The banking industry’s evolving landscape: six predictions for the next five years
Simon Kent is the Global Head of Financial Institutions at A.T. Kearney. Here he shares with us his predictions for the state of banking over the next five years.
The banking industry is the subject of constant conversation, for better and for worse. It is the industry that people look to as an indicator of political and economic health and as such, attracts much scrutiny.
With this attention, it can be hard to cut through the noise and distinguish fact from fiction, as the conversation around the future of banking continues to gather pace. However, the benefit of being subject to so much expert debate means that it is possible to pull out some common threads of discussion. With that in mind, here are six predictions for banking over the next five years:
1. The changing face of retail banks
While European banks are currently enjoying record high profits, revenue levels are stagnating, and over the next five years, most will fall. Not all incumbent banks will survive this tide of change as customers increasingly favour digital banks, for whom offering innovative products and services is second nature.
The digital revolution has spawned the rise of so-called “neobanks”, which offer solely digital products to their customers. A recent study from A.T. Kearney looking at the retail banking landscape in Europe showed that neobanks’ customer bases across Europe have grown by over fifteen million since 2011. This is compared to a decrease in two million customers for retail banks. Looking ahead, up to 85 million Europeans will be customers of neo banking models by 2023 – which equates to around 20% of the population over 14 years old.
2. Open everything
There is no doubt that being an open and inclusive financial services provider will be a requirement for future success in the banking space. Customers, regulators and banking service providers are all aligned on the opportunity and need to collaborate, but the pace of change is slow. This means that no one can be sure exactly how Open Banking will evolve or what impact it will have over the next year, let alone five years. However, what is certain is the customer demand for ‘open’ services that provide competitive offerings that are seamlessly connected, with half of all Europeans prepared to share their data in exchange for these services. Banks are very well placed to position themselves at the centre of the digital economy in the coming years, but to what extent incumbent banks will grasp this opportunity, and how quickly, is yet to be seen.
3. Uberisation and the importance of credit
The place that credit has in the conversation around financial services will become increasingy apparent as Open Banking and the ‘uberisation’ of customer platforms gains traction. Nowhere is this more clearly seen than in the credit process, where advances in technology have made taking out an unsecured loan to finance a purchase in-store is now much closer to a frictionless experience.
Change is coming, and the legacy that many big banks have lived by and used to retain customer trust is becoming less relevant. It is clear that technology is at the forefront of the conversation around transformation, but an organisation’s culture will ultimately determine how successful they are at adopting it.
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4.The rise of China
It is estimated that the equivalent of the collective population of two-to-three European countries will emerge from the East as China’s rising middle class explore other parts of the world. The innovation, investment and scale from the East dwarfs the European domestic market, and those businesses that can open themselves up to the opportunity from this region will enjoy hyper growth in the next 3-5 years. What is telling about China’s strong financial services outlook is its booming Fintech sector. The nation is also home to the world’s biggest mobile payments market, which handled $17tn in assets in 2017. As such, the nation represents a burgeoning market for the future of banking, and key to its success has been investment in technology that is targeted directly towards consumer needs.
5. Make or break: people and culture
Despite the clear benefits technology brings, it is only part of the answer. The need to build a motivated, knowledgeable workforce is still as relevant as it has ever been, and will only grow in importance as technology advances and becomes more prevalent. The war for talent will be tough for many, with clear winners and losers. Those businesses that have a clear map of how to transform their organisation will be more likely to succeed. A clear plan, an attractive proposition and a clearly stated purpose will all be important ingredients when people make career choices. If change is really going to happen, it needs to be powered by an organisation’s culture, not technology.
6. Reigning in the spend
Margins are down and set to remain low, with the top line stagnating and no tangible improvements to operating costs in sight. Regulatory compliance costs show no sign of reducing down, investments in digital customer tools will continue at pace and although reducing the number of branches will provide temporary relief, it is not a sustainable way to improve costs; astute cost management will become a determinant of success and if banks cannot achieve this, we will most likely see a rise in the number of mergers and acquisitions as banks seek to merge or sell, resulting in 1 in 10 banks disappearing.
Zafin: Banking is now in the era of the tech ecosystem
The development of tech ecosystems is placing the future of post-COVID banking in jeopardy. At a time when Big Tech can replicate the functions of traditional financial institutions, what can banks do to retain a grip on the market?
John Smith, EVP Ecosystem at Zafin, has a few ideas. A SaaS cloud-native product and pricing platform for financial institutions, Zafin is preparing the next generation of banks to cope with this precise challenge.
Smith is responsible for the strategic and tactical management of the company’s ecosystem, including the creation of new business models to support growth and differentiation. We asked him four questions:
Q. Have the events of the pandemic caused an irreversible shift in the digitalisation of banks? If so, is COVID the sole cause or are there other factors?
It’s a great question and one that I am asked a lot. Without a doubt, the COVID-19 pandemic has driven a significant shift in the acceleration of digital. In fact, I’ve seen some estimates show there to have been as much as four to six years of digital adoption growth since the initial lockdown started.
While the pandemic may be the primary reason for this growth, two other drivers include fintech disruption and the high costs of operating a traditional retail bank. Both of these factors have caught the attention of banking executives as they set their minds on accelerating digital transformation with a focus on high return, low risk.
Q. Some commentators believe banks must learn from Big Tech in order to survive. Do you agree? Please expand.
I agree completely; we’re living in the era of the ‘ecosystem’. All the seismic shifts we’re seeing in technology, be it aggregation, embedded finance, DeFi or hyper-personalisation are all enabled by the foundation of an ecosystem.
When financial institutions work with a strategic partner like Zafin, which has made the strategic investments in a best-in-class ecosystem, they’re able to capitalise on opportunities more quickly and safely, and will be better positioned for growth now and at the other side of the pandemic.
Q. What are currently the obstacles to adopting Open Banking? Is it more likely to 'take off' in some regions rather than others?
I would argue that Open Banking has been in the US for some time and will only continue to grow there. By definition, Open Banking is about the secure sharing of financial information that customers are aware of and have authorised. Under that definition, we’re seeing aspects of this well underway even though its full potential remains to be seen.
Third-Party Providers are a natural outcome of Open Banking, whereby they can create propositions beyond what a bank normally does to enable banking functions such as payments, borrowing, saving and so on. Once again, some of these are already present through industry-led initiatives, whereas regions such as the EU have taken the pathway of regulation such as PSD2.
The industry-led initiatives we’ve seen in the US have also had the added advantage of guard-rails that regulatory bodies like FFIEC and CFPB provide. There are also other technology-led initiatives such as API definitions that are set out through the FS-ISAC.
I would argue the future of Open Banking in North America will be through the natural evolution of the guidelines and API definitions that have been published, as well as the natural progression of industry initiatives.
Q. Are there any other bank tech trends you'd like to discuss?
Coreless banking. Zafin has been pioneering some of the work around externalising functions out of the legacy core to drive a more ‘fintech nimble’ bank, while not having to deliver a ‘heart and lungs’ core bank replacement.
Real life examples of this include moving some of the core functions of a banking system, such as product and pricing to a platform like Zafin. Origination, onboarding, KYC, risk, and compliance are all other examples of externalising banking functions for added agility.