The banking sector is going through a significant transformation as it catches up with the shifting demands and expectations of customers, regulators, and rivals in the digital age. The COVID-19 pandemic has sped up the transition to digital channels while also drawing attention to the flaws and inefficiencies in many banks' antiquated systems and procedures. As a result, banks are navigating a complicated and unsettling economic and geopolitical climate, which presents both new problems and opportunities.
Based on observations from multiple industry sources and experts, we will examine some of the major digital developments that are altering the banking business in 2023 and beyond in this article.
Customer-centricity: from journeys to Intent
Customers are looking more and more to digital platforms and suppliers that can suit their needs as they seek more ease, speed, and personalization from financial services. Over 45% of respondents to Insider Intelligence's Mobile Banking Competitive Edge Study in 2020, up from 38.0% in 2019, indicated they identified mobile as one of the top three factors that decide their choice of financial institution (FI), making it the second most important factor behind fees.
Banks must focus on understanding and addressing customers' entire well-being and intent to comprehend and retain consumers. This goes beyond simply delivering products and services. This entails developing data-driven, unified, cross-channel customer experiences that offer individualized assistance and counsel. To improve their customer-centric skills, banks will also need to use cutting-edge technology like artificial intelligence (AI), biometrics, natural language processing (NLP), and blockchain.
Core Modernization: a change of Heart
Many banks continue to rely on outmoded and compartmentalized core systems, which restricts their capacity for innovation, scaling, and regulatory compliance. Deloitte reports that 39% of retail banking executives believe cost-cutting is where technology has the biggest influence, as opposed to 24% who believe it has the largest impact on improving customer experience.
Banks will need to adopt core modernization as a strategic goal and ongoing activity to overcome these obstacles. As a result, monolithic architectures and antiquated applications must be abandoned in favor of cloud-based, modular, and open platforms that can facilitate quicker development, integration, and deployment of new capabilities. Additionally, to promote a culture of cooperation and experimentation, banks will need to implement agile techniques and DevOps practices.
ESG: a new imperative
Banks are under increasing pressure from customers, investors, regulators, and society at large to demonstrate their commitment to sustainability and social responsibility (ESG) considerations, which are also known as environmental, social, and governance (ESG) aspects. Over the next ten years, ESG-related assets under management (AUM) are predicted to increase by 15% annually, according to Accenture.
Banks must incorporate ESG concepts into their strategy, operations, products, and culture to take advantage of this potential. This includes tracking and publicizing their ESG performance, adapting their lending and investing strategies to ESG standards, providing customers with ESG-related goods and services, and interacting with stakeholders on ESG matters. To monitor and enhance their ESG performance, banks will also need to use digital technologies like blockchain, big data analytics, and artificial intelligence.
Embedded finance: a new frontier
The integration of financial services into non-financial platforms and ecosystems, such as e-commerce, social media, ride-hailing, and gaming, is referred to as embedded finance. Without having to navigate to a different banking app or website, embedded finance enables clients to access financial services conveniently and effortlessly within their chosen digital surroundings.
Banks have a fantastic chance to broaden their customer base, attract new clients, and develop new sources of income through embedded finance. Insider Intelligence projects that the global embedded finance industry will expand at a compound annual growth rate (CAGR) of 43.5%, from $22.5 billion in 2020 to $138.6 billion in 2025. Banks must collaborate with non-financial platforms and suppliers, use open banking and APIs, and provide modular and flexible payment methods to take advantage of this potential.
Digital assets: a new asset class
Digital assets include cryptocurrencies, stablecoins, nonfungible tokens (NFTs), and central bank digital currencies (CBDCs), as well as any other assets that exist in a digital form and are protected by encryption. As a new asset class that offers more transparency, efficiency, and inclusivity than traditional assets, digital assets are becoming more and more popular among investors and consumers.
As they disrupt the current financial system and infrastructure, digital assets are also presenting new potential and challenges for banks. 80% of central banks, according to Accenture, are looking into CBDCs, which might have a big impact on monetary policy, financial stability, and financial inclusion. By building their own capabilities, collaborating with platforms and producers of digital assets, and adhering to new rules, banks will need to adapt to the shifting world of digital assets.
Cybersecurity: a new imperative
As bad actors increasingly target banks online with threats and attacks to steal their sensitive data and other valuable assets, cybersecurity has become a crucial issue for banks. According to Deloitte, the number of cyber incidents involving more than 100 financial institutions spread across 30 countries grew by 38% in 2020 compared to 2019.
For banks, cybersecurity is an issue of trust and reputation in addition to risk management. Customers expect their banks to safeguard their personal information and financial assets from cyber dangers, and any breach or compromise may cause them to lose trust and loyalty. The use of AI, cloud, biometrics, encryption, and zero-trust architecture are just a few of the cutting-edge cybersecurity tools and techniques that banks will need to invest in. Additionally, banks will need to cooperate with authorities, and competitors, and exchange knowledge and best practices on cyber resilience with other stakeholders.
Conclusion
The banking sector is going through a significant upheaval as it transitions to the digital age. The trends mentioned above are linked and mutually reinforcing rather than exhaustive or mutually exclusive. Banks can take advantage of these trends to benefit their clients, shareholders, and staff members.
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