Remember 2008, and the subprime mortgage crisis that sparked a meltdown in worldwide financial markets? It’s hard to believe it’s been more than 10 years since the banking industry was brought to its knees. For those who survived, the scars will always be there. But financial institutions have generally stabilized their balance sheets, and financial performance is trending positive.
However, there’s still much uncertainty ahead for retail banking providers, causing what consulting firm KPMG terms a “fog over strategic planning.” It’s not like strategic planning is hard enough when everything is rosy and humming along, but it gets much more challenging in highly fluid environments where everything is changing at light speed.
For starters, FDIC Chairman Martin Gruenberg says that an extended period of low interest rates and an increasingly competitive lending environment have led some institutions to reach for yield, in turn leading to heightened exposure to interest-rate risk, liquidity risk and credit risk.
“These risks must be managed prudently for the industry to continue to grow on a long-run, sustainable path,” cautions Gruenberg.
Not to mention the geopolitical environment (e.g., Trump, North Korea, Russia, international trade, et al, ad nauseam), regulators, fintech, bigtech and other potentially disruptive pressures facing financial institutions. The result? What KPMG dubs “strategic anxiety.”
“Strategic anxiety generally emerges as management teams scramble to solve for the best approach that will allow their institution to compete while lowering costs and — at the same time — still meeting heightened regulatory expectations,” explains David Reavy, who helps head up the banking practice at KPMG.
KPMG says that many banks are struggling to develop strategies that improve their return on equity, with the ROE of most banks 7% lower than before the financial crisis.
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There’s also the fear factor — fear of the new, abandoning the status quo. It can paralyze many senior leadership teams, and cripple the rest of the institution right along with them.
“If there is fear at the top level, it cascades throughout the organization,” explains Rob Frohwein, CEO and co-founder of Kabbage, a fintech company based in Atlanta. “When that happens, there is little incentive inside the organization for others to stand up and say, ‘Hey, let’s pursue something new!’”
The volume and speed of newly available data is exploding. In response, consulting firm PwC says firms need new ways to store, classify, and use it all.
For firms with varying account structures and naming conventions, finding the right data is rarely simple. PwC says financial institutions will increasingly be prepping their data for machine learning, making it a priority to label a lot of data. This means sourcing, organizing, and curating unstructured data — including text, images, and even audio.
PwC says the banking industry should expect to see emerging applications of what it dubs “intelligent process automation,” including machine learning, auto process discovery and natural language processing.
“Today’s bots rely on humans to train them, but this will likely change,” says PwC in a report on the future of financial services. “While advanced tools still need to be ‘trained,’
they can learn from prior decisions and data patterns.”
In fact, PwC says many of its clients in the financial industry are already experimenting with intelligent process automation, and have IPA bots in production or are looking to scale.
1. How can we keep digitally-savvy consumers happy and deliver the CX they expect today?
Answer: You won’t be able to if you try to go it alone.
Thanks to Amazon and Netflix (among others), consumers have an intense appetite for frictionless, intuitive and highly personalized experiences.
“There is no let-up in the increasing demands of banking consumers,” notes KPMG. “If banks don’t make their experience a priority with innovative products, people will move on quickly.”
But improving the digital experience is a massive undertaking that financial institutions everywhere struggle with. Banks and credit unions in particular have difficulty aligning the experience they deliver with the expectations of consumers — in meaningful ways that deliver real business value. Banking providers have heard the clarion call — they know CX is “important” — but according to Worldwide Business Research, six out of ten financial institutions admit they don’t really have any idea where CX should fit within their overall business strategy. “Just make it digital, and better” is about as far as most have gotten.
A great experience is more than providing self-service options that are convenient and intuitive. Remember, for years now people have been talking about how Amazon and Netflix use AI to make suggestions for a new product or movie based on their customers’ past purchases and behaviors. Brie Tascione, Chief Marketing Officer for Relay Network, calls this “proactive CX.”
“Unlike self-service, a proactive experience takes the weight off of consumers’ shoulders by eliminating the need to search for answers,” says Tascione. “Instead, it predicts the information that consumers will need based on where they are in their journey. Then, it delivers this content as personalized experiences, directing consumers to the information they need before they have to ask.”
KPMG says it’s extremely unlikely that banks and credit unions who try to go solo will be able to satiate consumers and keep them happy. Instead, KPMG advises financial institutions to partner up with fintechs and to open up APIs and swap code with third-party partners. This partnership strategy will yield faster and more compelling innovations in CX than going it alone.
It’s a radical departure from the longstanding model of exclusivity to one of inclusivity, says David Pessah, Director of KPMG’s Innovation Lab. He says open banking is not just about the experience with respect to products and services. “It’s also about a financial institution’s ability to work with other participants within the banking ecosystem,” Pessah explains. “It’s all about how interconnected the institution can become, and how it can personalize the banking experience.”
It sounds simple enough: in essence, those institutions who figure out how to share their toys and play nice with others will have a massive strategic advantage over others who cling to their “walled garden” mindset (to mix metaphors). It’s about learning how to work with other third-parties at a holistic, philosophical and cultural level — the communications, meetings, contracts, etc., that are required when cooperating with outside partners.
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2. How heavily should we invest in data analytics?
Answer: As much as you need to.
AI, cognitive intelligence, automation, machine learning and predictive analytics. All these various disciplines can be lumped up under the umbrella of “data analytics.” Whatever you want to call them, they are essential tools that banking providers can use to understand consumers and their behaviors so they can create and deliver the products and services that people truly want, need, expect and demand. These technologies scan and interpret all kinds of signals — social, interactive, transactional, behavioral and personal data — to provide practical insight and actionable intelligence.
The data is largely available, but it’s stored in silos. That’s a problem that many banks and credit unions are tackling. But there is no need to wait until silos are broken down. Some of the most valuable data is readily available outside the institution’s walls.
KPMG recommends that banks and credit unions focus on mining behavioral data found through mobile devices, apps and social media sites to really understand what drives consumers, then apply AI and cognitive intelligence to this behavioral data.
“If banks and credit unions incorporate machine learning into gathering and analyzing behavioral data, then they are going to gain a big advantage,” believes Kesavan Sampanthar, Executive Director for KPMG’s Innovation Lab.
While its natural for banks and credit unions to first look to making process changes to their back-end systems to harness behavioral data, Sampanthar says that that thinking is old school. Just capture behavioral data and funnel it into AI applications rather than taking the time to retool the back office, he recommends.
Bottom line? Time is of the essence. The competitive advantage will go to the industry’s first movers and early adopters.
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3. How are we going to meet regulatory requirements without spending a ton of money?
“Financial firms are finally finding room to breathe after a decade of new regulations, but don’t expect the break to last.”
The continued (albeit improving) tight interest margin environment, coupled with the need to boost capital reserves as revenues decline, is anxiety-producing on its own. But add in regulatory woes and anxiety increases a notch… or ten.
No one really knows if the Trump administration will be able to keep its promises of rolling back various elements of regulatory compliance. The smart strategy is to be prepared for anything, but being prepared for the regulatory unknown requires spending money, something that is not an easy option amid financial pressures.
Reality Check: Financial institutions in the U.S. hoping that the regulatory environment will ease up and become less burdensome (i.e., that a Trump administration will push through massive reforms or repeal Dodd-Frank) are being foolish. The situation might improve — temporarily — but ultimately the amount of regulatory pressures facing financial institutions will only grow as their businesses become primarily more and more digitally driven.
KPMG says financial institutions should anticipate regtech to become an increasingly essential way to automate and standardize regulatory reporting and compliance. KPMG defines regtech as software — often hosted in the cloud — that analyzes data to manage complex regulatory compliance requirements in an automated and repeatable manner. According to KPMG, advance in regtech promise to lower compliance costs while increasing enterprise wide coordination and agility. AI will likely find a home in regtech since regulatory reporting and compliance is typically such a friction-filled manual process.
“Regtech solutions provide an excellent platform for supporting financial institutions’ strategic growth agenda, accelerating speed to market, and optimizing business processes while meeting regulatory standards,” says KPMG.
There are currently more than 250 regtech providers, and the industry is moving toward broader scale adoptions, especially in market abuse surveillance and regulatory affairs management, according to PWC. Expect banks and credit unions to express intense interest in using regtech to identify bad actors, improve consumer compliance, perform scenario modeling, and help administer enterprise risk management programs
Regtech is more than just a software solution. “Regtech isn’t just adding technology to existing processes,” explains David Choi, a regtech leader for PwC in the U.S. “It can change the way you think about regulatory compliance. Once you understand its transformative potential, you may find ways to create a competitive advantage.
Keep in mind: it’s not just financial institutions that will begin adopting regtech. Regulators, too, will start using these tools to identify systemic risks and flag financial financial institutions that aren’t in full compliance.