As the banking industry continues to move more transactions to digital channels and adjusts the technology used in back-office operations, costs are being reduced, productivity is increasing and response to risk and compliance needs are improving. As a result, and for the first time in its five-year history, the annual Economist Intelligence Unit survey on the future of retail banking, conducted for Temenos, shows that global bank executives are now more concerned with technology-driven trends than they are by regulation.
About 58% of respondents in the survey said “changing customer behavior and demands” will have the biggest impact on retail banks in the years till 2020, citing a survey of 400 senior banking executives across the globe. In addition, “technology and digital” (48%) are now bigger trends than “regulatory fines and recompense orders” (43%).
This trend is not true in North America, where regulatory fines and penalties are still the primary concern for large banks (56%), compared to just 34% who said the same about new technologies such as artificial intelligence and blockchain (14% lower than global results). And, while the changing competitive environment was expected to have a major impact for 36% of global banks, the impact was felt to be much higher in Latin America (48%) and the Middle East & Africa regions (40%). This most likely is the result of the large underbanked segments in these economies, making it easier for new non-bank competitors to enter the market with smartphone and cloud technologies.
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Big Banks Concede Battle for Payments
Has the battle for payment supremacy been lost by traditional banks? Globally, 77% of respondents say that the majority of payments will flow outside traditional banking networks by 2020, with bankers in Asia-Pacific the most likely to agree.
This loss of an important component of traditional banking has impacted the importance of agility in the minds of bankers. According to the research by the EIU, 52% of global bankers consider product agility as a top strategic priority. Moving consumers to digital channels and cutting costs were considered equally important priorities (45%).
Supporting the finding that traditional bankers are concerned about their remaining payments business, the non-traditional players that keep bankers up at night are the large payment players. Somewhat surprisingly, the big tech firms (Google, Alibaba, Facebook and Apple) were considered equally a threat as neo-banks.
David Arnott, Chief Executive Officer at Temenos, stated, “Banking has reached a watershed moment with changing customer behaviors, disruptive new technologies and a dramatic increase in competitors from within and outside of banking. The most enlightened banks understand that to become truly digital they need to update their systems front-to-back. This will fulfill their business need for product agility, where they can offer the right products, over the right channel, and at the right time.
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Positioning for the Future
New competitors, new technologies and increasing customer demands are forcing banks to rethink, adapt or completely change their business models, according to the EIU report. One banker interviewed stated, “If you don’t have a digital strategy, your bank is already dead.” The two options available are to specialize by market or product, or to leverage fintech solutions with an API (open banking) strategy.
According to the EIU/Temenos study, 61% of global respondents believe the best strategy is to develop a niche that will retain customer loyalty. This could be to serve a specific local market or to serve a specific consumer or product segment.
The second strategy is to leverage open banking based on API, or application programming interface. In this option, banks can offer largely indistinguishable products possibly using small on-screen icons on aggregator apps that consolidate financial data from different accounts. A better option would be to be the aggregator as opposed to the aggregated … but few banks have thought through what this option entails.
“Technology is now the enabler, which will empower banks to build digital ecosystems and capitalize on the open banking opportunity,” states Arnott. “IT renovation is key to banks’ strategy and, indeed, their very existence; as they will need to redefine their business models in the new API economy.”
There is some skepticism whether conventional banks can become the digital platform of tomorrow when faced with emerging fintech firms or GAFA giants. But, while security and trust are a major advantage of traditional banking organizations, it is not as if traditional banks can afford to take data protection or privacy for granted. In fact, this is still a primary challenge for traditional banks as well.
The impact of open banking and tighter security and data rules is not clear. While 71% are focusing their digital investment on cyber security, only 17% are thinking about the risks from third-party relationships as a result of open banking.
Technology budgets are also being directed to mobile and other internet-connected channels, with mobile being the focus of 54% of respondents. Banks are investing heavily in cloud-based technology as well, with 48% of investment focused there, and also in modernizing front- and back-end systems to ensure that processes run more smoothly and economically (cited by 37% of respondents).
Artificial Intelligence Increasing in Importance
While machine learning and artificial intelligence have been around the banking industry for some time, AI is becoming an increasingly important component of the new technology mix. Moving beyond the behind-the-scene risk and security processes and compliance procedures, AI is now emerging as an important customer experience tool.
Consumers will benefit from these enhanced analytical tools as behaviors are tracked, preferences are learned and advice is provided in real time that is more accurate (and proactive) than ever in the past. “Survey respondents see most AI benefits concentrated on the existing customer, with more than one in five saying that personalizing the user experience and boosting customer engagement will be the most valuable use of AI for retail banks,” states the report.
It is not all rosy for the use of AI in the future, however. Although the banks think that AI holds significant potential for easing processes safely and effectively, they believe customers still have some doubts. According to the survey, AI raises significant issues about the security of customer data (64%), privacy (64%), and how data will be used (60%).
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One Size Does Not Fit All
It is clear that the digital revolution is the most important banking trend now and in the foreseeable future. In almost all global markets (with the U.S. being a notable exception), changing customer behavior and digital technologies have surpassed regulation to become the most significant trends impacting banking.
Probably the most important threat to traditional banking organizations are the big tech firms (GAFA). With Amazon in discussions with JPMorgan Chase and other organizations about potentially offering checking services in the U.S., the potential for banking services to be offered by non-banks should be expected.
While traditional banks still have the advantages of established customer bases, reputation and trust (not to mention significant capital), no organization should rest on their laurels. There is no excuse for inaction. We have already seen outflows from local community banks to larger organizations that can provide advanced digital services.
In the future, the winners will be determined by those that serve their targeted markets the best through a combination of digital and human interactions. The focus on reducing costs while improving customer experiences will prove to be a difficult paradox, only mastered by those organizations that are agile, responsive and technologically advanced.