system has to consider the customs, cultures, languages and expectations of their clientele who represent a wide range of backgrounds.

Globalization and the Internet have eliminated geographical boundaries and national hindrances and brought people of the planet together, almost as if everyone lives in the same neighborhood in which the common interest enhances everyone’s welfare. The future success and profitability of the IB system rests on how successfully this common interest is realized. The challenges of the future banking system are how successfully it can attract educated and affluent customers and provide them with the financial services; achieving efficiency and realizing economies of scale in all banks, from large to small; securing a skilled and educated workforce that can face the challenge of global competition through perpetual innovation of financial services; establishing reliability and accountability by respecting global regulatory agreements; and finally hiring the newest user-friendly technology that facilitates banking transactions. For further information, please see Footnote #6.

The survivability of the banking system, domestic or international, is based on how opportunities are seized in the different regions of the planet, in light of globalization, and how the new menu of financial services is offered to customers, domestically and globally. Understanding the role of e-banking in the future by the banking system is a must in order to be competitive in online services. Future challenges for the banking system are not unique to U.S. multinational banks, but encompass other multinational banks, especially those of Japan, China and the European Union.

Conclusion

In this module, you have learned about regional economic agreements in relation to the operation of the banking system. You have learned about cultural and ideological differences that limit the operation of the IB system. You have learned about the urgent need of the banking system to invest in new technology and utilize the Internet to facilitate banking transactions. And finally, you have learned what the future IB system should be in order to satisfy the needs of the financial market in the age of globalization.

FOOTNOTES

(1) North American Free Trade Agreement.



(2) Critics say NAFTA's 10-year record validates dire predictions. (2004). Retrieved from

(3) The NAFTA: Challenging Its Critics. (1993). Retrieved from

(4) The Future of Banking Technology? (2012). Retrieved from

(5) Islamic Banking.



(6) How six key developments are shaping the business world.



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