Academy of BFSI,

Applying Game Theory for Positive Growth of Banks

Game theory in the banking industry

When only a few companies exist in a particular industry, the ups and downs of each company depend on the actions of others. If one company reduces the price of a product, other companies also must slash the price of a similar product in order to retain their customers. It is not only applicable to the oligarchic economy but also applies to large sectors with multiple players as well. Here the relationship between the companies or brands is like a game and this model is popularly known as Game Theory.

According to Investopedia, Game Theory is a theoretical framework for conceiving social situations among competing players. In some respects, game theory is the science of strategy, or at least the optimal decision-making of independent and competing actors in a strategic setting. First introduced by mathematician John Von Neumann and economist Oskar Morgenstern in 1940 and later developed by mathematician John Nash.


It is used by economists in analyzing competition, bargaining, auctions, and behavioral economics. It has wide applications in psychology, politics and international relations. For instance, neoclassical economics struggled to understand entrepreneurial anticipation and could not handle the imperfect competition. Game theory turned attention away from steady-state equilibrium toward the market process.

In business, the players can create a model of competition behaviour in the market. For example, in such dilemmas wherein the businesses to take either choice like whether to retire existing products or develop new ones, lower prices relative to the competition, or employ new marketing strategies, they can use the principles of game theory.

Game theory for a bright future of the banking industry

As one of the biggest service sectors, the financial service industry including banks involves in various competitive measures to reach out to customers. Reducing interests on loans, increase interest on deposits and facilitating bonus or cashback for card transactions are some of the doles the banks offer to the customers. Such an action by a bank directly affects others in their businesses.

Increasing profits while reducing the operation cost is the major objective of the banking industry. While one focuses on profit-making, it may adversely affect others as today the banking industry is well connected. This emphasises the importance of cooperation between the banks in order to achieve a collective good. Cooperative game theory model is the best solution for the banks.

Automated Teller Machine (ATM) deserve a pivotal position in the cooperation of Indian Banking players. The ATM transaction is done in a unified server and all banks are connected to it, that eases the efforts to manage individual data. This helps to boost the trust of customers towards the banking sector. Hence, cooperation or coalition enables the banks to realize the reduced operation cost and a steady profit to all the players in the system.

Likewise, banks can come together for the further development of the industry especially when the economy faces an unprecedented crisis in the form of a pandemic. Additionally, the disruption caused by the advent of FinTech players and cutting-edge technologies is leaving a significant mark on the industry. Therefore, overwhelmed cooperation is imperative among the banks to handle the new situation and overcome the current crisis.

Build a workforce to boost the coalition

However, like most other economic models, the game theory relies on the assumption that people are rational actors who are self-interested and focus on maximizing utility. Of course, we are also social beings who do cooperate and do care about the welfare of others, often at our own expense. Game theory cannot account for the fact that in some situations we may fall into a Nash equilibrium, and other times not, depending on the social context and who the players are.

[Proposed by mathematician John Nash, the Nash equilibrium explains a stable state of a system involving the interaction of different participants, in which no participant can gain by a unilateral change of strategy if the strategies of the others remain unchanged.]

On the other hand, the banking industry needs to focus on building an agile workforce to address the issues and improve cooperation between the banks. The game theory model is also helpful for banks to produce a future-ready workforce. As many of the banks now follow a train-before-onboarding model, the other banks can also rely on this model to get job-ready talents to perform from their first day at the workplace. This is a helpful method to reduce the cost of training after bringing the fresh talents onboard.

For decades, Manipal Global Academy of BFSI is a trusted partner for banks to train the banking workforce with a comprehensive module and curriculum. The holistic approach of the Academy has already trained over one lakh candidates and these individuals are working in different positions at various banks today. Since the faculty comes with a considerable amount of work experience in the industry, the learners get hands-on knowledge about the industry. Hence, new employees across the banks have uniform competencies and it will ultimately enhance the cooperation among banks as proposed by the game theory.

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