For an industry that has survived for hundreds of years as a fundamental underpinning of society, the notion of “radical change” may seem far-fetched. The basic business model of most traditional financial institutions will not change overnight, it’s true. But signs increasingly make it likely that banking could be fundamentally different within ten years.
Given the pace of modern times, that might as well be tomorrow. So decisions made now — or not made — could be pivotal in shaping the outcome for individual banks and credit unions.
Two broad trends could bring such a change:
- The expectation that financial institutions take a more direct role in helping to bring about societal improvements and progress in areas more traditionally left to government. Such a shift would impact products, marketing, revenue and growth.
- The technology-driven growth of alliances between traditional institutions and a variety of big techs, fintechs, retailers and payment companies. These alliances, or ecosystems, are already being formed.
Both trends, along with sweeping technological changes could lead to the development of different business models for financial institutions over the next ten years, according to a new report from Deloitte on the future of banking.
Two of the report’s authors told The Financial Brand in an interview that while the current players won’t necessarily be radically different in ten years, the way they operate will be.
A Broader Social Mission for Banking
A growing body of opinion maintains that financial institutions increasingly are expected to not simply facilitate the workings of commerce — even though doing so helps creates growth and wealth — but to proactively use their resources to advance societal goals.
Some may argue that such opinions merely reflect the shifting political winds. No doubt some do, yet when Accenture and Efma surveyed 30,000 consumers in 2018 they found that nearly two thirds (62%) want companies to take a stand on such issues as sustainability, transparency and fair employment practices. It seems unlikely that the percentage would have decreased since then.
Financial institutions’ ability to attract workers, raise capital, navigate regulatory scrutiny, and sustain profitability and growth will increasingly rely on their commitment to a net-positive social impact, Deloitte states. “This represents a perspective shift from shareholder capitalism to stakeholder capitalism,” says Jim Eckenrode, Managing Director, Deloitte Center for Financial Services.
Sign of the Times:
The six largest U.S. banks have all pledged to achieve net-zero greenhouse-gas emissions as a result of their financing activities.
Opportunities from a Refocused Bottom Line
Deloitte views stakeholder capitalism as a long-term trend presenting banks and credit unions with both challenges and opportunities. Regarding the latter, the report cites a figure of $2.1 trillion as the overall commercial opportunity (2020-2025) for funding climate-change infrastructure initiatives and $6 trillion as an estimate for business/investment opportunities in economically depressed Opportunity Zones in the U.S., set up by a 2017 law.
“Financial institutions are in the best position to help move society in a different direction because they sit at the center of the economy,” says Monica O’Reilly, Vice Chair, U.S. Financial Services Industry Leader for Deloitte. She concedes such a stance can be hard to embrace when you’re looking for growth. But she believes that contributing to a sustainable world and growth are now interdependent. “Following this path will truly set institutions apart because stakeholders will expect financial institutions to do the right thing,” O’Reilly states.
“It’s doing the right thing and making a profit while doing it,” Eckenrode emphasizes. “We believe that there are ways that both of those things can happen.”
One caveat from Accenture regarding what it calls “purpose-led banking”: Don’t do it casually or simply for quick reputational kudos. “Inconsistencies between what a bank says and does can be minefields for those who are inadequately committed,” the firm notes. “Avoid a copy-and-paste approach that seeks to replicate some other company’s initiative. Instead, find your own way to purpose.”
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Pressures on Traditional Banking Revenue Streams
The above views are not simply a matter of keeping in synch with the times. The Deloitte report points out that traditional bank revenue models are plateauing. Eckenrode points out one reason: narrowing margins due to the prolonged low-interest- rate environment. Another is reduced non-interest income, resulting from a decline in interchange revenue and competitive pressure on overdraft fees.
In recent years, payment companies and other fee-based financial firms have seen valuations rise faster than traditional banks.
Eckenrode points out these downward revenue trends can be offset by expanding the range of financial products offered as well as by expanding the markets in which they are offered, such as underserved populations. He doesn’t expect that 100% of such populations would be immediately profitable. However, self-service and other digital technologies have greatly increased the efficiency of serving such markets. In time, these customers will become new profit pools as they gain access to more banking products and services.
At the same time, Eckenrode points out, more tailored and socially responsible types of product options offered to higher-value customer segments will generate additional profits, which banks and credit unions can use to develop underserved markets. One example of such an option is so-called green deposits. A handful of financial institutions (Citibank, Standard Chartered and MUFG Union Bank among the larger ones) offer these deposits, in which funds are loaned to environmentally conscious projects or companies.
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Banking Ecosystems: Threat and Savior
The social-mission trends discussed above give traditional institutions some advantages in the near term. That’s because the big tech firms — many of them moving into financial services — are less trusted as a group than banks and credit unions. Several have come under fire from regulators and legislators for anticompetitive behavior or for their intrusive data practices.
Deloitte: Big techs and fintechs are poised to own most of the financial services customer interfaces of the future due to their mastery of customer experience and data.
Banks and credit unions have advantages in terms of trust, along with deep regulatory and compliance expertise. To avoid having their customers disintermediated and their products commoditized and white-labelled, Deloitte emphasizes the need for incumbents to fully embrace the technologies and data strategies, including artificial intelligence, that the tech companies and fintechs are using so effectively. More than that, the consulting firm recommends “accelerating and strengthening co-creative alliances with disruptors and nonfinancial services partners” in order to survive in a transformed landscape.
In its report, Deloitte mentions Google’s Plex bank account (officially Plex by Google Pay), offered in partnership with about a dozen banks and credit unions as an example of the kind of emerging cross-industry alliance it foresees. It says these “one-stop-shop” platforms will act as “a central nervous system” coordinating data flows and rules for interaction and participation.
“Firms that move early to establish alliance ecosystems will secure significant advantages as they lock in the network effects that many-to-many value webs offer,” the report states. It further expects financial services such as payments and lending to be embedded as a “financial layer” in a technology stack.
If that sounds like a threat to a financial institution’s brand, Deloitte’s O’Reilly counters that these alliance business models provide access to customers that incumbent institutions wouldn’t typically have, as well as access to technology that enables their brand to be elevated. “They become more tied into where technology is going — more focused on the future,” she states.
Both O’Reilly and Eckenrode concur that such alliances are not just for a handful of banks and credit unions. “It’s actually quite the opposite,” says Eckenrode. “With new technologies, more financial institutions can participate in these kinds of models than might have been able to ten years ago.”
How Banking Will Look in 2030?
The Deloitte report makes a very interesting statement: As consumers become more sophisticated and financial services becomes more commoditized and disintermediated, consumers increasingly will act as competitors to financial institutions. New platforms will allow them to service their own financial needs. The consulting firm expects to see this become common by 2030.
While consumers do have reservations about the privacy of their data, Eckenrode points out that the whole notion of open banking, in which consumers own their own data and allow it to be shared outside the institutions they do business with, is growing. A 2020 Deloitte survey found that a third of U.S. consumers would be interested in some sort of platform banking offering that would be built upon that kind of data sharing.
Overall, Deloitte concludes that the banking marketplace in 2030 will be highly fluid and interdependent, requiring “innovative business models and alliance ecosystems.”