Banks face a pivotal moment in their evolution. The last decade saw the digitisation of financial services forever change the way in which people manage their finances and interact with their service providers.
New technologies, such as AI and machine learning, voice recognition, mobile banking and the smart use of data will define how financial services are offered, and an evolving regulatory landscape and the hyper-personalisation of banking will set new standards for business models and customer expectation. Balancing these challenges will be crucial to success.
Technology continues to drive global change. In banking, it has the potential to offer unprecedented speed, new levels of convenience and give tailored and personalised services and advice.
Mobile banking, for example, has given consumers the freedom to manage their finances when and how they like, wherever they like; the implementation of AI and machine learning to analyse and use data has helped financial services companies both internally – the ability to monitor account activity, complete multiple tasks at greater speed, and more effectively, combat fraudulent activities, and so on – and externally; and data is proving to be the framework for the provision of greater user experience and the managing of trust and relationships.
A common perspective in this forward-looking narrative is that banks – incumbents or ‘traditional’ in particular – face a significant challenge when it comes to developing and implementing such technologies compared to those more innovative fintech market entrants or the tech giants that are not-so-tentatively dipping their toes in the financial services sector.
There’s good cause to consider this argument, too. Take Accenture’s Five Big Bets for Retail Payments in North America report, published in October last year. In a wide-ranging survey of US and Canadian banking experts, it found that between 11% and 15% expect to lose ground to fintechs and challenger banks, describing a market in which incumbents find themselves on unstable ground and faced with “truly transformational change”.
However, in a report published in November exploring what the next decade holds for incumbents in the age of digital banking, HSBC suggests that this is a “common myth”, highlighting the growing landscape for collaboration between banks and fintechs and suggesting that “we are already in an era of innovative cross business collaboration which many would have not imagined a few years ago”.
The paper, Banking of the Future, Finance in the Digital Age, also states that while technology and data advances are transforming the industry, future success in banking will rely on achieving the right balance between innovation, risk management and consumers’ behaviour and expectations.
The report, which is written by financial technology expert Professor Markos Zachariadis, says that the hyper-personalisation of banking, which will be enabled by technologies such as AI and augmented reality as well as advanced data analysis, and through which customers will take greater control of their own personalised data through ‘digital ID profiles’, will replace traditional product sales and service models.
This will create an environment in which banks will become ‘trust brokers’ in the management, development and safeguarding of these IDs, unlock new revenue streams and access third-party services outside of traditional financial services.
According to Josh Bottomley, Global Head of Digital, Data & Development at HSBC: “the impact of technology and data is going to be different in financial services because of the distinct aspects of this industry.”
Bottomley acknowledges that the financial sector is one “inherently based on managing risk” – regulation is fundamental, for example, in maintaining the integrity of the industry, but new innovations can bring greater complexity to a risk management landscape that is already one of the most complex. “On the one hand,” he notes, “technology can help both banks and regulators manage risk in the sector more effectively, while on the other hand new challenges are introduced to the system.”
Therein, according to HSBC, lies the ‘critical balance’ in the future of banking for incumbents, in which three key development areas must be aligned: technology and data enablement, the risk management advantage, and the consumer behaviour revolution. The successful bank of the future, Bottomley affirms, must “carefully balance a series of trade-offs between what technology and data enable, in terms of improving customer experiences, with the absolutely fundamental need to ensure the highest customer standards are upheld and the integrity of the financial system is maintained.”
Banks have – and continue to – invest in technology and digital transformation heavily, dispelling the myth that incumbents are less well placed to take advantage of new innovations. So too have they increased collaboration with fintechs, startups and innovators in the sector in order to leverage new ways of thinking and co-develop new services for customers.
HSBC expects these partnerships to increase exponentially in the future and affirms its belief that fintechs will likely not displace traditional banks – there is, after all, value in such collaborations for fintechs too in terms of access to a larger customer base and greater investment power.
Data and analytical technologies will continue to define how financial services are delivered into the next decade and beyond, particularly with regards to enabling a greater focus on bringing financial institutions and customers closer together to deliver more personalised services. The extent to which banks will develop autonomous technology or AI applications, says HSBC, remains unclear, particularly as many are still in the nascent stages of implementing big data and predictive analytics – the bank itself currently has 1,600 robotic devices across its global network, for example, which processed 11.5 million transactions in 2018 representing a tenfold annual increase.
As explained by Bottomley, however, greater use of data and AI increases risk in several ways. “At its heart, banking is based on trust,” he explains. “While customers often want banking services to be modern and responsive, they also want to be certain that their money and their information are safe.” This, he explained, relies on banks making ‘informed and appropriate’ decisions, while demonstrating how they propose to use such technologies in an ethical manner that is consented to by regulators and investors.
To this end, balancing risk mitigation and technology will be crucial for banks to succeed. Robust ethical frameworks will be essential, for example, as will controls for protecting customers in order to maintain trust levels and the integrity of the wider financial services market. To achieve this, HSBC proposes financial services regulators, governments, banks and other industry bodies work closely in order to evolve from national regulatory practices to a singular global regulation that considers how to best adopt and work with new technologies available. In particular, says the report, “developments in areas like big data, cloud and AI will need more and more international cooperation” with banks ensuring that they are ‘global’ in their outlook to facilitate this.
It adds: “Technology will require better regulation; regulation will require better technology. But within this cycle, a responsible and more intelligent global banking ecosystem can thrive.” If, for example, work is undertaken to standardise the development of technologies such as AI for financial services, a better balance between innovation and safeguarding customers and the industry will be achievable.
Customer experience and personalised services will drive the future of banking. This, on a growing level, has been the case already in recent years thanks, in no small part, to the proliferation of 24/7 mobile and digital banking. The future will be no different, says HSBC, with traditional services becoming less common in the face of consumers taking greater personal ownership of their data and their banking. In particular, the report points to the creation of ‘digital IDs’. These data-driven ‘identities’ will naturally contain financial information, but also broader personal data such as profiles, typical patterns of activity and preferences.
The result of this evolution will be an era of ‘hyper-personalisation’ in which banks will move towards the selling of experiences rather than products, HSBC says. In such a scenario, services will be tailored to individual customers, driven by data as well as newer technologies such as the Internet of Things and 5G. Bottomley adds: “Customers can expect a highly-personalised service determined by their individual requirements, instead of being based around a set of savings, borrowing and investment products - each with their own sales and servicing characteristics.” HSBC goes as far as predicting a world in which banks could form a part of a wider ecommerce system, integrating with other third-party providers such as utilities to offer advice and recommendations based on existing customer data.
While there is little doubt surrounding the proliferation of digital banking solutions, evidence still suggests that consumers want the ability to interact with a human voice during their financial activity. HSBC predicts the rise of digital voice activation as “the default channel for consumer communications”, as well as an environment in which augmented reality is supplemented by the option to speak with human advisors where necessary.
The scale of change facing banks, and the wider financial services sector, shows little sign of abating. That banks will survive is in little doubt. According to HSBC, however, to thrive will require a deft hand at balancing the need to innovate and remain at the forefront of the sector in terms of technology, with managing those new risks that will arise and the expectations increasingly engaged consumers.
HSBC’s Banking of the Future: Finance in the Digital Age report was written by financial technology expert Professor Markos Zachariadis. It can be read in its entirety here.
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