With technology always improving, it can be difficult for executives in the financial services industry to assess how to prioritize their investments.
The exciting, the trendy and the nifty new all threaten to distract strategists on the technology team and on the business side from their primary mission: efficient growth.
That is especially the case in environments where spending may not be as robust as originally planned.
Forrester aims to help with its annual report assessing how well various emerging technologies are likely to pay off for financial institutions that invest in them. Below we review what the research and consulting firm suggests in three areas: low-code/no-code development platforms, natural language processing, and the metaverse and Web3.
But first, there is one tech investment that Forrester says must remain a priority, despite tighter budgets.
The Most Important Tech Initiative in Banking
Forrester research in early 2023 found that, among banking executives globally, more than three out of four said that their companies would increase spending on emerging technologies this year, compared with the previous year. But Jost Hoppermann, a principal analyst at the consulting firm, says he expects some downward adjustments to technology budgets are happening, given the pall of the banking crisis in the spring and the current economic outlook.
“There will certainly be a reshifting of spending,” he says. “Banks will need to do more with less. That means, with those limitations, that some areas will be neglected.”
Hoppermann expects the industry to favor tech choices meant to increase customer engagement or efficiency, as is the general pattern amid budget cuts. But he cautions that leaders must not bypass the main longtime drag on banking: legacy core systems that continue to creak along in the back end of the business.
“Core transformation is crucial these days — even more than in the past. Banks have to create an end-to-end digital experience.”
— Jost Hoppermann, Forrester
Amid tighter budgets and the temptation of shiny new things, Hoppermann stresses that this longstanding challenge, too often backburnered, is, in fact, the most urgent of all.
“If a bank won’t transform its core over the foreseeable future, it will be at a competitive disadvantage for the foreseeable future,” says Hoppermann, “because of a less-than-great digital experience and a less-than-great ability to quickly deliver new products across the institution.”
Forrester’s annual report on emerging bank tech always aims to separate what offers near-term payoff from what has murkier potential. The tech the firm relegates to the latter category won’t pay off for an extended period or, for banking specifically, might never be worth the investment. The analysis is not about the bells and whistles of the emerging tech and focuses instead on practical implementation and results.
In an interview with Hoppermann, one of several Forrester analysts who worked on the “The Top Emerging Technologies in Banking in 2023” report, The Financial Brand explored a few of the key conclusions.
- Digital Banking Readiness Is Top Priority in 2023
- The Right Way to Balance Digital and Branch Banking
- Where Are Bank-Fintech Relationships Headed?
Emerging Technology #1:
Low-Code/No-Code Development Platforms
A common delay on tech implementations is waiting for the IT department to get to the new programming or the needed upgrade to move forward. For banking executives who’ve had that experience, the allure of low-code/no-code technology is undeniable.
Imagine being able to craft your own tools at will without extensive — or even any — knowledge of coding. No more waiting for IT to get around to you.
Forrester defines low-code as “a set of visual, declarative development tools that enable a broad range of developers as well as nontechnical employees to quickly build software applications — instead of programming.” The report points out that while low-code initially came about as a speedy way for trained software engineers to work faster, its cousin no-code evolved to allow “citizen developers” to build.
But the benefits of the speed and democracy of development come with some potential downsides to guard against. To illustrate a practical risk, Hoppermann tells a story from his days in tech at a large European bank.
This was way back when the dreaded “Y2K” bomb was lurking — the worry that many software packages would fail with the changeover to the year 2000. Hoppermann was screening the corporate banking area for Y2K vulnerabilities and discovered that some key functions had been cobbled together using nothing more sophisticated than macro functions in the department’s word processing software. None of the immediate alternatives were good — going one way risked a breakdown, going another risked a gamble on noncompliance.
Hoppermann tells this story to illustrate a risk in applying low-code/no-code: Without a governance structure of some kind, the result of pure homegrown development can be a tech Wild West, where use of this technology results in tools that may not interconnect with other parts of the financial institution.
This will create internal “silos” that don’t or can’t communicate with each other — a challenge the industry has been tackling for years.
This challenge can be exacerbated when a function, such as a customer relationship management system, is being implemented through the cloud but also permits local-level solutions.
Another critical risk is that these applications may not comply with relevant banking laws and regulations, having been grown outside of normal channels.
“The institution has to tell the citizen developer that they can do X, Y, Z, but that if they do A, B, C, they must involve professional developers so no business or operational risk comes into existence.”
— Jost Hoppermann, Forrester
Hoppermann recalls that, at the European bank where he worked, “there was no rule in place that avoided the corporate bankers from implementing their own business critical process.”
This can happen without governance in place, he warns.
Forrester’s conclusion: In spite of the challenges, investing in low-code/no-code can deliver a positive return on investment within 12 months.
Emerging Technology #2:
Natural Language Processing
Natural language processing can be thought of as the “in-bound” and “outbound” sides of speaking with artificial intelligence. It also includes AI “ingestion” of text and images and the ability to “understand” and to respond in natural language, rather than code. (The response side is referred to as “natural language generation.”)
Forrester has found that a growing portion of banks are investing in elements of natural language processing. Applications include customer onboarding, customer self-service and loan origination, among others.
It is the technology behind chatbots, but the applications go beyond customer-facing applications, and include internal uses that could free up humans for more analytical tasks.
For example, banking generates heaps of data that humans could take forever to sift through. AI married to natural language processing can do the sifting at much higher speed, and generate the basics of reports and conclusions, Forrester points out.
Still, people are going to have to review the results, given the serious pitfalls.
“Humans will remain part of the equation, as natural language generation systems won’t be able to tell when they’ve produced ‘plausible nonsense.’ Natural language generation in banking will need to continuously mature to reduce the amount of human intervention.”
— Forrester report
Hoppermann gives a timely example of “plausible nonsense.” A colleague was fiddling around with ChatGPT, not to write a report but just as an experiment. The analyst asked the software to give the reason for the failure of Silicon Valley Bank.
“To make a long story short,” says Hoppermann, “ChatGPT said it was a some kind of conspiracy of AIs using social media. I guess that’s why having a human involved is always important when using these tools.”
Hoppermann sees natural language technology becoming a critical aid in compliance, enabling rapid and detailed production of regulatory reports. This could turn a significant project into a straightforward task, he says.
Forrester’s conclusion: Investments in natural language technology could begin paying off within a year, and there will be an increasing number of financial institutions investing in it within two years.
Separately the report also discusses at length sophisticated chatbots that go beyond simple rules-based logic, using natural language processing and other AI. Forrester predicts this application will go mainstream between 2025 and 2028. However, a caveat is that banks will have to make the handoff between chatbots and humans smoother, while such shifts remain necessary.
Emerging Technology #3:
The Metaverse and Web3
Certain areas of emerging tech can be “squishy” because, when new tech comes along, people often use the same term to describe different things or sometimes different terms to describe the same thing. Acknowledging that challenge, Hoppermann says he and a colleague issued a guide to new tech terms a while back.
Case in point: Some commentators use “metaverse” and “Web3” synonymously. However, Forrester considers them separate and has a different outlook for each as they relate to banking.
Forrester defines the metaverse as a “future, immersive experience of interoperable and interlinked environments that will be delivered via a variety of devices.” It will be multisensory and multidimensional, the firm says. Forrester also sees any payoff on investment to be at least five years away, in spite of the hype.
“It is unclear how banks will leverage this new experience to provide better products and services.”
—Forrester report says of the metaverse
Hoppermann says the metaverse is a great marketing tool and vendors keep pushing it. But in his view, metaverse-related initiatives offer no immediate increase in revenue for the banking industry.
“It doesn’t help to create a branch in the metaverse,” says Hoppermann.
First off, there isn’t a single metaverse, but multiple disconnected virtual worlds. At best, he says, the metaverse as it exists today is a precursor to something else that hasn’t taken definitive form yet. That unfolding may take a decade to happen — if ever.
Forrester defines Web3 as “essentially an updated version of today’s web that is more equitable and democratic.” Much of Web3 relies on public blockchains, for example, which leads to some decentralization, hence the “democratization.” The concept of Web3 is that it won’t be dominated by big tech, banks nor other entities that rule much of the conventional internet, according to the Forrester report.
But Web3 faces challenges to become mainstream, “as today’s cryptocurrencies and other blockchain-based digital assets are unregulated and usability remains poor,” the report says.
Forrester’s conclusion: “When it comes to the metaverse and Web3 and so on, we definitely don’t think banks should invest right now,” Hoppermann says.