The financial services industry is undergoing significant change. A nexus of influences – rising customer expectations, mounting operational costs, leading-edge technology, a shifting risk landscape, regulations du jour, and growing competition from tech-savvy newcomers – has indelibly altered the playing field. It’s no surprise that in their quest to remain relevant retail banks are scrambling to adapt and align their business models and offerings.
These days, consumers accustomed to intuitive and individualised service from tech giants (think Google, Apple, Facebook, and Amazon) expect a seamless journey and smart, omnichannel banking tailored to their immediate needs.
So, the pressure to improve customer service is palpable.
Banks, large and small, are adopting artificial intelligence (AI) to fuel intelligent solutions that streamline and optimise operational processes. Intelligent banks are also generating insights to anticipate, understand, and meet the needs of individual customers.
By analysing vast amounts of readily-available bank customer data, firms are gaining keen perspectives to help them develop new products and services that resonate with millennials and Gen Z while keeping long-time customers happy. Design thinking methodology is gaining ground as retail banks assume an empathetic or customer-centric approach and consider new products and services within a human context
Today’s increasingly dynamic banking ecosystem offers established firms new and unexplored opportunities while encouraging them to transition beyond the traditional with services such as point-of-sale financing and unsecured consumer lending.
Collaboration with new age partners (FinTech and RegTech firms) is now typical, while a shared marketplace built around standardised application programming interfaces (APIs) becomes inevitable.
2020 banking innovation: players will need to work collaboratively
The shared Open X marketplace of the future will require players to work collaboratively
The post-Open Banking transition to Open X is fuelling profit around re-bundling products and services. Re-bundling via partnerships among financial and non-financial ecosystem players is clearing a path to sustained transformation and growth for all participants
For a glimpse into the fast-changing retail banking ecosystem and the tools and solutions firms are using to meet new-age challenges, be sure to read Capgemini’s Top Retail Banking Trends: 2020.
Who’s going to win in 2020? future-proofing digital infrastructure is key
There’s no denying that today’s consumers are more tech-savvy than ever before. But while enterprises continue to roll-out sleek apps and digitally-enabled tools for their businesses to meet their customers’ needs, far too much of this innovation has been aimed at front-end functionality, while much of the critical back-end processes are sitting on complex, legacy tech systems.
Businesses of all sizes need to assess their entire end-to-end technology platforms if they want to stay ahead. In this dynamic world, customer and operational data is vital to secure. And, for the inherent value to be truly unlocked, it must flow freely across the hospitality value chain providing connected insight across channels, functions and locations.
2020 banking innovation: the right digital architecture
Avoiding fragmentation is one of the key challenges many consumer-facing industries will need to solve in 2020. We are not talking about ripping and replacing digital infrastructure as the cost would be monumental, if not entirely impossible, but surround and expanding legacy systems to stay competitive.
With the right digital architecture, businesses can not only ensure they are prepared for the future, but they can also solve another key challenge: customer data.
Many businesses still have issues analysing, managing and understanding their customer’s data. Turning data into profit is a challenge, but there are solutions on the market that can deliver real-time customer and business intelligence, to allow businesses to analyse consumer habits, purchasing trends and fine-tune the services they provide.
The key is to ensure that you have the right commerce platform that can work collaboratively within the hospitality eco-system alongside IT teams, operations, marketing and finance.
Those businesses that have implemented a plan to solve the data and digital infrastructure challenges will inevitably be the ones that see the most success in 2020 and beyond.
Gege Gatt, CEO of AI firm EBO
The financial services industry has reached a turning point. 2019 has been the year in which financial technology has established its place in the mainstream by demonstrating its transformative potential. Going into the New Year, while integration of this tech is creating fresh challenges for the industry, banks must address old issues such as trust, as a more immediate priority.
As we reach the end of 2019, consumer trust in the banking sector remains at the same low levels seen in the fallout of the 2008 financial crisis. According to YouGov, 66% of UK adults don’t trust banks to work in the best interests of society, and an increasing number of people are looking to move to alternative providers. This is most prevalent with millennials, with 45% saying they are likely to change banking provider in the next 12 months.
Many are choosing ‘challengers’, like Monzo and Starling Bank, who have prioritised customer experience on their digital platforms.
Dynamic and innovative, their high investment to ensure superior customer experience has given them the upper hand over traditional institutions. In 2019 hesitation on innovation has been costly, in 2020 however, it may be fatal. For financial services institutions of all sizes, investing in the three Ps – personalisation, prediction and privacy – will pay dividends.
AI may be able to operate 24 hours a day, but people are still discouraged by virtual agent customer service interactions that don’t feel individual. People want personalisation.
Consumer expectations are already powering the move towards hyper-personalised content and messaging, and we can expect the gap between AI and human customer service to close in 2020. Those firms that can implement personalisation the best will give themselves a competitive edge.
Success for many financial service businesses in 2020 will depend on the ability to turn vast data pools into smart predictions. Organisations that develop strong data analytics capabilities will be able to create correlated models and apply real-time analysis. This generates unparalleled insights into customer sentiment and needs. AI is built on maths, and utilising data sets intelligently will allow firms to anticipate market behaviour to their benefit, while delivering better outcomes for their customers.
Finally, privacy will continue to grow in importance next year. The greater our reliance on digital platforms, the greater the digital footprint we leave. Individuals are waking up to this fact and are rightfully challenging organisations who misuse their data.
If people are going to work with AI in 2020, they need to be able to trust it. Companies committing to ethical, transparent practices can use it as a competitive differentiator and will become a winner for consumers. ‘Explainable AI’ will help build trust while simultaneously allowing companies to refine their services. The EU’s ethical guidelines for ‘Trustworthy AI’ showcases its significance – and the need to take it seriously.
2020 is set to be an exciting year powered by increasingly high consumer expectations driven by a more digitally channelled world. The opportunities for enhanced personalisation, privacy and prediction are there. But those financial institutions that take customers for granted will inevitably quickly fall behind.”
2019 in review and a look to 2020
The evolution of mPOS has been one of the most exciting and disruptive payment trends this year. Using consumer off-the-shelf (COTS) smartphones for payment acceptance is delivering huge benefits to traders, small retailers and SMBs, as well as payment platforms and solution providers.
Adoption costs are plummeting, enabling a broader range of merchants to accept card and mobile payments. This is in turn is increasing customer satisfaction with reduced queuing time and enabling more personalised check out experiences.
It is no surprise then that the global mPOS market was valued at $26bn in 2018 and continues to rise – reports predict the market will grow by 35% from 2018 to 2025. Early adopters in the hospitality and retail sectors have been quick to adopt this trend and other verticals won’t be far behind.
Threats to data and apps remained a challenge. Although legislative mandates like PSD2, Strong Customer Authentication and GDPR have been driving forces for the development and adoption of better security, many at C-level still don’t fully recognise the security risks that must be guarded against when taking new app-based banking, fintech and payment services to market.
Fraudulent transactions emanating from compromised devices, for example, is a real security threat that must be taken more seriously.
That said, there has been good progress in the app security space. Banks and financial service providers are realising that there doesn’t have to be a trade-off between security and functionality. Cybersecurity can be a tool to deliver richer and faster services that enhance the user experience, not limit it.”
A look to 2020
The continued success of smartphone mPOS depends very much on consumers’ ability to safely and securely make high-value payments. This requires the whole payments chain to work together to deploy solutions that achieve secure PIN entry on all COTS devices. While we might not reach ‘mPOS acceptance nirvana’ in 2020 – i.e, secure payment acceptance and PIN entry happening on the same device using the smartphone’s NFC technology – we’re not far off!
When investing in mobile point of sale solutions, merchants will need to focus on identifying solutions that are secure by design and protected by in-app protection solutions that have been evaluated by relevant industry bodies, like the Payment Card Industry Security Standards Council and EMVCo. We are starting to see more of these solutions available on standard smartphones and this will continue into 2020.
Away from the commercial world, government initiatives are working hard to drive greater financial inclusion. In Indonesia, for example, the provision of secure eKYC, with our partners like VIDA, is driving striking shifts in financial inclusion – from 20% in 2011 to 49% in 2017.
Banking innovation 2020: top trends to expect
A trend that has been gaining pace over the last few years, we really are seeing the customer put at the centre of business models and decision making. The entire concept of a return to relationship banking (possibly with a commoditised product delivery around it) is something that many banks are starting to embrace with their digital offerings. The AI space in this area will be very interesting to watch as individuals get what they need, when they need it and how they want it.
This is the power shift in the market, with a realisation that just technology collaborations or “bank-led” collaborations are not enough. There has to be alignment from strategy through to value realisation in the entire ecosystem for collaborative models to work. As this develops the support to the customer experience and the ability to deliver better products faster and at a lower cost will be key.
Composable business architectures. This is how the market will deliver a framework for collaboration in order to support customer-centricity. We also call it ‘composable banking’ which refers to the quick and flexible assembly of independent systems. Having an architecture where everyone is “the best” at what they do, but with an easy integration that allows banks to build solutions and products for an unknown future is going to be a big differentiator.
Speedboats becoming battleships
A lot of the composable banking and collaboration is happening in the start-up and neo-bank space, but the larger banks are launching or have launched “speed boat” digital banks to prove the model. Over the next few years, these solutions will become the central process of the bank, removing the legacy and on-premise monolithic technology stacks and related business architectures with an agile, fit for purpose and composable solution that is adaptable to future business needs.
A tipping point in the industry
This comes down to banks realising they cannot predict the future, there are too many unknowns in terms of increased speed of innovation, customer expectations, a shift to the cloud, new market dynamics with challengers and new market entrants, shifting regulatory landscape and new technology focus (AI, IoT, etc.).
The list goes on, but these drivers put us in a position where retail banking is no longer about delivering basic services, having the most suitable (or coolest) channel or lowest costs. Right now, it is about delivering the diverse, individual customer experiences across a wide range of demographics and geographies, with very different and often complex demands, that the market has not seen before.
We are at a tipping point in the industry, there are so many moving parts (innovation, regulation, customer expectations, move to cloud/SaaS, AI, analytics, return to relationship banking etc.) that to predict the future is impossible. I believe that we should abandon the idea of building ‘future-proof’ businesses, and start building ‘future-ready’ ones.
Flexible, scalable and collaboration-based business models are the way to go and the technology to support that must quickly address this shift and give a platform for this unknown market. Working as a collaborative ecosystem that drives innovation quickly and has a customer-centric focus is the only way for banks to win.
2020 banking innovation: the sky’s the limit
Sky’s the limit for the Cloud
Banks across the globe have learned by now that cloud technology provides greater resilience and improved security than most on-premise systems. Crucially, cloud also enables banks to trial innovations quicker and to greater effect, allowing them to transition towards the implementation stage faster for solutions they choose to market. In 2020, we will see a greater number of banks leveraging cloud solutions.
We’ll see further growth in digital-only players enter the banking space
RBS’ Bó is just the latest example, but the mobile-only market will almost certainly heat up further in the coming year as incumbents respond to the rapid growth of smaller and nimbler challengers.
Players from other segments such as P2P lending, are also increasingly seeking to pursue their banking ambitions. At the beginning of December, Zopa famously rescued its banking licence with hours to spare after raising the required funds from the IAG Capital.
What is more, technology giants continue to push into consumer finance, with Google reportedly preparing to launch a personal checking account service in partnership with Citigroup. Not to mention Facebook’s ambitious Libra project! Against this backdrop, 2020 promises to be an exciting year.
Look East for innovation.
After years of Silicon Valley dominance, 2020 may mark a turn in the tide in terms of leading trendsetters within the retail banking space. Chinese internet giant, Tencent, has recently been granted a license by Hong Kong’s Monetary Authority (HKMA) to operate a “blockchain bank”
HKMA also announced further virtual bank licences will be issued in order to boost competition and innovation within China’s financial industry, with Ant Financial and OCBC among companies considering applications. Needless to say, Alibaba-owned Ant Financial is a true innovation powerhouse, and could therefore set the tone in terms of developing innovative solutions to consumer finance globally next year.
The year that was and the year that will be
The year that was
2019 has mostly been overshadowed by economic and political uncertainty; as a result, many initiatives have not progressed as we would have expected. In the UK, Brexit uncertainty is a drag on the economy, affecting investment and resulting in deferred projects and initiatives.
The Challenger banks have continued to make progress but have yet to impact on the incumbents truly, and indeed we have seen some of the larger challengers run into issues, for example, Metro with their balance sheet problems and Revolut who needed to bolster their senior management.
Open banking and PSD2 arrived, at least the first implementation, but again this has not yet had a seismic impact on the industry with most banks doing the minimum to be compliant.
The year that will be
Looking at 2020, our annual Change Perspective report shows a number of things:
There will be a continued push to improve digital offerings and customer experience. For instance, RBS has recently launched Bó –a greenfield digital bank. To support the first point, there will continue to be a focus on cloud migration and particular concerns about cybersecurity.
As a result of the push to digital a number of skills will be in short supply, including Data Scientists, Agile practioners and others. Robotic Process Automation (RPA) and associated robotics and AI augmentation will continue to receive attention, but it will be some time before it begins to become mainstream.
Climate change will go much higher up the agenda, with regulators looking for climate Change plans, it will be a board-level agenda item.
Collaboration will become a major focus, for example, the emergence of utilities for sharing compliance data, and potential consolidation of the challengers.
2020 banking innovation: major digital banking trends
Adrian Cannon, CEO Omnio
The world of digital banking is evolving rapidly. For the past two decades, banks have been working to personalise their offering, surrounding their core platforms with peripheral systems that deliver other financial products.
The idea has been to provide a humanised view of customers’ interaction with their banks. But it isn’t that simple – the approach has been limited by the underlying bank ledger, and therefore unable to address the complexity of a customer’s life.
2019 showed us how other businesses have approached the issue from a different angle – cue the Non-Bank. As retail bank branches have continued to close, Amazon, Apple, Uber Money and others have understood that by being hyper-relevant at multiple moments in their customer’s everyday lives that they can reinforce their brand value and become an embedded and trusted partner.
Non-banks to grow stronger
The key word here is data. Forget using a limited, ledger-like perspective – carefully and cleverly utilising data around customers’ habits and preferences allows non-banks to place their customer at the heart of many holistic, tailored services that can be delivered by them or by third parties.
2020 and the decades beyond will see the non-bank grow stronger. Modern platforms, designed to service the broad spectrum of a customer’s needs, will become combined with the ability to deliver low cost, compliant financial services, including payments.
Non-banking players are set to increasingly extend their product set into the financial services sector, challenging the big banks to raise their game quickly. Provided these long-time banking giants can change their legacy platforms quickly enough and have the ambition to do so, they may be able to respond in time.
Along with more hyper-personalised services, this digital evolution will potentially have another benefit too – namely gradually increasing financial inclusion. With services offered via mobile apps, digital financial services can deliver an alternative option for today’s ‘unbanked’ population compared to traditional high street banks, by offering a tailored ‘bank in your pocket’ that understand its user’s requirements and limits.
Whether via well-known incumbents, disruptors in the fintech space, or both – the future of banking therefore is set to provide secure and fast responses to customers’ needs.
This, in an increasingly digital society, can surely only be a good thing.
Sector is warming to ecosystems and new partnerships
The financial services industry is starting to wake up to the idea of ecosystems and partnerships between challengers and traditional banks. In the coming year we will see the discussion evolve from old vs new and see real-world examples of financial services organisations of all shapes and sizes working together.
The need to identify ‘magical moments’
Many banks are realising that they need to harness the customer life-cycle through data and agility. They need to identify those “magical moments” that make up their customers’ life, such as setting up a pension or planning for a family, and offer seamless and personalised services for all stages.
Challenger banks are booming due to agility, ease and convenience of their platforms. They are digitally native, designed from the bottom-up for a customer base which is increasingly becoming reliant on mobile. But these organisations are young, and do not necessarily have the wealth of data that traditional banks do. Traditional banks possess information from individual accounts, but they also have insight into how the individual or household spends and saves
They can see how accounts are used and start to plot these crucial life moments, a vital differentiator. Ecosystems offer a marketplace of financial services that consumers can dip in and out of according to their needs, whether this be a mortgage or a student loan, accessing the best products out of a large portfolio. This gives traditional banks the agility they need to stay relevant, and challengers access to the data required to understand customer needs and habits. It also creates compelling new business partnerships as buying a home for example has many facets not just the need for finance.
Compelling new partnerships
We are already starting to see movement towards ecosystems with concepts such as Facebook Pay, which is consolidating payments across all of its apps. The race is now on to provide platforms that consumers will go to for every aspect of their financial lives. Competition in financial services will shift from individual banking products to shared marketplaces.
The next year will be a crucial time for the financial sector. As banks get to grips with adopting and feeding into this ecosystem, consumers will see the agility and personalisation of financial services go to a whole new level. The future is all about partnerships between old and new.
Banking innovation 2020: the move towards BaaS
Madhur Kumar Jain, Senior Vice President and Global Head of Solution Consulting, SunTec Business Solutions
Customers today expect the same experience and convenience that they are able to get online from any marketplace to be delivered from a bank too. They want to plan, compare, assess and then only purchase what is a hyper-personalised offering for them, rather than take up any standardise product or service from the bank.
With Open Banking and an API driven ecosystem, this is slowly becoming feasible. Banks are increasingly collaborating with fintechs, independent developers and non-financial lifestyle institutions like restaurants, retail outlets. This makes the move towards making BaaS a reality, sooner than later.
The risk/opportunity with the entry of BigTechs
The strategic focus on customer experience has largely been driven by the pressure banks have experienced this year from the BigTech companies such as Google, Amazon, Facebook and Apple muscling their way into financial services and muddling the boundaries between industries.
In order to truly compete with BigTech companies, banks need to transition from being a service provider to truly owning the customer value chain experience; offering empathetic banking by humanising the banking experience.
On the other side, there is also an opportunity to work together and collaborate to take advantage of each other’s strengths rather than just compete. The fact that consumers’ trust the banks to handle their financial data, their ubiquitous presence and industry expertise provides a good opportunity to collaborate with BigTechs which have expertise in handling big data, AI, analytics and building customer centricity.
Regulations set to become more prominent
Open Banking, as well as entry of Fintechs and BigTechs has paved the way for the industry to own customer journeys by providing best in class customer experience rather than simply selling some random products or services.
But what we have seen is that the advent of these technology transformations has increasingly put highly confidential customer data and privacy at risk. In fact, with news about many high-profile data breaches the role that regulators have to play has become so significant and interestingly, they are quite involved too.
The recent scrutiny of Facebook’s plan for launching Libra is a good example of how regulators across the world has a huge influence on the financial markets.
It is remarkable to see how law makers have come together to ensure that as long as the digital currencies are not able to address key risks around data protection, financial security, money-laundering , investor protection etc., there is no way it will see the light of the day.
Regulations could vary depending on the maturity of the financial services industry in the region, but in general, the role that regulators play can never be ignored and could turn out to be the Joker in the pack, that can alter the way financial services will look in the future.
Increasing use of AI and Data Analytics
Although it will be take time for AI to be seamless enough to totally replace human customer service, today AI is increasingly used in customer facing areas like Chatbots, as well as back and middle office processes like underwriting, data processing and anti-money laundering.
One key area that we feel will definitely will grow is Natural Language Processing, that can help utilise deep learning algorithms to understand language and generate responses in a more natural way.
With the Increasing use of RPA, AI & ML in financial institutions, another fascinating thing to note is the huge amount of customer interaction data that is being made available to these banks.
But how do they make sense out of them and respond in real time? This requires putting their existing data in order with big data analytics and an insights engine that could even identify and incorporate new sources of third-party information that could help, such as geographic and socioeconomic data as well. The result is an extremely personalised one to one relationship with the customer.
Increased focus on cost management
With Challenger banks, fintechs and BigTechs leading the disruption drive, there is no looking back for the industry or the consumer. They are innovating continuously, putting pressure on the large banks to see how they can meet the agility, create new offerings and reduce time to market to stay relevant as well as adopt AI/ML and other data/technology driven initiatives.
This pressure has actually made them look inward, especially where they are struggling to meet profitability targets, keep margins as well as not being boggled down by the legacy IT systems.
Across the board, we are finding that the banks we are working with are focusing on increasing margins by plugging revenue leakages, building partnerships and adopting a phase-wise, low risk digital transformation approach, which is seen to be more preferred over an abrupt rip and replace of the core systems to meet the market pressure and stay profitable at the same time.
A Retrospective look at 2019 and what’s to come in 2020
Our first major milestone of the year was the launch of two new products, Temenos Infinity and Temenos T24 Transact. This marked a major upgrade to the main stack of software that we offer banks, allowing our clients to deploy separate solutions for the front and back office.
It also signified a major shift towards the cloud, allowing us to offer banks the best possible cloud deployment for our product. The crucial feature? Becoming cloud-native and cloud-agnostic”.
Being cloud-agnostic means giving our customers the freedom to deploy on any major public cloud of their choice: Microsoft Azure, AWS Cloud or Google Cloud Platform (GCP) currently. This is a key Temenos strategy and an answer to regulatory concerns over single vendor dependence, particularly given our ability to deploy simultaneously across more than one cloud by taking advantage of distributed database technology.
Being cloud-native means that we invest in exploiting each platform properly – leveraging the power and capabilities of each cloud platform and making use of their managed services wherever possible.”
The acquisition of Kony, the US #1 digital banking SaaS company, has played a key role in accelerating our US presence and accelerating our Temenos Infinity strategy”.
The acquisition of Kony enables us to provide banks with compelling out-of-the-box digital applications, supported by a great low-code and no-code, extensible environment. Through our platform, banks can take our models and quickly build a beautiful user experience for their customers, fully tailored to their brand.”
Joining forces with Kony has not only been transformative in terms of advancing our technology but, with 1,500 very talented and experienced people joining our family, it has also allowed us to expand our digital culture as a company.
Explainable AI / Logical Glue Acquisition
Temenos has been building AI into its software for many years but with the acquisition of Logical Glue, a London-based provider of a patented award-winning Explainable AI (XAI), we are accelerating Temenos’ AI roadmap by bringing together a patented, proven, industry-first XAI platform.
Temenos will have XAI embedded across its banking platform. Our technology allows banks to be transparent to their client and regulators by being able to explain in simple human language how their models work and how they have reached their automated decisions.
This means that banks can make faster, more accurate, fair and explainable decisions driven by AI algorithms. Our job is to take this powerful, but essentially complicated, capability and package it into easily deployable options for banks using our software.
Temenos Value Benchmark Program
In 2019 we launched the results of the Temenos Value Benchmark Program. This strategic survey-based program provides in-depth analysis of how software capabilities impact a bank’s profitability.
The results of the program have been very exciting. And it demonstrates that Temenos software enables its top-performing clients to achieve industry-leading cost-income ratios of 25.2% and returns on equity of 25.0%, 2X better than the industry average. These clients which invest in end-to-end digital transformation derive tangible value to their business from their IT investment.
2020 banking innovation forecasts
In 2020, we expect to see an accelerated take-up of SaaS, with the use of cloud in banking becoming the norm in most parts of our industry and in most countries. This is not only because banks are becoming more technology-aware, but also because of a cautious but significant acceptance of cloud by regulators. From our conversations, banks are no longer asking if we run on the cloud but how we run on the cloud. We consider that a sign of maturity as banks now understand that cloud is the future”.
We will also see a greater demand for AI capabilities that are embedded into financial software. Over the last 4-5 years, there has been an increased interest in deploying AI but as the market matures, many banks will want other firms to productise it instead of having the burden of attempting to understand it in depth. In this way, banks will become more discerning when it comes to AI and more mature in their understanding of both cloud and AI technologies in general.
Without a doubt, digital banking channels are increasingly the main way that customers interact with banks today. We will continue to see banking optimised for digital experiences in 2020 and beyond. However, it’s important for banks to focus on recovering the intimacy in their customer relationships. Technology can sometimes lead to disintermediation, but with new customer-centric technologies like Temenos Infinity and Explainable AI (XAI), they can regain this intimacy”.
Driven by a desire to offer differentiated experiences to their customers, we are currently seeing the approach to technology adoption in banking evolve. Banks are no longer just adopting technology that is fit for today’s demands and customer needs, but are looking to more flexible solutions that can easily adapt to support them and their customers in the future.”
Regulation and the cloud
Regulators are becoming more accepting and understanding of the cloud, but there is growing concern about the risk of banks needing to close their doors should their cloud fail. The effect of this would not only be detrimental to the bank itself but, with so many banks relying on the same small pool of cloud providers, it also creates systemic risk that could pose a threat to an economy.
We recently invested in technology from NuoDB, the next generation of database. Crucially, this offers banks the ability to run their software on two different clouds at the same time, from two different cloud providers. This not only has advantages in terms of scalability, but very importantly, it offers some very practical disaster recovery capabilities. If one cloud goes down and becomes unavailable, banks can carry on seamlessly on another.”
Six top changes for the financial services sector in 2020
Ian Bradbury, CTO Financial Services, Fujitsu
The financial services industry in the UK in 2019 is drastically different than that of 2009. Social, economic and technological shifts have led to enormous change and this has translated to a radically different banking experience for consumers across the country. We have seen the rise of digital banking, the disappearance of banking services from our high streets; and traditional banking institutions are facing increasing competition and growing costs of operations. The next decade holds only more transformation for how banks run their business, and consumers interact with their banking providers.
Changing the face of banking
Technology has completely changed the face of banking in the UK. As we head into a new decade, it’s safe to say that there has been a radical shift in the way people bank.
Customers are looking to digital alternatives that are speedier and more convenient than traditional ways of banking and the new competition in the market has changed the way traditional banks operate. The past year has seen app-only challenger banks rise in popularity, a decline of physical bank branches and a renewed focus in the industry on social purpose. These will continue to shape the face of financial services over the next year as the industry heads towards another important year.”
In the face of rapid transformation, I have set out six top six changes for financial services in the coming year.
Workplace transformation will take hold
While we have been seeing a subtle transformation in the banking workforce for a number of years, 2020 will bring the biggest shift yet. As the digitisation of banking continues, financial services organisations will move away from traditional, functional roles; prioritising people who can help evolve what the bank does.
This will result in a vastly different workforce with vastly different skills. Creativity, collaboration and empathy will be crucial skills for the new set of banking employees, as companies look for employees who can offer not only technical expertise but the soft skills that will help banks build the new services and ways of working that will attract consumers.
Banks all around the world have been looking at ways to scale down and reskill the workforce, but 2020 will be the year we see that fully take shape.
2020 will be the year of challenger banks
There has been a lot of talk about challenger banks over the past few years, and in 2019 the likes of Monzo and Starling Bank were successful in their crowdfunding ventures. But 2020 will be the year they reach their full potential.
These banks have all been born in the cloud and their methods are agile, cheap and stable, a model that traditional banks have been attempting to replicate. Over the year, they will continue to grow their customer base and expand their services over the next year. Most significantly, these banks will start to see growth coming from the segment of consumers who are the most loyal to legacy banks; tempting traditionalist to use their services by offering slick user interfaces and superior digital services.
As a result, 2020 may be the year when a traditional bank takes the leap and acquires a challenger bank to take advantage of the brand loyalty, as well as the scalable cloud-native systems owned by those banks.
Many challenger banks are now in a position where they are serious competitors to traditional banks, largely thanks to the huge investment in the fintech sector over the past year. This will see them move even further into the mainstream in 2020.
Debate about digital currencies will reach fever pitch
The arguments for the introduction and adoption of cryptocurrency may be valid. For example, ensuring that nation states are unable to manipulate and influence traditional currencies, ensuring more financial stability for citizens. But the entrance of new cryptocurrencies in 2019 has attracted strong criticism from the industry.
With tech giants betting big on the future of cryptocurrencies, financial regulators have had to respond in kind; and 2020 may be the year we see central banks introducing their own cryptocurrency.
Tech companies will go through great lengths to develop their own cryptocurrencies next year, so central banks will have to match them to maintain control over their legal tender.
Outsourcing rates to spike
Banks will hand over responsibility for legacy systems.
As banks continue to focus on modernising their services, we will see a dramatic rise in outsourcing when it comes to the management of legacy systems. Rather than focusing resources on managing their IT stack, banks will hand off responsibility to third parties, so they can spend more time serving their customers and finding new routes to market that will grow their consumer-base.
Much like the moves we’ve seen in the insurance industry over the past few years, banking will become less about legacy tech, and more about building new cloud systems that allow for innovation and new digital solutions for customers.
As banks improve their IT systems, they will be able to meet the increasing demands of today’s tech-savvy consumer.
Banks will put trust at the heart of their services
2020 will be the year where banks invest in services, offerings and programmes that demonstrate to consumers that they are trusted institutions. Businesses are entrusted with consumers’ money and their. And so they hold a unique position to build a strong relationship with people based on trust.
As the industry’s social purpose is increasingly put in the spotlight, banks have recognised the need to contribute to wider society. This means not only providing banking services to their customers. But it also means improving their lives on a broader level.
With traditional banks typically more trusted than new digital entrants, this is an opportunity to differentiate themselves in 2020 in an industry that is more crowded, more complex and more competitive than previous years.
Given the pressure that traditional banks are under from app-only alternatives, trust will be one of their biggest strengths.
Non-bank digital platforms will up the fight against traditional banks
As non-bank digital platforms continue to offer alternative payment schemes, lending options and savings alternatives in 2020, banks will risk losing an increasing number of customers to these competitors. As these services become more integral to the customer journey, banks will be facing a tough decision – whether to find opportunities to partner with digital-first non-banks, or to rise to the challenge and compete with the new players in the market.
For those who choose to create partnerships, there will be the opportunity provide payment, lending and saving services via the non-bank platforms, but they should expect to see a squeeze on their margins of profit and a rise in competition across the market. The increased competition on the market means that banks’ profitability and wallet share will inevitably suffer.
Jonathan Shawcross, Managing Director of Banking, Gobeyond Partners
2019 saw continued pressure on the traditional UK banks. Margins remained squeezed through rates staying lower for longer; regulatory pressure continued; the ‘tail’ of PPI proved extremely painful; political and economic uncertainty around Brexit prevailed; the investment required for digital-led transformation remained high and the continued competitive pressure from new challengers, all made for a difficult operating environment.
Whilst some of these factors will ease in 2020, don’t expect the situation to get too much rosier for the larger incumbents any time soon.
Profitability squeeze ahead
Throughout this coming year, we expect to see the profitability squeeze continue in an increasingly difficult UK banking market – this will only make such major investments more and more challenging, yet more and more critical. These will be difficult decisions to make.
Recent Gobeyond Partners client research on the topic of ‘customer experience and digital transformation’ in 2020 and beyond, indicated that there was significant nervousness in the banking sector. Only 11% of those surveyed in the industry expected their revenues would increase significantly over the next 12 months.
Banking was also one of the most concerned sectors when it came to new technology. 61% of respondents expressing that they were concerned with the impact that the current speed of technological change will have on their own ability to grow.
Given that we expect to see an increased use of AI across the sector to drive more tailored experiences and more targeted promotions to customers directly, firms will need to work hard to overcome their fears and ensure they are deploying the right technology, through outstanding customer journeys, to best meet their customers’ needs.
Competition pressures to increase
Additionally, 65% of banks also expressed concern about how much changing customer expectations will have on their growth. There was however widespread recognition that customer experience is now seen as a fundamentally strategic issue. Some 77% of banking respondents agree that the priorities in this space should be driven at Group Executive/ Board level.
With renewed and refreshed challengers such as Virgin Money, TSB & Metro Bank (all under transformed ownership or leadership following difficult periods) and the second major phase of growth coming at Starling and Monzo, there will be even greater competition in the UK and a further need for pace of change, innovation and customer-led thinking across the sector.
Technology is only part of the answer though and for organisations to win in the race for customer loyalty and stronger profitability, organisations will need to successfully marry great technology and innovation with a major focus on what this means for people – customers, employees and partners – in the transformation journey.
Taking this ‘human lens’ will differentiate the quality of solutions offered. And it will drive greater efficiency in getting there. Moreover, it will engage their own people more significantly in the change and in delighting customers.
2020 will be a huge year in determining who will ultimately succeed. And who may not be able to make the scale of changes required in time.
Five key trends in banking for 2020 and beyond
Fintech partnerships will become the norm
Banks face a choice as we enter the 2020s. They can either innovate and restructure business models and provide new services and products to improve their value chain. Or they can become commodity players, specialising in a particular area. Partnering with fintechs will be key going forward. The industry experience and trustworthiness of traditional banks can combine with the agility and innovation of fintechs. This will allow banks to create more compelling customer experiences and remain relevant in the coming years.
Data intelligence will drive competitive advantage
Data intelligence will be a key competitive differentiator. This is evident not just in banking, but across other industries. For example: the recent acquisition of Fitbit by Google. This has given the tech-giant access to a huge source of anonymised health data. Similarly, banks hold a wealth of customer financial data. The challenge is how best to use it effectively. While agile challenger banks and fintechs are already experimenting here, traditional banks remain behind the curve. Data intelligence will be a key focus as they aim to personalise their services and become more embedded in customers’ lives.
RegTech will take centre stage
The way large banks handle regulatory compliance is overly complex and costly. Many are hamstrung by legacy systems. In 2020 I expect to see a drive to deliver efficiencies in this area.
Challenger banks are already partnering with cloud-based technology providers to handle KYC, customer verification and other regulatory requirements.
This approach is critical in keeping costs low. Incumbents need to transform and simplify the myriad of systems they have in place to perform tasks like customer verification, and to agree on common standards. Only then can they can embrace RegTech and benefit from the associated efficiency savings.
Consolidation among challenger banks
It’s not sustainable for challenger banks to continue losing money in the pursuit of customer acquisition. The race is on. Incumbent banks are playing catch-up as they launch new digital services. Meantime challenger banks will be looking to sell higher-margin loan or insurance products. Not all challenger banks will survive a downturn. I expect consolidation in the form of mergers and acquisitions over the coming year.
Use of hyper-connected devices will continue to grow
The uptake of smartphones, voice-activated assistants, Internet of Things and edge computing will continue to grow. BigTechs like Amazon and Google are working to roll out voice-activated devices across households. This makes them a potential interface for all kinds of things in the future, including conversational banking. This may not yet happen in 2020. But phase one is just about getting users familiar with the technology and its capabilities.
Banking in 2020: What to expect?
A new definition of banking has made its way into financial services. Banks, large and small, are looking beyond traditional ways of doing business. In 2020 banks will not only accelerate their truly digital transformation but also scale it multi-dimensionally.
Amid growing pressures of competition and declining profitability, banks will be quick to formalise their strategy, and move away from the universal banking model. Apart from the strategic choice of operating as a manufacturing bank, an aggregator, a distributor, a segment player, or a combination of these approaches, banks will juggle variables of size, cost efficiency, experience, segmentation, and personalisation for the most optimal blend of scale and value.
The pursuit of agility that is at par with BigTechs and FinTechs will see banks adopting Agile-at-Scale, an approach championed by the likes of ING Group in banking. Its full import will span product development, processes, operations, and even communication.
2019 saw a rapid uptake of RPA and automation across the enterprise but few banks can claim to have achieved the benefits of agile automation as some leading banks like Turkey’s Akbank have. The bank’s co-bots work hand-in-glove with the human workforce completing a triggered task without human intervention or triggering a process themselves.
Achieving savings of around 513 hours per day, the bank’s employees now have more time to focus on value-added services and customer interactions. More and more banks will integrate RPA with strategic workforce management, operations and customer experience processes in 2020 and beyond.
Making every employee digitally proficient
Next, making every employee digitally proficient will be a primary charter of workforce and culture transformation for all banks. Banks will continue to support their employees with suitable learning programs in flexible on-the-go formats, deploy experts to co-create experiences with bank staff, and pull out all stops to empower their employees to succeed in their roles during and after digital transformation.
As the somewhat conflicting demands of contextual value and increased protection of data increase, banks will increase their investment in cybersecurity in the 2020. Part of this investment will also be dedicated to educating employees and customers.
The last decade was about preparing for a digital future. Now, the future is here. In 2020 banks will ramp up their business model, technology, automation, security and workforce modernisation efforts significantly, and ready themselves to reap the benefits in the new decade.
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