This topic explores how the ethical challenges and responsibilities in the banking industry are changing due to new developments in technology, competition, and societal expectations.
Drivers of Change in Banking Ethics
The traditional ethical principles of trust and confidentiality still apply, but modern banking faces new and complex ethical dilemmas.
1. Technology and Digitalisation
Technology has changed everything in banking, and it brings a new set of ethical challenges.
- Data Privacy: Banks now collect vast amounts of customer data. The ethical challenge is to use this data responsibly and protect it from misuse or breaches, going beyond just the legal requirements.
- Ethical Use of AI: Banks are using Artificial Intelligence (AI) for loan approvals and product recommendations.
- The Dilemma: Is it ethical for an AI algorithm to reject a loan application without any human review? What if the algorithm is unintentionally biased against a certain group of people?
- Cybersecurity: With the rise of digital banking, banks have an ethical duty to invest in robust security systems to protect customers’ money from online fraud and hacking.
2. Increased Competition
- The Challenge: Intense competition from other banks, NBFCs, and new-age fintech companies puts immense pressure on bank employees to meet high sales targets.
- The Ethical Risk: This can lead to unethical practices like mis-selling.
- Mis-selling: Persuading a customer to buy a financial product they don’t need or that isn’t suitable for them, just to earn a commission or meet a target.
- Example: Selling a complex ULIP (Unit Linked Insurance Plan) to an elderly person who is looking for a safe, fixed-income investment.
3. Greater Regulatory Scrutiny and Public Expectation
- The Change: After several global and domestic financial crises, regulators and the public are holding banks to a much higher standard of conduct.
- The Expectation: Banks are now expected to be more transparent, fair in their dealings, and accountable for their actions. Simply following the letter of the law is not enough; they are expected to follow the spirit of the law as well.
4. Environmental, Social, and Governance (ESG) Expectations
This is a major new dynamic. Society now expects banks to be responsible corporate citizens.
- Environmental: Banks are expected to finance “green” projects and avoid funding projects that harm the environment.
- Social: Banks should contribute to society through financial inclusion and corporate social responsibility (CSR) activities.
- Governance: Banks must be managed in a transparent and ethical manner.
- Example: A bank may face public criticism if it provides a large loan to a company known for causing significant pollution.
Summary
The core principles of banking ethics, like trust and integrity, remain constant. However, the “dynamics” or the environment in which these principles are applied is changing rapidly. Key drivers like technology are creating new ethical dilemmas around data privacy and the use of AI. Intense competition is increasing the risk of mis-selling. At the same time, society’s expectations have evolved, and banks are now judged on their broader contribution to society through Environmental, Social, and Governance (ESG) criteria. Modern banking ethics is no longer just about avoiding fraud; it’s about being a responsible, transparent, and fair player in a complex digital world.
Quick Revision Points
- Changing Dynamics: New ethical challenges due to new developments.
- Driver 1: Technology: Creates challenges like data privacy and the ethical use of AI.
- Driver 2: Competition: Can lead to unethical practices like mis-selling.
- Mis-selling: Selling an unsuitable product to a customer to meet a target.
- Driver 3: ESG: Banks are now expected to be responsible corporate citizens.
- ESG stands for: Environmental, Social, and Governance.
- The New Standard: Ethical behavior now goes far beyond just legal compliance.