There is no doubt that technology is disrupting the banking ecosystem. For instance, digital banking is increasingly being adopted by consumers and businesses. It is accelerating at a rapid pace to become one of the main touch points for banks. It is predicted that mobile banking users is expected to reach 2 billions by 2020 globally, meaning more than 1 in 3 of the worldwide adult population. With new developments on technology, regulation and innovation, the growing demand for digital banking is an opportunity for both incumbent banks and fintech companies. In this article, we present 4 key banking trends to watch.
1. Open banking and the development of RegTech
With the adoption of PSD2, it allows equal access of financial information to attract more players to the market. This state of open banking is rapidly changing the competitive landscape of incumbent banks and financial institutions. With open banking, it enables the sharing of data much easier with third-party applications and presents information to customers in a holistic way for them to make better choices with regards to financial planning, products and services. This business model facilitates banks to reduce costs and provide an improved customer experience by better predicting their needs through the sharing of data. While it is easier for new players to enter the market, banks and other financial corporations also need to manage compliance requirements, especially in the realms of financial crime and consumer data protection. Therefore, to address the regulatory challenge faced by these financial service providers, it leads to the development of RegTech solutions, which utilize the latest technology such as AI, RPA and machine learning to redesign compliance process by monitoring and reporting compliance obligations easier.
2. Burgeoning of challenger and neo-banks
That being said, open banking also leads to the proliferation of a myriad of challenger and neo-banks entering the market. Unlike neo-banks that do not have their own bank license, challenger banks either have already earned banking license or are in the process of obtaining one. Neo-banks distinguish themselves by improving current account features such as providing book-keeping and personal financial management tools, whereas challenger banks differentiate themselves through their unique product offerings and user experience. These banks are increasingly shaking up the market and gaining financial interest from private equity firms and incumbent banks. On the other hands, a report conducted by KPMG reveals that the total profits of challenger banks in UK has risen by £194 million, compared to a decline of £5.6 billion for the five largest banks in the country. With both challenger and neo-banks fully or predominantly utilizing digital channels to engage with customers, they disrupt the status quo by operating under a simpler business model with higher transparency and offering cheaper services and hence a higher cost advantage.
3. Creation of omnichannel banking experiences
While the omnichannel approach has already been widely adopted in the retail industry especially under the prevalence of e-commerce, financial corporations are embracing this strategy in order to create a compelling customer experience. With the omnichannel strategy being applied in banking, it faciliates customers to perform the same banking operation seamlessly even moving across all available channels, both online and offline. To achieve a full omnichannel banking experience, banks have to ensure there is a real-time synchronization of data and thorough customer support across all channels. However, not all banks are ready for this omnichannel experience. Banks used to be product-centric by having product teams to define and package the product then mapping out the best channels to sell them. With omnichannel banking strategy, the customer journey is strongly driven by behaviours, meaning that these companies need to move away from being product to customer-centric. According to PwC’s Banking 2020 Survey, even most bank executives recognize a growing importance to develop a more customer-centric business model, only 17% of them are prepared for this transformation.
4. Rising significance of blockchain technology
Blockchain technology entails attractive and reliable characteristics that are beneficial to financial service providers in multiple ways. The application of the technology could optimize transaction quality, lower risk and errors, thus resulting in a more transparent and streamlined process. It is estimated that with blockchain technology, investment banks could reduce 70% of the cost on central financial reporting to improve the efficiency of clearing and settlement. Transaction such as cross-border payment and share trading can be carried out in a faster and simpler manner, yet with a higher accuracy. The distributed transaction ledger of blockchain also facilitates smart contracts and agreements automatically. It requires all parties to be in a contract but without the need of a middleman, thus lowering the cost. Also, as the technology is processed through a decentralized network, there is no need for a centralized control such as the presence of financial institutions or government. Based on these characteristics, 84% of senior level executives believe that blockchain technology is broadly scalable and will eventually achieve mainstream adoption.
Technology is developing in an extremely rapid pace that presents a multitude of advantages for customers and opportunities for companies of all sizes. From the customers’ perspective, it has already transformed the way people manage money and make transactions. For banks and other financial corporations, it is crucial for them to continue to invest in banking technology to help them move forward and maintain their competitiveness despite new entrants.
Written by Verna Kwan, Digital Marketing Executive at Payments & Cards Network