As global economies recover from the COVID-19 pandemic and interest rates increase, savers and lenders seek favorable outcomes amid recent bank failures. Recent news of SVB and more banks borrowing from the Fed has created waves in the financial markets. Yes, the Fed has much more complex work to do. After all, recent attempts to control inflation and maintain stable economic growth may be hindsight.
Have you thought about how rising interest rates will affect the banking and wealth industries? Or how these internal problems can be solved, and failures circumvented using emerging technology?
How Rising Interest Rates Impact Banking
When interest rates rise, banks typically increase their interest rates on new loans, such as mortgages, auto loans, and credit cards. Rising rates often create higher borrowing costs for consumers, which may lead to reduced demand for loans and decreased revenue for banks. Rising interest rates benefit banks that lend at variable rates, as they can earn higher returns on their existing loan portfolios.
However, the existing fixed loan portfolio is a much different story. In addition to changes in lending practices, rising interest rates can also impact on the profitability of banks’ deposit-taking activities. Banks typically offer higher interest rates on savings accounts and other deposit products to attract new deposits when interest rates increase. However, this can also increase bank costs, as they must pay more to attract deposits. Furthermore, higher interest rates often increase competition among banks for deposits, which can pressure margins.
“JIFFY.ai has an AI-powered platform for enterprises to automate their business processes. Our value proposition is the ability to help organizations reduce risk, increase efficiency, and productivity by automating repetitive, manual tasks using AI and machine learning,” says Brian Bristow, SVP – Business Analysis, Wealth Management at JIFFY.ai, an autonomous enterprise platform for the Wealth Management industry.
“Our platform offers a range of features, including natural language processing, computer vision, and predictive analytics, which can be used to automate a wide variety of business processes. The platform also allows for easy integration with existing systems and tools, making it a flexible and scalable solution for enterprises of all sizes,” he adds.
What Contributes to Bank Failures
Left unchecked, some banks can fail! There are several reasons why banks fail, ranging from poor management and inadequate risk management to economic downturns and financial crises. Here are some of the most common factors:
- Poor Management: Poor management is one of the most significant factors. A lack of oversight, inadequate risk management practices, and a failure to respond to changes in the market are often contributors.
- Economic Downturns: Economic downturns, such as recessions or depressions, can also contribute to bank failures. During periods of economic decline, borrowers may be unable to repay their loans, leading to increased loan defaults and losses for banks.
- Financial Crises: Financial crises, such as the global financial crisis of 2008, can lead to bank failures. In such situations, financial institutions may be forced to write off large amounts of debt or take on risky investments that ultimately lead to significant losses.
- Fraud and Misconduct: Fraud and misconduct, such as embezzlement, insider trading, and money laundering, can contribute to bank failures. These activities can result in significant financial losses, regulatory fines, and reputational damage.
- Cybersecurity Threats: Cybersecurity threats, such as data breaches and ransomware attacks, can pose a significant risk to banks. These attacks can compromise sensitive customer information, lead to financial losses, and damage the bank’s reputation.
“At JIFFY.ai, we’ve created comprehensive technology experiences across the entire workflow and value chain. Our platform provides transparency by documenting all processes using automation and AI to monitor risk, improve efficiency, and create better customer experiences,” Bristow says. While the specific reasons for failure may vary depending on the situation, banks need to use technology to maintain strong risk management practices, respond to changes in the market, and remain vigilant against emerging threats. By doing so, banks can help ensure their long-term viability, continue to serve their customers and stakeholders, and keep the trust of the public.
The Wealth Industry Isn’t Spared, Either
Rising interest rates can have a significant impact on the wealth industry. While the specific effects can vary depending on the market and individual firms, investors and financial professionals need to stay informed about changes in interest rates and adjust their strategies accordingly. Individuals can make informed decisions about their investments and financial goals by understanding the potential impacts of rising interest rates.
Rising interest rates can have positive and negative impacts on wealth management firms. On the one hand, this can benefit investors who own variable-rate income investments, such as inflation-protected bonds. As interest rates rise, the yield on those bonds increases, which can lead to higher returns for investors. However, fixed-rate bondholders may see values decrease as interest rates rise. Higher interest rates can make bonds more attractive than other investments, increasing demand for bonds and reducing equity investing.
On the other hand, rising interest rates can negatively impact equity investments, as higher interest rates can lead to reduced consumer spending and decreased economic growth. This scenario can lead to reduced earnings for companies, causing their stock prices to fall. Additionally, higher interest rates equate to increased borrowing costs for companies, which can decrease their profitability.
Bristow comments, “One of the key benefits of JIFFY.ai’s platform is its ability to reduce the time and cost associated with manual processes, allowing organizations to focus on higher-value tasks that require human involvement. By automating routine tasks, JIFFY.ai’s platform also helps to reduce the risk of errors and improve the accuracy of data processing. Our value proposition is centered around helping organizations achieve digital transformation by leveraging the powers of AI and automation to reduce risk, drive growth, improve efficiency, and enhance the customer experience.”
Intelligent Automation helps Create Efficiency during Crises
Designed to enhance and create efficiencies, when intelligent automation technology is harnessed to monitor and fix problems, it positively impacts financial services as below:
- Enhanced Customer Experience: Automation technology is helping firms to understand their customers’ needs and preferences. It allows them to offer personalized services and experiences, such as tailored product offerings and targeted marketing.
- Improved Risk Management: Intelligent automation helps banks to better manage risk by providing real-time data on transactions and customer behavior. It allows banks to identify and prevent fraud, detect money laundering activities, and monitor credit risks.
- Increased Efficiency: Automation is streamlining many of the back-office operations of banks, such as processing transactions and managing customer data, thus enabling them to reduce costs and become more efficient.
- New Business Models: Intelligent automation enables banks to explore new business models, such as online-only banking and robo-advisory services. These models are often more cost-effective and accessible to customers and help drive innovation in the banking industry.
- Regulatory Compliance: Automation technology is helping banks to comply with increasingly complex regulatory requirements, such as KYC (Know Your Customer) and AML (Anti-Money Laundering) regulations. These regulations are essential for maintaining the financial system’s integrity and preventing illegal activities.
In conclusion, many factors can contribute to failures at financial organizations. While the specific reasons may vary depending on the situation, it is vital to use emerging technologies such as intelligent automation to maintain strong risk management practices, quickly respond to changes in the market, and remain vigilant against emerging threats. By doing so, financial services companies can help ensure their long-term viability and continue to serve their customers and stakeholders.