Financial institutions struggle with complex regulations, legacy systems, new technologies and competitors, and an increasingly demanding customer base. Insights from a crowdsourced panel of 100 financial services influencers, industry analysts and banking providers combined with the results from a global research study helps identify future trends and strategies for long-term growth.
For the seventh consecutive year, we have surveyed a panel of over 100 global financial services leaders for their thoughts on retail banking and credit union trends and predictions. The crowdsource panel includes bankers, credit union executives, industry analysts, advisors, authors and fintech followers from Asia, Africa, North America, South and Central America, Europe, the Middle East and Australia.
We used the findings from our panel as the foundation to develop a global survey of executives involved in the financial services industry which provided a prioritization of our trends. Our global survey also provided an opportunity to do an end-of-year review of last year’s projections. Finally, the survey collected insight into strategic priorities for 2018 and the fintech players that the industry believes will have the greatest impact in the upcoming year.
By collecting insights from leading influencers, ranking the trends using an industry survey, and including extensive analysis around each trend, we have developed the most comprehensive annual trend report in the banking industry. For the third consecutive year, the research, analysis and Digital Banking Report entitled, 2018 Retail Banking Trends and Predictions, are sponsored by Kony, Inc.. The report will be available right after Christmas.
Top 10 Retail Banking Trends for 2018
The ranking of the top 10 trends and predictions was done by providing a list of trends identified by our crowdsourced panel and asking banks, credit unions and the supplier community globally to provide their top 3 predictions for 2018. Of the organizations that provided their top 3 trends, the highest ranking prediction was that the industry was going to remove friction from the customer journey (61%). The next two most mentioned trends were the improved use of data and advanced analytics, and refinements in multichannel delivery (mentioned by 57% and 42% respectively).
Interestingly, with the exception of one trend (testing and use of blockchain technology), the trends and order of these trends were the same as last year. Last year’s trend of investment in innovation did not make the top 10 this year. The importance and underlying components of each trend differed in this year’s research compared to the predictions for 2017.
The fact that the list of trends identified by the financial services industry has remained relatively consistent could be a symptom of a greater problem. The banking industry is moving much too slow, and legacy firms are failing to differentiate themselves. According to Forrester, “In a market where one-third of all customers say ‘all banks are basically the same,’ it would make sense for executives and their teams to obsess over how to differentiate. Unfortunately, 2018 will look more like a digital arms race between warring incumbents than a year in which firms find new ways to specialize and create value for customers.”
Regarding changes in emphasis for this year’s trends, removing friction from the customer journey increased in importance from last year, with 61% of organizations placing this trend in the top three, compared to 54% last year. The trend around the use and application of data also increased in importance from last year, with 57% of those surveyed placing this in the top 3 for 2018, compared to 53% in predictions for 2017. Other notable shifts of importance included a greater belief that open banking APIs would be important, less emphasis on regulatory changes and a greater belief that advanced technology would have an impact in 2018.
Top 10 Retail Banking Trends for 2018
Top 10 Strategic Priorities for 2018
When we asked financial services organizations worldwide about their top three strategic priorities for 2018, there was a significant change in priorities compared to last year’s research. While the order of the top three priorities remained the same as last year, the priority of reducing operating costs dropped from 41% last year to only 32% for 2018. At the same time, the priority of investment in innovation dropped from the 4th position to 7th, with the number of firms mentioning innovation falling from 26% to 22%.
The biggest jumps in strategic priority in 2018 were seen with the emphasis on automating core business processes (up 13%) and recruiting talent (up 8%). These shifts illustrate the growing importance of becoming a digital bank and the impact of this transformation on the types of employees required to address new challenges.
Top 10 Strategic Priorities for 2018
1. Removing Friction from the Customer Journey
While the banking industry has talked about ‘customer-centricity’ and ‘improving the customer experience’ for decades, most organizations have had difficulty breaking down product silos or leveraging internal data to deliver a contextual digital experience. “Long-term sustainable growth in the banking industry seems only possible with a radical departure from a sales- and product-obsessed mindset to one of genuine customer centricity, and further rationalization of strategies to target the right markets, customer segments, and solutions,” states Deloitte.
According to the 85-page report, Improving the Customer Experience in Banking, the objective of delivering a positive customer experience has become secondary to other bank priorities, resulting in a transactional banking relationship for the customer. For financial organizations to change this dynamic, and meet the evolving needs of today’s customers, there are five areas that have emerged as crucial priorities:
- Move focus of digital engagement from cost reduction to experience enhancement.
- Leverage advanced analytics, machine learning and contextual engagement to provide a highly personalized experience.
- Allow the consumer to engage with their bank on the channels they prefer at the times they want to engage.
- Transition advisory and sales activities from being reactive to being proactive.
- Engage end-to-end throughout the customer journey, from shopping to account opening, to onboarding and through relationship expansion.
A positive customer experience is channel sensitive, with customers placing a higher weight on digital customer experiences more than physical or call center channels. In fact, in a recent J.D. Power, survey, the largest banking organizations improved in overall customer satisfaction, while midsize banks declined and regional banks plateaued. This was attributed primarily to improved mobile and online satisfaction.
As the banking industry responds to the “Age of the Individual”, big data and advanced analytics will define the winners from the losers. It is critical for banks and credit unions to deliver on the personalization promise to win the battle of having the best customer experience.
How customer insight is used can make a big difference to the customer experience – and ultimately to the profitability of the organization. The right information, analyzed in the right way, can ensure that the financial institution can provide the right offer at the right time – along with a seamless service at a lower cost. And that has to be good for everyone involved.
2. Expanding Use of Data and Advanced Analytics
Over the past 18 months, the Digital Banking Report has seen a growing gap between the organizations that are embracing the power of contextual insights and the potential of digital transformation vs. those that continue doing things the same way they have in the past. There is no reason to see this gap narrowing in 2018.
Best-in-class financial institutions will apply advanced analytics and artificial intelligence to increase automation, improve personalization, reduce costs, enhance the customer experience and even assist with compliance. The potential of advanced analytics grows exponentially over time. Each iteration, additional data source and performance measurement results in learning that enhances the accuracy of the predictive models. It also allows organizations to refine data sources as opposed to simply adding more and more data.
Finally, with each iteration, predictability goes up while costs can go down, improving marketing efficiency. From the customer’s perspective, the messaging in more “on target,” improving the customer experience, satisfaction and lifetime value.
According to David Gerbino, Principal of @dmgconsulting, “Financial institutions that effectively leverage data and advanced analytics across the enterprise will be in a position to capitalize on newer technologies such as machine learning and automation. Those firms who fall behind will need to quickly overcome barriers that are preventing them from enjoying the benefits of advanced analytics or they will find themselves too far behind to catch up.”
3. Improving Multichannel Delivery
Banks and credit unions will see less than half their customers face to face in 2018. Instead, an increasingly digital customer base will use self-service touchpoints as a first point of contact, only reaching out to contact-center agents or branches for the most complex engagements. This movement of transactional interactions to digital channels will mean that branch and contact-center interactions are more important than ever in building human relationships with customers.
Winning financial services organizations will provide all customer contact personnel with the digital tools required to access answers quicker, and will invest higher trained personnel who are better equipped to use these tools and present high value responses to inquiries.
The traditional definition of convenience in banking has revolved around the proximity of the branch. With the growth in digital technology and the increased acceptance of online and mobile banking, access to banking products and transactions is no longer tethered to a physical location, resulting in a redefinition of convenience. Today, while convenience is still the primary driver of initial consideration, the importance of branches in that definition has gone down.
Novantas found the correlation between ‘perceived convenience’ and ‘consideration’ to be slightly stronger than the correlations between ‘perceived convenience’ and ‘purchase’, with both being very strong. The biggest news is that the drivers of ‘perceived convenience’ start with an organization’s digital capabilities. In fact, the importance of branch-centric factors have dropped in each of the past three years of the study. This is especially true for consumers aged 18-54.
Aligned with the preference to shop digitally, there has been a corresponding increase in the preference to open accounts digitally, according to Novantas. Over a third of consumers prefer to open their account digitally, with the number being significantly higher (46%) if the consumer shopped using digital channels exclusively. In fact, the mobile channel has replaced other channels as the centerpiece of the banking relationship.
4. Embracing PSD2 and Open API Banking
While APIs are not new to banking and are nothing more than a structure for how software applications should interact, they provide the gateway for innovative, contextual solutions that would be difficult to offer without Open Banking. As outlined by the World Retail Banking Report 2017, published by Capgemini in conjunction with Efma, there are three types of APIs:
Private APIs: These are APIs that are used within the traditional banking organization, reducing friction and enhancing operational efficiency. A vast majority (88%) of banks viewed private APIs as essential in 2015.
Partner APIs: These are usually between a bank and specific third-party partners, enabling the expansion of product lines, channels, etc.
Open APIs: In this scenario, business data is made available to third parties that many not have a formal relationship with the bank. Because of the structure of open APIs, many banks have a greater concern around security.
Most banks ease into the use of APIs, moving from private, to partner and sometimes to open APIs. It is believed that, over time, APIs will evolve to the more extensive options in response to the consumer desire for greater digital solutions not currently provided by legacy organizations. This will also occur as both fintechs and traditional banking organizations understand that they need each others strengths. This collaboration will enable both banking organizations and fintech firms to offer more to customers than previously possible.
Deloitte believes there are four distinct strategic options for banks and credit unions in the future. In two scenarios, an institution remains in control of the customer/member relationship. In the other two, products and distribution become unbundled.
- Incumbent as a full-service provider
- Incumbent as a utility
- Incumbent as a supplier
- Incumbent as an interface
It must be mentioned that the options are not mutually exclusive. Organizations may want to play in multiple quadrants. For instance, they may want to be a supplier of services as well offering products in a third-party interface.
Perhaps the greatest risk of open banking is that it will allow consumers and merchants to execute direct transactions without going through banks, making it more difficult for banks to have a full view of the customer transactions and maintain customer relationships. It is hoped that the open banking concept can avoid this demise, as traditional banks and fintech firms work together to build the customer’s trust and offer products and services that will improve a consumer’s lifestyle.
The foundation of these partnerships will be the data that can be collected and cultivated for the benefit of the customer, the bank and the fintech firms. If applied diligently, the improvement in customer experience could be the differentiator that retains the overall banking (and non-banking) relationship.
5. Building Fintech Partnerships
In the past, many traditional banking organizations looked at fintech start-ups as more of a nuisance than a threat. Today, many are viewing these non-traditional providers as a threat as well as either a partner or potential acquisition.
In its latest Global Fintech Report, PwC found that 88% of legacy banking organizations fear losing revenue to financial technology companies in areas such as payments, money transfers and personal loans. The amount of business at risk has grown to an estimated 24% of revenues.
In related DeNovo’s research from PwC, it was found that 30% of consumers plan to increase their usage of nontraditional financial services providers, with only 39% planning to continue using solely traditional service organizations. This is an additional wake-up call to legacy organizations to determine how they will retain the key components of an existing banking relationship.
In response to this threat, 82% of traditional financial organizations stated a plan to increase collaboration with fintech companies in the next three to five years. Similarly, almost 50% of financial services firms are planning to acquire fintech startups over the same period.
Fintech startups realize that it takes more than a great solution to attract a scalable customer base. To reach beyond early adopters and the tech-savvy takes massive amounts of capital for promotion and product support. Partnering with an established banking organization who will support the expansion of users among their client base seems like a logical means to an end.
Alternatively, legacy banking organizations, struggle to keep up with consumer expectations. Size, organizational structure (silos) and even traditional leadership styles hamper the ability to deliver the new digital solutions consumers receive from other industries. Partnering with a fintech startup alleviates some of these issues, allowing the established organization an opportunity to keep pace with marketplace demands.
Fintech collaboration is not about grabbing for the ‘next shiny object’ — it’s about intuitive product design, ease of use, and 24/7 accessibility.
6. Expansion of Digital Payments
Despite increased adoption of digital payments, cash remains a primary form of payment for many, especially for low-value transactions and by certain demographic groups. Attributes of cash contributing to continued use include speed, universal acceptance, anonymity, lack of fees, etc. Some emerging markets also still lack a modern payments infrastructure while certain cultures don’t have trust in the banking system. In other words, the reports of the death of cash are still exaggerated.
While e-payments are expected to grow at a CAGR of 17.6% from 2015 – 2019, the yearly growth rate is expected to decrease, as more transactions move to mobile payments (m-payments). Mobile payments are expected to have a CAGR of 21.8% from 2015 – 2019, helped by an increased proliferation of mobile devices. As with many of the payment trends, the impact of China on growth numbers is significant.
The integration of customer analytics, improved fraud management, dynamic wallet solutions and other value-added services will have a positive impact on both the consumer and the merchant. It is expected that ongoing improvement in biometrics and secure payments will become mandatory in the future, while integration real-time financial management solutions will become commonplace.
Finally, as fintech firms continue to bypass traditional value chain components, traditional financial services organizations will need to determine if they should partner with, buy or ignore these new competitors. Given that most of the fintech activity in the payments space has targeted the most lucrative components of the payment value chain, significant decisions are necessary.
There is no clear path to success in the new payments ecosystem, with many variables, opportunities and challenges still in an embryonic state. It does seem to be clear that success will require collaboration between players and markets. Especially as new technologies and new structures of solutions emerge in connection with open banking APIs, AI and big data, organizations will need to determine their best role in the new ecosystem.
In the end, the consumer and commercial marketplace will determine the winners, but there are tremendous opportunities for firms that embrace collaboration of insight and solutions to develop an improved value-added proposition that can address the need for speed, insight and security.
7. Navigating Compliance and Regulatory Changes
Similar to what we saw in 2017, most banks and credit unions worldwide are continuing to do business under a cloud of regulatory uncertainty that is expected to a challenge for the foreseeable future. Even though lawmakers and regulators aren’t expected to make many definitive changes, most financial institutions continue to do their best to meet risk and compliance parameters and supervisory expectations.
Since most institutions realize that they don’t have the ability to wait to see how things will eventually end up, many banking organizations are making progress, trying to keep in alignment with what is anticipated from a risk and business perspective. As one banker stated this past year, we are in a position to ‘beg for forgiveness’ rather than ‘asking for permission.’
According to Deloitte, “Banking organizations need to keep moving forward as planned, with deliberate linkage between regulatory strategy; business strategy; and building infrastructure for governance, regulatory reporting, and risk management that scales and is flexible.The good news is that many of the changes banking organizations are currently implementing make good sense from a business perspective—not just a regulatory perspective—and are worth doing no matter how the future unfolds.”
8. Exploring Advanced Technologies
At a time when most organizations are still playing catch-up, a new wave of digital technology has the potential to change the way organizations deliver banking services even further. These new technologies include artificial intelligence (AI), the internet of things (IoT), blockchain, open banking platforms with application program interfaces (APIs) and robotic process automation (RPA).
With the potential to increase efficiency, decrease costs and enhance the customer experience, these digital-enabled technologies will result in disruption of the way people do their banking and potentially what organizations deliver these services. We are already seeing organizations testing many of these digital technologies, hoping to win the battle to become the ‘bank of the future.’
As quickly as past technologies have become the norm, a new wave of emerging technologies will combine digital technologies and the power of data to set new standards. According to PwC, these ‘essential eight’ technologies include:
- The Internet of Things (IoT)
- Artificial Intelligence (AI)
- Robotics
- 3-D Printing
- Augmented Reality
- Virtual Reality
- Drones
- Blockchain
Obviously, the prioritization and investment in each of these technologies will vary based on the industry, business model and strategic goals of each organization. For instance, while the marketplace as a whole does not foresee investing much in blockchain technology, the financial services industry ranks this as a high priority.
That said, investment in emerging technologies as a percentage of overall technology investment has not increased since 2007 (across industries). In fact, the share of the overall technology budget that is allocated to emerging technology is only 17.8%, according to the PwC research.
Especially for the financial services industry, it is imperative to think beyond individual emerging technologies. With the advent of open banking APIs as a way to bring external technologies and innovations directly to banking customers, and the emergence of non-traditional banking ecosystems that may include non-banking services, combinations of technologies will become the norm.
For instance, the use of customer data insights and advanced analytics may be combined with IoT technologies to allow payments directly from smart home devices. Likewise, the the expanded use of conversational AI and VR devices may come together, providing methods of banking interactions only imagined in sci-fi movies.
Being a leader in emerging technology is no longer a luxury only for the big players. It is important for all financial organizations to make emerging technology a ‘core competency,’ with engagement throughout the organization (not just the very top). In addition, the focus of every implementation much be both internal and external human experiences, as opposed to revenue, profit and cost savings.
9. Competing with New Challengers
Modest-sized fintech firms and large tech giants continue to make retail banking inroads worldwide, providing services that leverage the best in digital technology to deliver a customer experience that removes cumbersome steps from both routine and more involved banking engagements. Relative financial newcomers like AliPay (China), WeChat (China), Rakuten (Japan), Atom (UK), Monzo (UK), Starling (UK), N26 (Germany) and Revolut (UK) have joined household names like PayPal, Amazon and Google to disrupt the banking ecosystem, leveraging modern infrastructures and innovative cultures.
According to Bain, “Many of the tech giants possess the ingredients of success: digital prowess, large customer bases, organizations well versed in improving the customer experience, and ample leeway to extend their corporate brands into banking.” More concerning may be that some of these firms are generating a level of trust previously reserved only for traditional banks and credit unions. As a result, an increasing percentage of consumers are willing to use financial products offered from these non-traditional firms – especially where the experience is superior to that offered by legacy organizations.
It is expected that demand for products and services from fintech firms and large tech companies will only increase as more consumers become familiar with new digital offerings. This is especially true for younger consumers, who have grown up with digital devices. More and more, people will get annoyed when they’re forced by bank policies and processes to use non-digital channels for everyday banking business, states the Bain research. This includes rudimentary transactions as well as being able to open new accounts or apply for loans.
The best way to prepare for the inevitable increase in competition that the continued expansion of banking services offered by Amazon, Google, PayPal, Facebook and an increasing number of start-up banks will bring is to be proactive in the development of personalized digital solutions. This will most likely involve new partnerships inside and outside of traditional banking organizations and a redefinition of what a banking ecosystem includes.
In other words, if banks don’t reorient their approach and radically accelerate their rate of progress, loyalty will suffer, and they will watch technology firms poach more business. Meanwhile, their economics will erode as too many routine transactions continue to flow through expensive branch and call-center networks.
There is a great advantage in the customer and member insights that traditional financial institutions possess. The key is to apply these insights in ways that directly and positively impact the digital experience, similar to how large tech firms currently improve shopping, social, search and payments.
10. Testing Blockchain Technologies
Satoshi Nakamoto, the unknown person or persons who designed the cryptocurrency, went on to say “digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending” in the original whitepaper.
In the proposed solution, the “network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed.” He further described the concept of miners where “a majority of CPU power” would generate the longest chain and outpace attackers or malicious intent.
Today, blockchain is no longer just about bitcoin or the broader category of cryptocurrency; it’s an exploded view of the underlying technology. It’s unique and differentiated in that it’s an immutable ledger with a single version of the truth of the transaction.
And unlike other immutable datastores, it is also a shared or distributed ledger across a peer-to-peer private or public network. It leverages a consensus mechanism to create permanent records of transactions through a distributed and decentralized network, removing the need for a central authority.
Ultimately it intends to create a trustless exchange of goods, services and/or real assets in a more trustworthy way. And with a potentially much lower cost of transaction.
Why should we all care? While financial services is the sector most likely to be disrupted, blockchain technology is poised to improve customer experience, streamline product features, and enable our global economic system to reshape market structures that will impact us from Wall Street to Main Street.
Financial services marketers, retail bankers, product managers and customer service executives will all be impacted by the progress of blockchain technology. One of the first overarching impacts could be in the development of a system of universal identity verification, that will impact everything from new account opening to cybersecurity.
Leaders must be prudent and act now in evaluating blockchain as the types of deployments evolve, while regulators need to re-evaluate policies and processes given the enhanced transparency the technology promises.
By: Jim Marous is co-publisher of The Financial Brand and publisher of the Digital Banking Report, a subscription-based publication that provides deep insights into the digitization of banking, with over 150 reports in the digital archive available to subscribers. You can follow Jim on Twitter and LinkedIn, or visit his professional website.