The COVID-19 pandemic has been a catalyst for change across many industries, but in banking, it’s been more than just a blip on the radar. In fact, the pandemic has irrevocably changed the industry, and banks are recognizing it in real-time. The pre-COVID days of incremental change and cautious experimentation have given way to a faster digital metabolism and a willingness to challenge conventional business models.
For banks, the pandemic has been a wake-up call, forcing them to adapt to a rapidly changing landscape. Customers are becoming more empowered and demanding, expecting more from their banks when it comes to service fees and sustainability. At the same time, new players are entering the market and offering a broader range of services than ever before.
Against this backdrop, we’ve identified 10 key trends that are likely to drive disruption and shape the decisions of leading bankers around the world. These include everything from the rise of digital currencies and the increasing importance of cybersecurity to the need for greater diversity and inclusion in banking.
1. Everyone wants to be a super-platform
The rise of super-apps is changing the way we approach digital banking. These apps are consolidating many of our needs into a single platform, combining financial services with social networks, commerce, and more. The result is a seamless user experience where banking becomes an enabling function for other activities such as travel, shopping, or side hustles. For example, WeChat has become a super-app that offers a range of services, including banking, without making financial services the main focus.
As big tech players such as Amazon, Walmart, and Meta expand into financial services, traditional banks are left wondering how to respond. They have a few options, each with its pros and cons. One option is to add non-banking functionality to their own services and compete directly with super-apps. However, this is a costly endeavor with no guarantees and may only be viable in a few markets. Another option is to partner with a super-app to provide white-label services, but this means accepting a junior partnership and competing with their own branded services. The third option is to defend their traditional franchise by walling themselves off from the competition, but this could prove challenging as differentiation becomes harder to achieve, and super-apps continue to dominate more of their customers’ financial lives.
For banks, the key is to recognize the changing landscape and adapt to it. They need to find ways to offer a more integrated user experience and meet customers where they are. This may involve partnering with other players in the ecosystem, such as fintech startups or super-apps, to provide a broader range of services. It may also require investing in new technologies and embracing innovation. Ultimately, banks that are willing to adapt and evolve are more likely to thrive in the new digital landscape.
2. Sustainability becomes tangible
The pressure is mounting on financial firms to become better stewards of the planet, and investors and regulators are no longer satisfied with empty promises. Proposed rules will require banks to provide independent verification that they are following through on their environmental claims. Banks will also face immense pressure to shift their focus from carbon-heavy companies towards sustainable energy, which will test their resolve as fossil fuel companies provide steady and predictable revenue. While some banks will embrace the change and adopt a stricter stance towards their clients’ environmental footprints, others may try to stay just one step ahead of regulators and environmental groups in a more cautious and managed transition. Nonetheless, many banks are already showing a willingness to sacrifice their short-term profits for long-term environmental goals. It remains to be seen which banks will take the lead in this transition and which will lag behind.
3. Creativity makes a resurgence
After the financial crisis, many banks focused on the basics and retrenched from introducing new products, leaving room for startups and digital challengers to step in and identify promising areas for growth. However, with the help of COVID-induced improvisation, banks are fighting back with creativity. Collaboration is a key theme at the industry level, with partnerships like Zelle taking on payment apps like Venmo. At the institutional level, banks are more strategic about when to build, when to buy, and when to partner. For instance, two of the world’s largest banks embedded their treasury services APIs into the Stripe payments platform, which is embedded in Shopify’s e-commerce platform. These decisions were driven by the belief that product innovation is what will move balance sheet market share over time. Banks are also tapping into the needs of customers who risk running out of funds just before payday and small businesses seeking advice, areas that they had previously ignored. As banks become more innovative and collaborative, they will continue to challenge digital challengers and startups in promising areas of growth.
4. Pricing becomes an enigma
Over the past few decades, banking fees have evolved from being upfront charges for account maintenance to more obscure fees for overdrafts and other services. Then came fintech companies, promising a wide range of services for free, only to reveal later that they need to generate revenue from somewhere. For instance, some fintech companies started asking for “donations” from their customers, while others charge high fees if customers fail to make their installment payments. As customers become more suspicious of these practices, banks are returning to their empathetic roots and creating new features that empower customers to make decisions about fees. Banks have little choice but to be more open about fees, and digital, AI, and cloud technologies are coming together to provide a personalized platform for giving trustworthy and engaging advice. This approach will help build consumer trust and engagement.
5. The tech brain embraces empathy
Banks have been investing heavily in digital technology to make banking easier and more efficient, but it seems that customers are not responding with loyalty. Despite having good apps, customers feel that banks have become impersonal and are not concerned about their financial well-being. A recent study revealed that the proportion of consumers who trust their bank “a lot” to safeguard their long-term financial well-being has dropped from 43% to 29%. Banks are now realizing that they need to bring empathy and relationships back to their business to gain customers’ trust. This means that banks need to understand their customers’ financial situations and respond accordingly, setting aside their neutrality on issues that customers care about. Banks are expected to use AI and other technologies to predict customers’ intent and offer more tailored messages and products that meet their needs.
6. Cryptocurrencies advance to higher education
For years, digital currencies have been seen as the rebels of the financial world – unpredictable and prone to breaking rules just for fun. But that’s all about to change. In 2023, digital money will come of age, and banks will have to take it seriously. Several central banks are already introducing digital currencies, and many more are considering doing so. In addition, regulations around cryptocurrencies are maturing, and there is growing recognition that the core principles of decentralized finance (DeFi) have lasting value. As a result, we can expect to see more collaboration between financial institutions and government agencies to figure out how to integrate this new type of money into the global financial system. This will involve sharing data and ideas, and exploring ways to incorporate decentralized trust concepts into traditional banking. So, while the future of digital money remains uncertain, it’s clear that it’s here to stay, and will play a growing role in the world of finance in the years to come.
7. Intelligent operations aim for zero waste
Banks are gearing up to apply artificial intelligence and machine learning to their back-office processes. This move is aimed at boosting efficiency and productivity while decoupling revenue from headcount. Some of the best digital banks have already been using these technologies to lower headcount while improving productivity. So far, banks have only made incremental efforts to streamline their operations, but these new technologies, combined with the cloud and APIs, can accelerate their efforts towards the long-held dream of “zero operations.” The goal is to eliminate waste and latency in the system, and some firms have already managed to strip out over half the work required to process commercial loan applications. They have achieved this by using technology to synthesize income statements, balance sheets, and footnotes into unified and adjusted statements. With AI and machine learning in the mix, we can expect computers to outperform humans in some tasks, resulting in further improvements to productivity and efficiency.
8. Payments: ubiquitous, instantaneous … and now universal
We can no longer imagine a world without payment apps like Alipay and Venmo. With just a few taps on our smartphones, we can send or receive money anytime, anywhere. But what if we could do more with these payment networks? What if we could use them to pay anyone, regardless of the app they use?
This is the next step in the payment revolution, and it’s happening sooner than you might think. Currently, most payment networks are closed, meaning you can’t send money from Venmo to someone on Zelle, for example. However, that’s all set to change as networks open up and allow people to operate across them.
China is already leading the way in this regard, having mandated that internet companies accommodate rival payment services. Meanwhile, India is proposing legislation that would force digital wallets to connect to each other, and merchants to accept payments from all of them.
As these networks open up, banks with payment offerings will have to compete and cooperate with rival banks, fintechs, and other players. Payment networks are set to become more interconnected than ever before, providing consumers with greater flexibility and convenience when it comes to managing their money.
9. Banks hit the pavement again
U.S. banks will continue to consolidate regional markets by acquiring rivals, with European regulators following suit. On the other hand, Asia is where banks will employ the most innovative growth strategies. Thailand’s Siam Commercial Bank, for instance, has successfully transformed itself into a holding company with a bank that generates short- to medium-term revenue, while investing in regional fintechs that are expected to provide long-term growth.
10. The battle for skilled workforce heats up
As banks rely more and more on technology, they’re finding that their appeal to prospective employees has waned. Despite the widely publicized shortage of engineers, data scientists, and security professionals, it’s clear that banks need talent across a wide range of roles. Younger workers especially are seeking flexible work arrangements and want to feel valued in their jobs. Unfortunately, the banking culture is often seen as rigid, hierarchical, and overly formal, which is leading to a disproportionate number of employees leaving the sector.
To address this issue, forward-thinking banks are developing integrated plans that tackle their work and talent issues holistically. They are identifying the skills they need both now and in the future, and they’re using a variety of strategies to attract and retain talent. This includes reevaluating their structure, culture, and work practices to make themselves more appealing to potential employees.
In the end, the most successful banks will be the ones that can attract and retain top talent. By prioritizing a more flexible and inclusive culture, banks can create an environment where employees feel valued and engaged, which will ultimately lead to better outcomes for both the bank and its customers.