Beyond the watershed

COVID-19 has changed the face of banking globally, but what’s next? Billy O’Connell delves into the top 10 emerging trends shaping banking this year.

The COVID-19 pandemic has irrevocably changed the banking industry. Customers have become more demanding on multiple fronts - from service fees to sustainability - banks have doubled down on technology, accelerating their innovation drive, and new entrants to the market have become more ambitious, broadening the scope of services they offer.

Here are the ten trends most likely to impact banking globally and locally in the months ahead. 

1. Everyone wants to be a ‘super-app’

Just as the smartphone consolidated our hardware needs within a single device, super-apps are consolidating many of our retail, social and other needs. 

Most digital banking consists of checking balances, paying bills, and making deposits — functionality more and more big technology players are incorporating into broader platforms alongside other services like commerce and social networks. 

How should traditional banks respond when faced with the expansion of Amazon, Meta, and others into financial services? 

They can try to add non-banking functionality to their own services and compete head-to-head for customer attention or partner with a super-app to provide white-label services. A third option is to wall themselves off from the fray and defend their traditional franchise. 

2. Green gets real

Investors and regulators will need to see environmental promises being delivered as they urge financial firms to become better stewards of the planet. 

Proposed rules will require independent verification, proving that banks are living up to their claims. They will face immense pressure to redirect credit away from carbon-heavy companies toward sustainable energy. 

In Ireland, lending has become increasingly ‘green.’ The main financial institutions are evolving their product offerings, focusing on supporting environmentally-friendly economic activity. These products make a real difference as they actively guide consumers towards a change in their behaviours. 

3. Innovation makes a comeback

Globally, the decade after the great financial crisis was a period of retrenchment in which many banks pulled back from introducing new products and focused on getting the basics right. Start-ups and digital challengers have emerged, with new offerings leveraging innovative solutions to target specific customer pain points. 

The growth of Buy Now Pay Later (BNPL) providers is an example of this. However, banks are fighting back with creativity. Irish retail banks have invested significantly in the last five years in technology and innovation projects to deliver new digital services for customers. 

We are seeing this in product innovation across the board – in the introduction of fully digitised customer journeys for personal lending and mortgages, instant account opening, data analytics and new digital capabilities to support SME lending. 

During the pandemic, we saw retail banks improvising and innovating at speed as they leveraged their technology investments to respond with creativity and agility to the new challenges.

4. Fees

Over the last several decades, banking fees have shifted from regular charges for services like account maintenance to in-built fees for facilities like overdrafts. 

Fintech firms arrived, promising an array of services for the magical price of free, only to reveal later that revenue must come from somewhere. 

Banks are creating features that put the users in charge of fee decisions. Fortunately, digital, AI and cloud capabilities are converging to provide the perfect platform for personalised advice that will help build consumer trust and involvement.

5. The digital brain gets a caring heart

Before and during the pandemic, banks continued to invest heavily in digital technology to make banking more accessible, faster, and efficient. However, it is more difficult than ever to win customer loyalty. 

Banks realise they have much to gain by learning to better understand and respond to customers’ needs and individual financial situations. Being well-positioned to meet customer needs through the challenges of the past 24 months has been important for banks and customers who needed their support. 

Building on this momentum and focusing on AI and other technologies will be important to help banks predict customers’ intent and respond with more tailored messages and products.

6. Digital currencies grow up

Several central banks worldwide are now launching digital currencies, and more are thinking about it. These are accompanied by maturing regulations around cryptocurrencies and a recognition that, while decentralised finance (DeFi) may still be in the experimentation phase, many of the core concepts of decentralised trust will likely have enduring value. 

We will likely see more financial institutions and government agencies sharing data and ideas on how to incorporate aspects of this new type of money into the global financial system. 

According to the Competition and Consumer Protection Commission (CPCC) research, one in ten Irish investors (11%) held crypto assets or cryptocurrency like Bitcoin in 2021. The number jumps to one in four (25%) for those aged between 25 and 34, indicating the appetite amongst younger generations in Ireland for digital money. 

7. Smart operations put zero in their sights

In 2022, banks will apply artificial intelligence and machine learning to back-office processes, enabling computers to outperform humans in some tasks. This will, eventually, decouple bank revenue from headcount. 

Banks have made incremental efforts to streamline their operations at a global level. These new technologies, along with the use of the cloud and APIs, can accelerate their efforts well beyond small efficiencies and toward the long-held dream of ‘zero operations’ where waste and latency are eliminated. 

8. Payments: anywhere, anytime and anyhow

Getting paid and sending money are now anytime, anywhere features we’ve come to take for granted. The next step in this payment revolution is for these networks to open up. China has already demanded that internet companies accommodate rival payment services. At the same time, proposed legislation in India would force digital wallets to connect and mandate that merchants accept payments from all of them. 

Banks with payment offerings will have to compete and cooperate with rival banks, fintech, and other players as the world of networks opens up.

We’ve seen this gathering momentum locally, with AIB, Bank of Ireland, KBC, and Permanent TSB coming together on a joint venture to create a real-time payments app. The continued investment highlights the desire to evolve in response to customer needs and compete with digital challengers, such as Revolut. 

Customer trust is an essential factor in driving success in the financial services industry. If the banks can give consumers the digital functionality they crave, alongside reliability and service, they could leapfrog their challengers.

9. Banks get on the road again

Just as individuals are relishing getting out from under pandemic travel restrictions, banks too will go wandering in search of growth both at home and abroad. In Ireland, we’re already seeing M&A activity from the core banks, causing a seismic shift in the entire landscape. 

This includes Bank of Ireland’s takeover of the capital markets and wealth management divisions of Davy stockbroker and its purchase of KBC’s loan book; AIB’s acquisition of Goodbody Stockbrokers and its JV with Great West LifeCo; and Permanent TSB’s purchase of Ulster Bank’s loan book. 

10. The war for talent intensifies

Figures released from The Workhuman Fall 2021 International Survey Report indicated that almost half (42 percent) of Irish employees plan to leave their jobs over the next twelve months. 

As technology has become a critical enabler for banks, a much-publicised shortage of engineering, data and security talent presents a real challenge. Younger workers, in particular, want flexibility and to be valued in their jobs. 

Forward-thinking banks are developing integrated plans that holistically address their work and talent issues. They’re mapping the skills they need now and expect to need in the future and are using a variety of approaches to recruit and retain them. They are also re-assessing their structure, culture, and work practices to improve their appeal as employers.   

Time for a different approach

Decades from now, the most successful banks will be those that continuously shape their businesses to the needs of customers, employees, and other stakeholders. Their greatest asset will be their ability to identify opportunities and innovate efficiently.