These are interesting – and uncertain – times for global retail banking. In the US, President Trump remains resolute in his desire to free the financial services sector from what he perceives as the painful legislative shackles of Dodd-Frank. In the UK, preparations continue apace for the implementation of the ring-fence which must separate core retail banking from investment banking by January 1, 2019. Plus there’s the small matter of Brexit to take into consideration, the impact of which is guaranteed to be felt by banks of all shapes and sizes.
In the wider Eurozone, the big ticket items on the regulatory agenda – namely PSD2 and GDPR – are swallowing resources with an ever-increasing velocity and voracity as deadlines (January 2018 and May 2018 respectively) loom. In Asia, fintech mania is alive and well in both developed and emerging markets, and while the Middle east and Africa (MEA) isn’t quite so manic the region is undoubtedly witnessing significant change driven by the need to improve user experience and/or connect people to the financial system for the first time.
With all this – and more – going on, the bank of tomorrow is without doubt going to look different to the bank of today. However, any changes need to be more than just skin-deep, and it’s neither far-fetched nor inappropriate to suggest that now is the ideal time for the fundamental future role of established retail banks to be openly debated.
While retail banks’ purpose – the safe management and movement of money belonging to individual depositors – has largely remained unchanged, a raft of non-bank new entrants has increasingly been nibbling away at existing market shares for specific products (savings, loans, investments etc.) by launching more attractive propositions. Technological advancements, coupled with evolving user needs, wants and expectations, have made it far easier to disturb the retail banking status quo (note: ‘disruption’ is a word which is rampantly abused).
Therefore, it’s entirely correct to question whether traditional retail institutions have justifiable reasons to remain at the centre of 21st century banking, or if they’re destined to become peripheral over an extended period of time. When I peer into the crystal ball which has rarely let me down, I see a very different competitive environment by 2025. Thankfully, if you’re a customer, regulator or investor, the changes are for the better.
The first step
Every journey starts with a first step. As we enter the last quarter of 2017 and start looking ahead to 2018, it’s evident that a number of progressive activities and initiatives will drive industry developments.
One of the major propulsion systems is that perennial favourite, cloud computing. While most definitely not an all-new IT breakthrough, cloud is critically important for two reasons. Firstly, adoption is accelerating, thanks to a combination of attractive benefits – which are both operational and financial in nature – and the reduction of technological, legal and cultural obstacles.
Secondly, the emergence of Platform as a Service (PaaS) is highly significant. PaaS takes cloud computing several stages further forward, and allows competitors to reach new heights of differentiation through the provision of new applications. It represents an enormous opportunity, as it gives banks access to new app-driven capabilities while simultaneously allowing third-party developers – ISVs, internal IT departments, academic institutions etc. – to showcase their wares and earn revenue in a digitalised marketplace. On a related note, we can expect to see and hear the term Banking as a Service (BaaS) used with increasing frequency during the remainder of 2017 and throughout 2018.
What else is happening?
From my perspective, the ability for retail banks (and others in the ecosystem) ‘to protect, prepare and predict’ is becoming a mantra, as firms seek new ways to repel cybercriminals while simultaneously using advanced analytics to get closer to customers, monitor liquidity and manage risks. Expanding on this theme, ‘protect’ is as much about protecting customers from cyberattacks like the pernicious WannaCry virus as it is about protecting previous investments in technology. In making the seismic shift to open banking, institutions need to be able to combine any relevant existing IT systems with new solutions being developed within the burgeoning Fintech community. Rip and replace is rarely acceptable from a dual cost and risk standpoint, and consequently the ability to deliver smooth, seamless transformation is essential.
This leads us to the next element in the mantra – ‘prepare’ – which focuses on banks getting their technology, business processes and people ready for a very different future. Which takes us neatly to ‘predict’: this is all about getting smarter, faster and better via the use of advanced analytics, artificial intelligence (AI), machine learning and deep learning.
Foundations are being laid for cognitive technologies this year as part of the drive to service and operational excellence, although the uptake among customers is [understandably] modest. However, it’s important to have the rails installed upon which such services can run in 2018 and beyond.
Now let’s end the tech-talk by mentioning the Internet of Things (IoT). Opacity surrounding IoT in retail banking is reducing: use cases have been few and far between in 2017, but frankly that’s not a major issue or encumbrance. The fact that banking is interested in understanding what role IoT will play in the(ir) future is encouraging from an innovation perspective. IoT’s impact on retail banking is modest both today and in the future compared to other industry sectors, but the growing symbiosis between IoT and AI is starting to dictate how sensor-gathered data can be used to positive effect in real-time.
Banking, contrary to opinion, is far from boring. The industry finds itself poised for another period of excitement, hastened by advancements in technology and the growing impatience of consumers eager to receive the service improvements which have long been promised. With new players joining the fray on a regular basis, there are reasons to be optimistic where the future of retail banking is concerned.
Africa presents the ideal environment for new cash and payments services architecture by linking rapidly changing customer expectations with new technologies. This puts banks at the centre of the creative clash of trends and technology as Africa’s financial institutions harness disruption for innovation and growth.
The only way PSD2 will function effectively and securely, will be through the mobile banking application itself. However, the directive does not specify how secure this access will be, nor, what risks will arise, and for who.
Matching incoming payments with invoices has long been a frustration for companies with many valuable hours being spent trying to determine who’s paying for what. However, artificial intelligence (AI) and machine learning solutions are starting to emerge that claim they can combat these treasury headaches.
Studies show that many organisations are not aware of the fines they could face after GDPR comes into effect, or lack the technology to allow for compliance. The penalties for non-compliance are high: any breaches incur a maximum penalty of 4% of the organisation’s global annual turnover, or €20m, whichever is more.