Retail Banking Priorities Have Shifted in 2023

The retail banking market changed in significant ways during the first half of 2023, thanks to events like the crisis that took down several large regional banks. These events have influenced consumer behavior and prompted financial institutions to reassess their strategies. Here's a look at how this is impacting the trends and priorities that are transforming the industry.

As 2023 got underway, we laid out the retail banking priorities for the year ahead (in this article and, separately, in this free report).

Looking back at the predictions and analysis, the areas of focus we highlighted remain highly relevant, but with a few shifts in emphasis emerging.

The industry’s pursuit of digital transformation is unwavering. Some facets of this, such as work to improve data analytics and multichannel delivery, have seen a slight decline in emphasis, but these two priorities remain important to enhancing customer experiences, increasing engagement and driving data-driven decision-making.

Other priorities, like addressing financial wellness, have gained more urgency with banks and credit unions, in response to an increase in consumer demand for advice.

As always, adapting quickly to numerous headwinds — in the economy, technology, talent and regulation — remains imperative. We’ll start with an overview of the headwinds, then review the impact on the major priorities in banking.

Bankers Are Juggling a Lot — Add Shifting Priorities to the Mix

The challenges for both consumers and the banking industry include:

  • Rising interest rates: The Federal Reserve raised interest rates in February, March and May, making loans more expensive for banks and consumers. This impacts all lending products, including mortgages, credit cards and auto loans. It has also further intensified the competition for deposits, with outflows challenging financial institutions of all sizes.
  • Economic uncertainty: Consumers feel challenged by inflation and fearful of a recession. They’re seeking advice and empathy from banks and credit unions, in addition to innovative financial products that can help them cope. Meanwhile, banks are bracing for potential credit losses.
  • Emergence of generative artificial intelligence: The introduction of ChatGPT has changed conversations in every financial institution’s boardroom. Discussions have been about the way generative AI can impact chatbot experiences, content creation, personalization, conversational banking, and fraud and risk modeling.
  • Big bank troubles: Consumer confidence in the industry has been shaken on several fronts. Wells Fargo, Bank of America, and other large banks experienced major tech disruptions in the first half of 2023, making branches and apps unavailable for hours. In addition, of course, many were rattled by the failure of Silicon Valley Bank, Signature Bank and First Republic Bank in the United States and turmoil with other major industry players globally.
  • Continued digital adoption: Mobile banking use continues to increase as financial institutions improve digital engagement. Under pressure to deliver even better user experiences, traditional financial institutions are partnering with fintech firms, collaborating with third-party providers and buying digital players that can help achieve this at speed and scale.
  • Cyberthreats: Account takeover fraud spiked in early 2023, as phishing and social engineering scams proliferated. At the same time, one study found that cybersecurity funding dropped by more than half, to $1.9 billion, in the second quarter, as fears of a recession led to a cutback. Banks and credit unions are looking to consolidate vendors to streamline the communication challenges between apps.
  • Embedded finance boom: Partnerships with fintechs and brands like Uber, Amazon and Apple continue to expand. This trend will get even more pronounced as traditional banks recognize the threat to revenue in payments and beyond and seek customer growth in key segments.
  • Talent shortages: Acute tech and analytics talent scarcity has made hiring and retention difficult. At the same time, the challenge of training existing staff has negatively impacted digital transformation efforts.
  • Regulation debates: Arguments around screening fintech partnerships more stringently and tightening oversight of buy now, pay later and other fintech offerings have taken center stage.

To succeed in an increasingly competitive market, financial institutions must stay ahead of the trends outlined below. This requires banking leaders to stay committed to innovation, embrace new business models, and invest in the right talent and technologies to ensure their institution is future-ready.

Download the free report on 2023 retail banking trends here.

Improving Digital User Experiences

Enhancing digital banking user experiences remains mission critical. The urgency around removing friction and improving the flow of the customer journey has not abated. If anything, consumer expectations for seamless digital experiences continue to rise.

With consumers emerging from the pandemic expecting even greater convenience and personalization, bank and credit unions must accelerate front-end and back-office digital transformation. Priorities include improving digital account opening and digital loan application processes, aggregating money management views across accounts, building conversational interfaces, and integrating banking into daily life are more important than ever.

Experience vs. Engagement:

A smooth customer experience is the price of entry, but engagement is the differentiator. Banks must move beyond experiences to build emotional connections, trust and relationships. The way to do this is through content, advice and empathy.

The need for omnichannel consistency also persists. Connecting the customer journey across mobile, online, phone, and in-person reflects the digital-first reality. The importance of thoughtfully reinventing physical branches for consultative services versus high-volume transactions holds steady.

Excellent digital user experiences also include robust security and proactive support. With account fraud rising, securing customer trust is vital.

Read more:

Leveraging Data and Analytics

The ability to harness customer data for contextual insights that power personalized recommendations and messaging remains a top priority. With privacy regulations multiplying, ethics around data usage grow more prominent, but banks can still create enormous value with consented data usage.

Advanced analytics and AI unlock that potential. Predictive models can help banks anticipate customer needs proactively, a capability that becomes more valuable amid economic uncertainty. Still, execution has been falling short of expectations. Data-driven personalization at scale remains more of an aspiration than a reality at most institutions. To move forward quickly, this is an area where collaboration with third-party solution providers can help banks and credit unions catch up.

“In financial services, data is the raw material, AI is the processor, and digital engagement is the final outcome that will drive banking forward. Many financial institutions have not gone beyond the mining process and are looking for partners that can help them take it to the next level.”

— Carlos Carvajal, Q2’s chief marketing officer

Simply having the data and insight is not enough. Financial institutions need to use this to engage with customers at scale. This requires the democratization of data and insights throughout the organization, with all departments and customer-facing employees having the tools to positively impact experiences and engagement.

Creating Digital Products and Solutions

With mobile and digital payments booming, banks and credit unions are increasingly playing catch-up. Their emphasis on improving in this area has picked up even more than expected, as competitive intensity has accelerated this trend.

Priorities include integrated money movement capabilities, digital wallets and contactless payments. Embedded finance partnerships are getting more attention as a way to complement core offerings. With economic volatility, products that assist cash flow management for consumers and businesses are also becoming higher priorities.

Across the industry, financial institutions must look beyond traditional products and channel delivery, embrace digital transformation and create new solutions that can be embedded in other experiences consumers engage in daily.

One example of this is buy now, pay later, which has been integrated into many online shopping experiences. Notably, Citibank and others are looking to compete with the digital players that are prevalent in the BNPL space.

Read more:

Talent Management Challenge Intensifies

Talent management has gained even greater prominence, as predicted. Capability gaps in digital product development and analytics are acute pain points.

Hybrid work opportunities have also created hiring and retention challenges for organizations that don’t provide employees with these options.

In response to the tech talent crunch, more banks and credit unions are seeking to collaborate with fintechs and other third parties. Up-skilling programs for existing employees has gotten more emphasis, with entire cultures being transformed in the process.

Even so, finding and competing for scarce digital skills will continue to intensify as a priority well into 2024.

Less Innovating and Experimenting Internally

Contrary to the report’s prediction, internal innovation programs and experiments with emerging technologies seem to be a lower priority. Economic caution — and the talent crunch — may be encouraging a more conservative investment stance, but the need for such internal digital transformation efforts has definitely not subsided.

The good news is that openness to third-party innovation and partnerships has increased. But in terms of testing advances like blockchain, quantum computing, the cloud, and Web3 applications, most retail banks and credit unions are not pushing boundaries. Perhaps internal innovation will surge again as economic conditions improve.

Read more:

Financial Wellness: Now an Urgent Priority in Banking

Financial wellness became an urgent priority in 2023 as high inflation increasingly strained consumer finances. Economic realities thrust financial wellness front and center, crowding out other priorities.

Banks and credit unions are working hard to deliver personalized insights, budgeting tips, credit guidance and cash flow management tools. That said, generating this high-value financial education at scale remains a challenge.

Some organizations are exploring how artificial intelligence tools like ChatGPT can automate custom explanations and guidance 24/7. Getting an AI tool to accurately respond to requests like “Explain 401k contribution limits for a 35-year-old making $80,000” has huge potential.

Financial Health is Life Health:

As trusted financial partners, banks and credit unions are in a unique position to support customers through all of their financial milestones — from first accounts to retirement.

Banking leaders realize they must proactively guide customers to better financial health outcomes if they want to ensure their institution’s own growth and remain relevant into the digital future. Embedding financial literacy into digital experiences is becoming integral to transformation efforts.

Adding Infrastructure Resilience to the Priority List

Major banking outages have underscored infrastructure resilience and reliability as a priority — a development the report had not predicted.

Modernizing aging IT systems is vital for avoiding disruptions and keeping pace with innovation. Architecture flexibility and composable banking, also known as plug-and-play, are part of the solution. Stability may not be flashy, but downtime and lack of modern digital solutions risk customer defections.

Overall, regardless of how the prominence of some trends has increased or declined, the digital-first emphasis holds steady. The pace of change continues accelerating, and financial institutions that proactively realign priorities around user experience excellence, data-driven personalization, innovative products and resilience will thrive amid economic turbulence.

But progress requires commitment and flexibility, because priorities change along with the always-evolving marketplace.

See all of our latest content on digital transformation.

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