Banking 2030, Part 2: The Seismic Forces Shaping the Industry

Special Report: Of all the forces that will shape the next decade of the banking industry, four are paramount: Accelerating technological innovation; unprecedented shifts in consumer behavior and preferences; the proliferation of competitive players and models; and intensifying focus on data security and privacy. How banks adapt to each will determine which survive and which fail.

In the years ahead, a complex web of interrelated forces will present challenges and opportunities for the banking sector.

These forces encompass groundbreaking technological innovations, shifting consumer behaviors, formidable competitive threats, and evolving regulatory landscapes.

Let’s explore each of these aspects in detail:

1. Technology Innovation

The emergence of cutting-edge technologies such as artificial intelligence (AI), blockchain and cryptocurrencies can potentially revolutionize the landscape of financial services. AI and machine learning, for instance, are poised to reshape data analytics, fraud detection, customer service, marketing and more within the banking realm.

As Ryan Gilbert, founder and chief executive of Launchpad Capital (a fintech-focused venture capital firm based in Oakland, Calif), observes, “The imperative to innovate and stay ahead of the curve arises from the need to proactively defend against various risks.

By harnessing the power of AI, banks can detect fraudulent activities at an earlier stage, gain valuable insights into customer behavior, and streamline routine tasks, thereby gaining significant cost and efficiency advantages.

Did you miss the first part of this series? Read The New Realities of Banking.

There is a significant shift toward automation and AI in large banks, says Fletcher Jewett, founder of the strategic advisory firm Jewett & Co.

“Large banks are increasingly looking towards automated processes and AI to improve efficiency and decision-making. While this reduces personal interactions, it allows these institutions to focus on strategic investments and regulatory compliance,” says Jewett. In this case, technology is not just a tool for efficiency but also a strategic asset in navigating the complex regulatory and competitive landscape.

Blockchain-based systems, on the other hand, offer the promise of facilitating secure and efficient transactions, lending, asset transfers, and the execution of smart contracts — outperforming legacy architectures in terms of both security and efficiency.

Amanda Peyton, chief executive and fo-founder of fintech Braid, acknowledges this potential while recognizing the intense regulatory scrutiny surrounding blockchain adoption within banks. “There are strong historical reasons why banks must prioritize the safety of consumers’ funds,” she says.

While mainstream blockchain adoption may encounter regulatory hurdles, innovations like centralized bank digital currencies (CBDCs) demonstrate promise. CBDCs are government-issued digital forms of fiat currency, pegged to existing monies like the U.S. dollar and held in accounts at the central bank.

Examples like the Bahamas, Grenada and Nigeria show active CBDC deployment, in addition to over 30 countries with pilot programs underway. By digitizing fiat currencies, CBDCs may streamline payments and settlement. However, their design requires balancing complex tradeoffs around privacy, centralized control and impact on monetary policy.

Major banks are heavily investing in cloud computing, open application programming interfaces (APIs), and flexible microservices to future-proof their technology infrastructures. The transition from mainframes to cloud-based platforms equips banks to scale operations, enhance resilience, and expedite software deployment. API-based architectures facilitate seamless integration with fintech partners, further enriching the array of services offered.

“There are strong historical reasons why banks must prioritize the safety of consumers’ funds.”

— Amanda Peyton, Braid

The emergence of neobanks and fintech companies presents opportunities and challenges for traditional banks. On one hand, these new players are disrupting the industry with innovative products, superior user experiences, and agile development capabilities. As Angel Rich, founder and chief executive of CreditRich, sees it, “banks have traditionally operated off of archaic systems where they have done multiple acquisitions, making their data analytics and cybersecurity a bit cumbersome.”

However, partnerships between traditional banks and neobanks and fintechs can be mutually beneficial. Banks can leverage the technological capabilities of these startups to enhance their digital offerings and strengthen cybersecurity. Rich explains that banks which partner with a compliance-forward tech company can actually increase the safety of customer data.

By combining their resources, banks and fintechs can overcome shortcomings and capitalize on shared strengths.

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Jewett further emphasizes the potential of these partnerships, especially for larger banks. “In the face of rapid technological advancements, big banks are recognizing the value of collaborating with fintech startups. Such partnerships are not just about adopting new technologies but also about staying relevant in a rapidly evolving financial ecosystem,” he says.

The path forward for banks involves proactively seeking strategic collaborations with promising neobank and fintech partners. This approach allows banks to integrate innovative solutions into their existing systems and processes. Doing so bolsters their competitiveness and equips them to better serve customers in an increasingly digital-first landscape. For traditional banks, the emergence of neobanks and fintechs may be disruptive, but it also brings new opportunities to reinvent services and reaffirm consumer trust.

2. Changing Consumer Behavior

Consumer preferences are in constant flux, particularly as younger generations, with their distinct values and priorities, assume more significant economic influence. Digitally native millennials and Gen Z individuals have gravitated toward agile fintech challengers over traditional banks. They’ll no longer lean on a single institution to get it right.

“The more intricate one’s financial life becomes, the less likely they are to rely solely on a single app for managing it,” says Gilbert. Millennials have embraced mobile neobanks such as Chime, Varo and Current for their simplicity, yet these platforms grapple with the challenge of monetizing their customer base.

Despite their digital savvy, younger demographics still seek personalization and human connections for significant financial milestones. The impending transfer of wealth across generations presents an important opportunity for banks that can seamlessly blend advanced technology with trusted advisory services. However, as Gilbert points out, banks appear ill-prepared to tackle this transition alone, as the intersection of banking and wealth management is complex and scrutinized and will require partnership with specialists to achieve success.

Banks that attune themselves to evolving consumer values, including sustainability and social justice, are better positioned to resonate with younger audiences. Peyton highlights the need for the “bank of the future” to align with customers’ existing lifestyles and experiences rather than being a mere physical entity.

Meeting these evolving consumer expectations necessitates a deep understanding of shifting behaviors. Banks must monitor emerging trends on social media and move beyond reliance on lagging indicators. By taking a page from the big tech playbook, banks may be able to derive data-driven insights to offer the right services at the right moments, creating experiences that delight consumers.

Gilbert suggests that banks are limited not by technology but by the weight of bank culture and historical precedent. “What’s to stop a bank from electronically combing through real estate listings, identifying individuals selling their houses based on customer addresses, and proactively contacting them to ask if they need advice, money management services, or even help to finance another property?”

The technology exists, the customers are there, and yet there may be a reluctance to use the tools, perhaps out of concern that some customers would react badly. Considering that social media companies are already feeding ads to users based on combing through their private texts and emails, maybe receiving a call from a banker who happened to notice a public real estate listing might not be as big a problem as some might fear.

3. Competitive Threats

The banking landscape faces competition from nimble neobanks and challenger banks on a global scale. Technology giants like Apple, Amazon, and Google leverage their massive user bases to enter the financial services arena.

Peyton aptly observes that “there is a fintech solution for every demographic out there.” While these ventures hold promise, many fintechs grapple with the challenges of profitability and scaling. Collaborating with banks can enhance their distribution channels and monetization strategies.

“There is a fintech solution for every demographic out there.”
— Amanda Peyton, Braid

Of course, it’s a two-way street, and many forward-thinking banks are looking for partners who bring products and services that may enhance customer relationships. “If it’s adversarial, you as the fintech will fail, and the bank won’t get what they want out of the relationship either,” said Peyton. “Fintechs need to remember that the relationships they have with their partner bank is the most important relationship that they’ll have in the life of their company.”

Banks face the pivotal decision of whether to compete directly, forge strategic partnerships, or acquire emerging players in the financial technology space. As Gilbert explains, “banks are perpetual learners, continually researching and remaining open to new ideas — a net positive outlook.”

Patrick McKenzie too advocates for the coexistence of robust competition and collaboration between firms. Banks that embrace an open approach to partnerships and cooperation are poised to reap the greatest benefits in this transition era. Instead of looking at their competitive position as vulnerable, McKenzie suggests it’s quite the opposite.

Banks have the customer relationships – right now. People walk into the branch where they already use the mobile app, and every fintech starts from zero on that. That is a major, major advantage from the financial institution point of view.”

4. Safeguarding Customer Data in the Digital Age

In the rapidly evolving landscape of banking, where digital innovation is redefining the industry, one core aspect remains unchanged: the critical importance of cybersecurity and data privacy. As banking activities increasingly migrate to digital platforms, ensuring the security and confidentiality of customer data becomes not just a priority but an imperative.

Banks face multifaceted challenges in safeguarding customer data. While offering unprecedented convenience, the digital realm is not without its threats. Cyberattacks, from the most basic phishing scams to highly sophisticated hacking attempts, loom as constant adversaries. The dynamic nature of these threats demands that banks continually invest in agile and robust cybersecurity measures.

Moreover, in this digital era, data privacy regulations have gained prominence. Frameworks like GDPR in Europe and various data privacy laws worldwide place stringent demands on how banks handle customer data. Non-compliance not only invites substantial fines but also poses a significant risk to a bank’s reputation. Navigating this complex regulatory landscape requires a delicate balance between harnessing data’s power for innovation and respecting customer privacy.

Banks must remain vigilant against emerging cyber threats that exploit new attack surfaces introduced by digital innovation. Rich argues that partnerships should focus on complementing banks’ strengths, not blindly pursuing technology integration. “I have taken a stance against fintechs and neobanks that are not operating with consumer data and security in mind,” she says.

By judiciously selecting partners and solutions that align with their security ethos, banks can modernize experiences without compromising safety. They must weigh each innovation based on its potential to strengthen trust and protection. With careful discernment, banks can pave the way for the future without forfeiting their duty as vigilant stewards of customer data.

At the heart of this challenge lies customer trust. Customers entrust banks with their most sensitive financial information. To retain and build that trust, banks must go beyond mere compliance. Transparency in how data is used and handled is paramount. Clear communication regarding the security measures in place and the steps taken to protect customer data can go a long way in reassuring customers.

In this endeavor, banks are not alone. Advanced technologies such as blockchain offer potential solutions that enhance security and transparency. Blockchain’s immutable ledger, for instance, provides an added layer of protection for sensitive data, making it exceptionally difficult for unauthorized parties to tamper with or access. Exploring these innovative technologies in conjunction with stringent cybersecurity practices can fortify a bank’s defense against data breaches.

As the banking industry charts its course into the future, the ability to navigate the complex landscape of cybersecurity and data privacy will be a defining factor. By addressing these challenges head-on and embracing technological advancements, banks can protect their customers’ data and ensure that digital banking remains a trusted and secure avenue for financial transactions.

Next: Part 3 – How Banking’s Core Businesses Will Evolve

J.P. Mark is an equity research analyst and the founder of Farmhouse Equity Research, LLC. Prior to launching his own firm, J.P. was Managing Director and Director of Research for Wells Fargo Securities, a Vice President and Senior Equity Research Analyst at Dain Rauscher Wessels, as well as holding research roles at the investment banking firms of Montgomery Securities and Robertson, Stephens & Company in San Francisco.

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