Before the pandemic, at the World Economic Forum 2018, Justin Trudeau addressed the audience by saying, “The pace of change has never been this fast, yet it will never be this slow again.” As we look back, we realize these words couldn’t be more true. Even in the past year, we have seen exponential tech advancements and changes in consumer behavior that have eclipsed what had occurred in previous decades.
From the pandemic, we are able to see the emergence of megatrends across multiple industries that will impact banking, disrupting legacy business models, and having the potential to improve consumer’s financial lives. Some of these megatrends are already well in process, while others are in their formative stage. These are not all inclusive, but must be understood as financial institutions build strategic business plans.
It is imperative that banks and credit unions embrace an innovation culture, increase their data and analytic maturity, invest in advanced technology, and look beyond the next quarterly business cycle to avoid the inherit risks and take advantage of available opportunities. Most importantly, financial institutions need to look beyond operational execution and product delivery, potentially creating entirely new business models.
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- Top Digital Banking Transformation Trends for 2021
1. The Race to Build Super Apps
In 2010. BlackBerry founder Mike Lazaridis defined a super app as, “A closed ecosystem of many apps that people would use every day because they offer such a seamless, integrated, contextualized and efficient experience.” In other words, a single app that will do almost everything a person does every day.
The key to being able to create a super app is an established user base, with deep first-party data that would allow for personalized targeting, engagement and real-time offers. In most cases, the apps within the ecosystem are not developed in-house, but are delivered within an easy to access platform. Acquisition and onboarding are made simpler by leveraging data already available.
Open Banking Opportunity:
Having to download only a single app is something that is appealing to a segment of consumers who already engage almost entirely on mobile.
The two most recognized players that have impacted banking are WeChat (Tencent) and AliPay (Alibaba), both from China. Closer to home, Google, PayPal and Square are racing to create super apps with both financial and non-financial services. The goal is to increase engagements and generate new revenue streams.
According to KPMG, “Banks will need to decide soon whether they plan to be a front-office player within a super app, a back office enabler or simply a piece of regulated infrastructure in the future — and then start investing and evolving towards achieving that vision.”
2. Connectivity of Health and Finance
New pharmaceutical and biotech advances are expected to increase the lifespan of humans by more than a decade. Adding to the advances in medicine is the explosion of ubiquitous sensing devices, the deployment of high-bandwidth networks, and the increasing improvement in the performance of artificial intelligence (AI) that will allow doctors to monitor health in real-time … at all times. The increasing lifespan of humans has a direct impact on financial services as wealth must support more post-employment years.
Sensors can create a unique opportunity to understand physical wellness and positively impact financial wellness.
Financial services will also be impacted by the integration of sensors and the desire to keep healthy. With the greater focus on personal health by the majority of consumers, this always-on connectivity will enable the insurance, banking and investment communities to provide financial incentives to prevent negative outcomes.
3. Creating a Frictionless First Mile
The line between digital and physical has blurred, with consumers who once preferred brick-and-mortar engagements now researching, shopping and buying using digital channels more than ever. This trend is expected to increase across all industries. While organizations have enabled improved digital engagement over the past several months, there are still major pain points, mostly with speed, simplicity and cross-channel integration during the ‘first mile’ of establishing a relationship.
The retail industry already understands that consumers are becoming increasingly impatient, wanting the convenience and transparency of eCommerce and the service and humanization of physical stores. In banking, consumers are diversifying their financial relationships, moving to fintech and big tech providers that can open relationships in an instant and personalize experiences.
According to Brett King, founder of Moven and author of the upcoming book, ‘The Rise of Technosocialism’, “The ability to acquire new customers at ‘digital scale’ will impact market share and challenge existing budgets for branches. The fastest growing financial institutions in the world are all highly specialized in acquiring and onboarding customers digitally – such as Ant, NuBank, Revolut, Chime, etc.”
4. The Emergence of the Digital Concierge
Just like a concierge at a fine hotel works on your behalf to create personalized experiences that you would select for yourself, organizations are trying to use data and advanced analytics to understand your buying and usage behaviors. As proactive recommendations improve, and contextual communication during the customer journey increases, consumers will begin to both trust and rely upon AI empowered engagements.
Differentiation in the future will be based on how organizations can leverage first-party data to optimize experiences and decision-making. First-party data will be the key to maximizing the value exchange across the full customer journey.
“AI-enabled ‘software shells’ will learn your preferences, anticipate your needs and behavior, shop for you, monitor your health, and help you problem-solve in support of your mid- and long-term goals.”
— Peter H. Diamandis, Founder and Executive Chairman, XPRIZE
Eventually, it is possible that organizations will no longer try to influence a human consumer, but their embedded AI that will make most buying decisions. According to Ron Shevlin, Director of Research at Cornerstone Advisors, “While there are any number of megatrends that will impact banking over the next five years, none will have a bigger impact than the development of AI technologies. Why? Because most of the trends impacting banking are dependent on the development of AI to reach their full potential.”
5. Reallocation of Capital Investment
Global venture capital funding in the first half of 2021 exceeded $288 billion worldwide, according to a report from Crunchbase – surpassing the previous half-year record set in the second half of 2020 by more than $100 billion. “The backdrop for all of this activity in the venture ecosystem is strong first-quarter earnings for leading technology stocks as countries slowly emerge from the pandemic,” stated the report.
Just as dramatically, 614 fintech firms worldwide raised $22.8 billion in investments in the first half of 2021 – more than doubling the amount raised in the fourth quarter of 2020 – and representing the largest venture capital-backed fintech funding quarter ever, according to research released by CB Insights.
The reallocation of investment in fintech firms – as opposed to legacy banking organizations – has not gone unnoticed. The biggest banks globally are trying to defend their turf by investing in, acquiring, partnering with, and/or serving tech-based fintech firms (or complaining that current regulations favor fintech firms). Even with these strategies, existing banks and credit unions will be challenged to generate significant investor interest in an ecosystem filled with innovative, technology-based alternatives that don’t include costly, under-performing physical infrastructure.
6. Making Sustainability Financially Viable
An increase in global environmental, social, and governance (ESG) awareness is already driving companies to invest in sustainability. In the past, many organizations saw sustainability as something to do in response to outside pressures or potentially unfavorable publicity. Today, more organizations are working to become more sustainable and/or to move more of its investment portfolio to sustainable business opportunities.
Banks have been slower than many other industries to focus on sustainability initiatives. There has been recent momentum towards sustainable banking since the pandemic, however, with the commitment by leading financial institutions only increasing. It is expected that more and more banks and credit unions will build a sustainability agenda as experiences from leaders are shared and pressure of interested parties increases.
To achieve the goal of more sustainable economic activities and projects, it is critical to have the right ESG data and to employ this data in a transparent and accountable manner. Transparency is also imperative. According to Chris Skinner, author and Chief Executive Officer of The Finanser Ltd, “Digital connectivity is providing digital transparency. This means that financial institutions that communicate thoughts and visions must follow through. The best example is ‘greenwashing’, where companies claim to be doing environmental sustainability, but don’t. Customers will find out and will share to the marketplace.”