While the global pandemic outbreak saw the financial sector facing a huge setback and an unprecedented global recession, the banking industry’s collective response has been notable- setting the course for several new retail banking trends to watch out for in 2021.
The World Bank’s database indicates over 3000 policy measures taken as of 30 October 2020, with 54% being taken from the banking sector alone. Despite the prevalent roadblocks, banking operations were executed smoothly as banks effectively deployed technology- demonstrating unprecedented agility and resilience. The industry made a seamless transition to handling large-scale virtual operations; executing untested operating models within weeks.
Even with interest rates dropping as low as 1% thereby increasing credit risk with the sustained financial slowdown in the last year; larger private banks have since emerged with stronger capital positions. The accelerated rate of digital adoption further served to benefit them. At least 30% of consumers stated their willingness to shift to fintech products due to unsatisfactory experiences with their primary banks during the pandemic. Banks have prioritized cost reduction as their next strategy to adapt to the new normal. These strategies, executed in effective combination, will serve to help in the industry’s recovery- as banks gain rapid market share and materially lower the cost to income ratios over the next few years.
2021 sees much scope for growth and innovation within the sector and its policies, following last year’s crisis management and damage control agenda. Last year’s display of resilience has led traditional retail banks on a more intelligent and experiential path this year.
Here are the top nine emerging retail banking industry trends in the spotlight this year:
The emergence of the neo-normal
Digital-only banks or neo banks are largely trending today with the acceleration of a digital-first economy. Operating entirely through a digital interface, the ‘new normal’ in banking will have every company with one or more such providers of banking services. There’s a shift in focus from branch-heavy interactions and product-centric organizations to offering personalized, seamless digital consumer experiences. With an expected CAGR of 45.23% between 2020 and 2027, the future of neo-banking looks very promising. According to Accenture’s report, 2021 will see several launches of the next generation of neo-banks — an optimized convergence for the post-covid world of the old and new banking business models. The surge in digital banking transactions in recent years has further prompted traditional banks to explore their own technological solutions and elevate their digital offerings. The presence of existing, trusting customers further aids traditional banks in not only keeping up with emerging neo-banks but also challenging their reach. For instance, JP Morgan Chase plans to roll out a neo-bank this year, code-named ‘Dynamo’. A millennial-geared service headquartered in London, it has already created 400 jobs in the UK.
Next-generation banking automation
Automation is a key tool for retail banking in the coming years. Next-generation banking automation will enable banks and credit unions to use sophisticated workflows to execute complex processes. Artificial intelligence and technological advancements will render better management of banking services executed at lower operational costs. AI, data analytics, and machine learning will not only enable a better customer experience but also help to effectively process the large volumes of data going through the banking system. Stricter data regulations, the demand for innovation, the need for instantaneous information, optimal customer experience, and faster approvals — all call for a rapid digital transformation within the sector. On average, a digital bank with decent technological processes is operating at a 10-15% lower cost-to-income ratio as compared to traditional incumbent banks. According to Autonomous Research forecasts, by 2030, AI technologies should help reduce operating costs by 22%.
Deploying automation in retail banking further renders the following benefits:
Adopting RPAs (robotic process automation) makes bots intelligent that in turn offers significant benefits to the KYC/AML processes. Intelligent automation helps digitize high volumes of documents and data which makes it easier to be extracted, indexed, and uploaded into a KYC (Know Your Customer) /AML (Anti-Money Laundering) compliance system that can then quickly assess risk without any human intervention required. RPAs can further be leveraged to help retail customers in managing account opening applications, accelerating payment authorizations, and setting up standard instructions for automated payments. One such example is Citi Smart Match which leverages AI and machine learning technologies to help increase the efficiency and automation of the cash application process of matching open invoices to payments.
AI for Data Analytics:
Banks will further deploy AI to leverage big data and offer customers personalized services. Upon fetching data from multiple sources, AI can analyze customer profiles, web data, and past interactions to provide product recommendations and other personalized suggestions. BBVA, a Spanish multinational bank, analyzes contextual customer data via its Bconomy app to offer their bank customers relevant content and product suggestions.
Open Banking to Open Finance and beyond
With Open Banking gaining traction, we are inching towards Open Finance and open data to create more connected and data-driven consumer experiences. An extension of Open Banking data-sharing principles, Open Finance refers to enabling customer data access to third-party providers across a broader range of financial sectors and products, including savings and investments. The FCA in the UK is in the early stages of making the shift to Open Finance. 2021 can expect to see further adoption of Open Banking and a move by global regulators towards opening their own versions of Open Finance post careful observations of developments in the UK. Open Banking and intelligence platform Moneyhub’s COO, Dan Scholey, expressed continued interest in unlocking transformative potential and constantly innovating in the space across the UK and their wider European clients. Open Banking Implementation Entity (OBIE), created by CMA to oversee Open Banking regulations, announced that the number of Open Banking powered product users has more than doubled since January 2020 to roughly 2 million.
Innovation to drive economic recovery and growth
With demand and supply adversely affected across sectors due to the COVID-19 crisis, credit growth and collections have significantly been affected. Innovations in technology models are being deployed to drive lending and revive economic activity. Here are two such innovations tested and implemented by banks.
Micro-market level customization of financing products
With COVID-19 restrictions placed across geographies and segments at varying levels, there is increased uncertainty and risk in MSME lending. Innovative tools like geospatial analytics provide a micro-market level understanding of each segment to enable product and service customization.
Indonesian bank, Bank Maumalat, has deployed a GIS-based smart mapping technology solution to optimize its branch and ATM network in a region-wise consideration of market potential. This led to a 64% enhancement in their ATM cost, a 10% increase in their customer acquisition, and 40% fewer branches.
Ecosystem financing solutions at point-of-sale
Financial institutions can integrate APIs (application programming interface) to offer marketplace lending, supply chain financing, and POS-based lending products to their MSME partners and build ecosystem partnerships with corporates. Tapping into cash inflows of MSME customers will improve pricing, underwriting, and collections. McKinsey Consumer Finance Pools forecasts an upward trajectory of 160 billion USD by 2021 for outstanding balances on POS installment lending financing solutions after it nearly doubled from 49 billion USD to 94 billion USD between 2015 and 2018. In April 2020, Goldman Sachs launched MarcusPay, a POS financing tool that helps users pay for larger purchases over time with interest rates ranging from 10.99% to 25.99% APR.
Green future and sustainable finance
Sustainable finance and ESG (environment, social, and governance) commitments are fast catching on to become an integral part of the banking sector across the globe. With an increased focus on ESG factors and sustainability in recent years, companies are dedicating more resources towards the same. With investors and activists putting added pressure and raising questions on the assessment and management of ESG performance, ESG reporting has now become mainstream with balance sheet implications across core banking business units. Many banks have taken this several steps forward, enhancing focus on ESG commitments in meaningful ways.
Goldman Sachs is deploying 750 billion USD for sustainable finance activities like climate transition and inclusive growth by 2030. They are doing this across investing, financing, and advisory activities. As of 2019, in Singapore alone, HSBC had delivered a total of 1.2 billion USD of sustainable financing and investments. Similarly, core sustainable investments of UBS rose to USD 488 billion last year.
Fintech as a service (FaaS) platforms emerge
With the recent upsurge in digital platforms for payments, lending, insurance, wealth management, Robo-advisory, etc., the need for technology-backed banking has greatly increased. Here, fintech technologies offer a solution for several traditional lending companies that are looking to integrate and leverage advanced business functionalities and financial processes. Several FinTechs have now emerged as service platforms- offering their APIs as software to other players in the financial markets, to be integrated into their systems. A relatively new model, Fintech-as-a-Service (FaaS) is fast emerging. Companies like Moov, Unit, and Synctera enable banks to provide a range of services such as transaction and ACH processing. Enhanced automation tools in collaboration with FaaS can reduce up to 25% of routine tasks handled by financial underwriters at lending firms. Synctera recently launched FaaS to community banks to help keep track of transactions through a dashboard that enables them to review each potential customer.
Advanced cloud computing technologies
As the amount of data being processed by banking institutions continues to rise, the need for advanced cloud technologies has become a strategic priority. Banks are investing in public, private, and hybrid cloud environments to make banking processes safer, easier, and more convenient. Furthermore, implementing improved edge solutions will mitigate challenges in processing data at faster speeds.
Financial service companies across the globe are expected to spend 500 billion USD on cloud technology by this year. In August 2020, Standard Chartered Bank announced its partnership with Microsoft to become a cloud-first bank- all its core banking systems will be 100% powered by the cloud by 2025. 2021 is expected to witness more such partnerships between financial institutions and cloud providers.
MD and Global Head of the Technology Centre at Deutsche Bank, Dilipkumar Khandelwal, remarks that over the next few years cloud will largely be of help in mitigating risk and increasing stability and control of business platforms. Banking application development technologies can then focus on solving business problems with the infrastructure problems managed by state-of-the-art infrastructure experts.
Accelerating investments in digital and technology to build scalable business models
The outbreak of the coronavirus epidemic has prompted financial organizations to rethink their now accelerated digital transformation journeys: aiming to capture newer growth opportunities and create more intelligent customer experiences. For instance, Citi’s investments in technology, automation, and electronic trading are estimated to result in savings worth 600 million USD this year. Their recent investment in quantum finance further allows the bank to quantify their risk more accurately, presenting a competitive advantage. Partnerships with renowned global tech firms like PayPal, for launching a seamless digital wallet payment option, and Google, to offer digital checking accounts, are recent indicators of increased tech collaboration in the banking sector.
Accenture’s previous estimates indicated that automation could save North American banks 71 billion USD by 2025. Even with financial constraints, banks like Goldman Sachs, JPMorgan Chase, and Bank of America have increased their teams of coders in the past year alone. Companies are further keen on investing in technology to build new products for consumers. Goldman Sachs, in one such instance, plans to launch a digital investment offering in the first quarter of this year, called Marcus Invest. This is meant to offer portfolios of ETFs from Goldman Sachs and other financial institutions and integrate this with existing free financial trackers and tools.
Blockchain for cyber-security
To ensure secure transactions, blockchain technology will play a key role in transforming the banking sector in 2021. Transactions are not only secure now, but there is a level of transparency that has increased customer trust in fintech companies. The financial sector has vast amounts of sensitive data that is prone to hacking, which makes blockchain technology a necessity in both traditional and online banking. Further, to prepare for emerging problems, banks must take a security-by-design approach that weaves their cybersecurity requirements into all aspects of their digital architecture. With services now largely moving online and the threat of attacks more severe, financial institutions have ramped up their cybersecurity spending for at least the next four years. An earlier Deloitte survey indicates that cyber spending jumped by 15% in the last year, to almost 1 billion USD for each of the largest banks in the US.
Recovering from the slowdown caused by the COVID-19 pandemic and keeping pace with the demands of next-generation customer-facing services requires banks to embark on a fundamental transformation exceeding their previous efforts. 2021 will see a focus on automation and adoption of renewed innovative approaches of connected, collaborative banking. The time is ripe for this sector to leverage technological advancements and collaborative efforts with FinTech to build resilient business models that help them stay competitive and relevant in the coming years.