Banking
Overview
One Minute Read
Banking is a key sector of the global financial services industry, that handles money, credit, and other financial transactions for individual consumers and organisation. Technological innovation, regulatory reforms and the increasing digitalisation of people’s daily lives are reshaping the financial services landscape. The COVID-19 pandemic has accelerated this with a cross-generational shift to digital channels and remote working. Rising interest rates, volatile markets and economic downturn create opportunties and risks as well as underline the need to accelerate transformation. The financial servcies industry is also a critical enabler for tackling climate change and sustainability. In response, the sector is transforming towards to a digital financial ecosystem, driven by five challenges and the widespread adoption of digital technology.
Sector Description
Banks are the largest segment of financial services, a $22.2 trillion global market in 2019 [1].
Over the years banks have developed from being licensed, by the national government or central bank, to receive deposits and make loans, into financial services providers offering wealth management, payment services, investment banking, capital markets and insurance.
Banks today come in various flavours with three key segments:
- Retail Banking (which includes mutuals/building societies)
- Corporate or Commercial Banking
- Wealth Management
Banks also participate in other financial services sectors such as Capital Markets (Investment Banks), Insurance (Bankasurance), and Payments (Transactions Banking or Payment Service Providers).
Some banks seek to address all markets through being universal, whereas some choose to specialise in a particular area.
Segments
Retail Banking
Corporate Banking
Wealth Management
Drivers
Shaped by the global megatrends, the pandemic, and now rising interest rates, the sector is being transformed by five major drivers:
Customer Experience – The growing influence of BigTechs has raised the bar for customer service and awareness of digital channels both for consumers and businesses.
Trust & Compliance – As a consequence of financial bailouts on the back of the 2008 crisis, regulators have introduced regulation to avoid the scenario where banks are “too big to fail”. This significantly increased the regulatory burden for banks. Regulation is intensifying, especially around cybersecurity, operational resilience, customer data & privacy, anti-money laundering (AML), transparency, ESG and digital assets. The financial crisis also challenged the trust previously placed in banks. High profile failures in investments like crytocurrencies may also have an impact.
Innovation – BigTech, FinTechs and neobanks are growing their financial services business fast. Banks need to adapt to the new normal by innovating, front-to-back digitisation is paramount to achieve greater efficiency, provide new digital services and deliver a superior customer experience. However they are hamstrung by legacy systems and an inability to change due to a lack of expertise and cultural inertia. Sustainability, Green Finance or ESG (environmental, social & governance) and digital assets are also a critical innovation.
Efficiency – With margins under pressure banks need to focus on operational efficiency. Digitisation of processes and products is seen as key. Resilience and hybrid working are also critical on the back of COVID-19, with 70% of bank workers working from home during the crisis [1].
Profitability – Global markets hit an inflection point in 2022. The reset button has been hit for nearly every major asset class. Increasing interest rates should help increase net interest margins (NIM) and help banks’ profits. The unpredictable normal driven by geopolitics and climate change, could mean volatility, especially when dealing with the complexities of multinational corporations and global trade.
Transformation
The industry is transforming towards to a digital financial ecosystem where the primary channel is digital & mobile; money, assets and paper products are transformed to digital on digital platforms, artificial intelligence is used to complement human interactions and manage risk, and where finance is embedded seamlessly into everyday life.
Banks understand that the new normal is digital, indeed 80% of the banks accelerated their plans to transform digitally due to the rise in demand for digital services amid the pandemic [1]:
- As financial services companies plan the new normal, they found that 90% of personal transactions and 90% of customer contact is via digital or non-branch channels [2].
- Contactless digital payments have accounted for 90% of all ‘face to face’ transactions since the start of the crisis [3].
- 70% of bank workers were forced to work remotely during the pandemic [4].
Digitising the end-to-end customer journey is key to improve customer experience, increase efficiency and reduce costs. As a consequence, banks continue to close branches and are planning a more hybrid way of working with digital engagement.
Almost three quarters (72%) of UK banks are also embracing digital technology to make their business operations greener [5].
According to the seventh annual global banking survey conducted by The Economist Intelligence Unit in March, 45% of respondents said their strategic response to the COVID crisis was to build a “true digital ecosystem [6].”
In addition, the crisis has driven a rapid increase in cyber-attacks and fraud, a 20% increase in actual attacks and a 500% increase in attempted attacks [7].
Transformation will require a shift to the design & development of:
Digital-first engagement
Digital Platforms
Intelligent Operations
Open Finance Ecosystems
Digital Technology
Fundamentally banks will need to adopt three key technology approaches:
Mobile-first for the new normal digital experiences. 78% of banks said digital transformation to improve the online and mobile banking experience had become greater priority [1],
Cloud-first for operational efficiency and time-to-market gains. Workloads
in the cloud increased from 8% to 15% in just one year 2021-22 [2].
API-first for effective ecosystems collaboration. 72% said that building new technology on top of APIs would be critical to providing consumers with more innovative banking services [3].
This will be supported by significant investment in Data, Analytics, AI & Automation to deliver better customer experiences at a lower cost, a Digital Workplace to enable a remotely located workforce, whether in-branch, at home or in offices and Security, Compliance & Data Privacy as customers, and regulators, expect a bank to operate at a very high levels to protect customer confidential information and money.