Bye-Bye Bank Branches, Hello Cloud: 10 Retail And Commercial Banking Trends To Watch
As Yogi Berra famously pointed out, "It's tough to make predictions, especially about the future.” Nevertheless, based on my interactions with clients over the last 12 months, here are some best guesses about what executives in the retail and commercial banking industry will be thinking and talking about in 2018. I will undoubtedly be proven wrong about what will matter, and I hope you find plenty to disagree with. So, presented in no particular order, here are 10 trends to keep an eye on in 2018.
Open banking goes mainstream
The wave is starting in Europe, where new regulations, such as PSD2, are forcing European banks to open certain banking services to third parties. In other markets, like the U.S., a move toward open banking is coming from fragmentation of the traditional vertically-integrated bank value chain. Open banking allows customers to share access to their financial data with non-bank third parties, so that those companies can then create apps and services to give customers a better banking experience. This will be the year in which attitudes to open banking start to separate those who want to differentiate themselves by being good trading partners from those still hunkering down behind trade barriers seeking to harvest diminishing profits from old business models.
Put it in the cloud
Twenty-five years ago, banks were debating whether it was safe to execute electronic transactions over the nascent internet or if they should instead build their own proprietary networks. Twenty-five years from now, the current debate about the safety of using the public cloud for banking will seem similarly quaint. There is already plenty of evidence that the cloud can be as secure as any private data center, and current predictions are that by 2020, more computing power will be deployed in the cloud than in all private data centers. In 2018, the conversation around cloud will shift from “if” to “how and when.”
Fewer heart transplants, more bypasses
Traditional mainframe core banking applications are not well suited to the digital economy. The world of overnight batch processing and 4 p.m. transaction cutoffs sits uncomfortably with customers’ expectation of real-time banking. But ripping out and replacing decades-old technology can be an expensive and risky option, especially in light of the promise of blockchain as a medium-term replacement for traditional books and records. Instead, look for banks to “freeze and wrap” — using existing core systems as books of record, while moving customer engagement and analytics to the cloud.
Become truly digital or get out
Customers today expect to be able to sign up for new banking services online. With the advent of the Aadhar digital ID system in India, it can be easier to open a bank account in New Delhi than in New York. Smart, forward-looking banks are now incorporating advanced authentication into their digital apps, while the laggards still ask you to come into a branch to sign a piece of paper. The evidence in the U.S. is that smaller banks are losing market share to the big players because they are struggling to deliver an end-to-end digital customer experience. In 2018, a failure to provide true digital origination will start to move from a disappointment to an existential threat.
Man or machine?
One of the biggest threats banks will face in the next year is synthetic identity fraud. This kind of fraud differs from traditional identity theft in that the perpetrator creates a new identity rather than stealing an existing one. Online deposit and loan origination allows these fake people to open digital accounts that pass all of the usual security checks. It’s a phantom crime that is costing banks billions of dollars and countless hours as they chase down people who don’t even exist. In 2018, banks will need to get better at sorting the real customers from the fake, without undermining the benefits of a great digital customer experience.
Digital first will mean fewer bank branches
Just as travel agencies are quickly becoming a thing of the past, digital banking will continue to shrink the number of global bank branches by 4% to 5% per year. Why bank in person when you can do it online? According to Accenture Strategy research, 66% of customers execute half of their banking transactions online, and 71% are open to automated support. In fact, Scandinavia has already seen half of its bank branches close in the last 5 years. Bank branches won’t disappear completely like Blockbuster video stores, as customers will still need to visit physical stores for complicated transactions and to make complaints face-to-face. But counter transactions are disappearing quickly. The challenge now is to try and get to that right mix of branches and digital offerings as quickly as possible. That means the sound of the shutters coming down permanently may become deafening in 2018.
Fintechs are friends
Despite the tens of billions of dollars of VC money piling into the fintech sector over the last 5 years, the meteor strike that was going to wipe out the banking dinosaurs hasn’t happened. Instead, fintech has lit an innovation flame under the incumbent banks and accelerated their evolution. 2018 will likely see more fintech acquisitions as large players buy rather than build. More broadly, bank innovation will have more of a business-as-usual feel, as banking startups find ways to play well with established players. While the dinosaurs will remain dominant in 2018, in 2019 and beyond, big tech beasts may appear and present more of an extinction threat to the banks. But in 2018, these super-predators will likely still be just sharpening their claws.
U.S. banking makes a comeback
Ten years after the start of the global financial crisis, European banks are still drowning in new regulations that require billions of Euros in investments at a time when the pretax profitability of the European banking industry is still 50% of what it was in 2006. In the U.S. however, the regulatory tide is receding in favor of “a more balanced approach.” Even before these changes take effect, U.S. bank profitability is already back above 2006 levels, with industry returns exceeding the cost of capital. With regulatory relief, reductions in corporate tax rates, and rising interest rates, U.S. banking could very soon be back to precrisis returns on equity. In 2018, we could see large U.S. banks starting to flex their investment and competitive muscles in a way that we haven’t seen for a decade.
Robots get to know you
At Christmastime in the U.S., viewers love to watch Jimmy Stewart as George Bailey in It’s A Wonderful Life. George saves his bank by appealing personally to customers he’s known his whole life. For most bank customers, that idyllic scenario is far from real life. Fewer than 10% of U.S. customers say they fully trust their bank. In 2018, artificial intelligence may start to reverse that trend by providing contextual, holistic advice that is truly in the customers’ best interest. That will require a level of radical transparency unfamiliar to most banks. But if banks fail to provide it, someone else will pick up the mantle. In 2018, look for banks to start to use AI to do right by their customers, regardless of the short-term P&L impact.
Is Bitcoin the next tulip craze?
Between 1634 and 1637, the price of a tulip bulb in Holland skyrocketed to the point where a single flower cost the same as 10 times the annual wages of a skilled worker. In 2017, the price of Bitcoin rose by 13 times, and like Dutch tulip bulbs, it’s currently functioning as a purely speculative asset. When the bubble bursts, it won’t wreck any economy – just as the Dutch economy shrugged off tulips becoming just plants again. Latecomers will lose money, but as always, lessons will be (re)learned. What will continue to matter is the evolution of the underlying distributed ledger technology. At some point – but not in 2018 – this technology may be used as the basis for cryptocurrencies that can simultaneously function as a store of value, a medium of exchange, and a unit of account. Until then, bankers shouldn’t worry too much about making Bitcoin denominated mortgages.