Banking
Megatrends
All industries are being shaped by the global Megatends of Globalisation, changing Demographics, Sustainability and Technology innovation. Shaped by these trends, the financial crisis in 2008, the pandemic, rising interest rates and a declining economy, the banking sector is being transformed by five major drivers:
Customer Experience
The growing influence of BigTechs has raised the bar for customer service. 75% of customers are satisfied with the digital services offered by their challenger bank, compared to 64% for “traditional” banks [1].
The customer experience is shifting online. 90% of personal transactions and 90% of customer contact is via digital or non-branch channels [2]. Customers are expecting greater personalisation, omnichannel access, data & analytics and even integrated banking & wealth management (this preference has risen from 13% in 2018 to 22% in 2021) [3]. As a consequence, banks are having the radically change their customer engagement model from physical branches to digital-led omnichannel. This does not only apply to consumers but also to businesses.
Mobile is the preferred device. Three times as many consumers now prefer to access their bank accounts using smartphones rather than computers, with security playing a pivotal role in this shift. While most consumers now view smartphones and computers as equally secure, many see biometric authentication measures, which smartphones tend to provide, as the most secure way to authenticate a transaction [3].
With these shifts in customer expectations and behaviour, traditional banks customer satifaction is lagging their digital born competitors. The net promoter score (NPS) measuring customer loyalty is 45 for neobanks compared with 21 for the top 20% traditional banks and 10 for the rest.
Businesses will also expect banks to work in the same hybrid way that they now operate. 70% of bank workers were forced to work remotely during the pandemic [4].
Trust & Compliance
Following 2008 there was much new regulation focused on capital adequacy to avoid future bailouts (e.g. Basel II, Dodd-Frank). This will continue as will the opening up of the banking system to competition (e.g. PSD2) and development of payments (e.g. NPA). Regulation is intensifying, especially around cybersecurity, operational resilience, customer data & privacy, anti-money laundering (AML), transparency, ESG and digital assets. The regulatory burden (and cost) will continue to limit the ability of institutions to innovate (in terms of capital and speed). Regulatory fines are also growing, with fines for AML and data privacy having totalled $5.4 billion globally in 2021 [1]. The UK regulator imposed fines of £214 million in 2022 [2], and Wells Fargo received a $3.7 billion fine for "widespread mismanagement" from US regulators [3].
The financial crisis challenged the trust previously placed in banks. Still over 80% of UK consumers trust their banks but more concerning is that only 35% of small-businesses said they depend on their bank for financial advice [4]. 83% of consumers trust their banks’ security measures, half believe their financial institutions should provide additional protection [5]. 83% of customers believe banks have a moral obligation to help society during this crisis [6].
Banks have seen a 35% increase in fraud attempts through digital channels during the crisis. Bank account hijacking went up over 20% in the first nine months of 2020. Overall attempted attacks are up 500% [7]. The statistics show 25% of Europeans exposed to any fraud suffered financial damage, causing a total loss of around €24 billion in two years [8].
Many banks have well developed internal sustainability programmes but they will come under increasing pressure to focus investments on sustainable projects both from a climate and resources perspective (ESG, sustainable or green financing). The European Central Bank (ECB) has found that most banks are partially or wholly missing climate risk goals. Fewer than half have taken steps to adjust their strategic planning in the face of “inevitably larger climate-related risks going forward” [9].
Innovation
Front-to-back digitisation is paramount to achieve greater efficiency, provide new digital services and deliver a superior customer experience. Overall, firms will need to develop access to real-time data, streamlined workflows, and multichannel and digital tools. Failing to innovate is a major issue as banks have been hamstrung by legacy systems (spending 75% of IT budgets on legacy support) [1], stifling regulations and an inability to change due to lack of expertise and cultural inertia.
A majority of bank respondents (59%) agree “the traditional branch-based banking model will be dead” by 2025, up from 44% in 2019 [2]. COVID-19 has accelerated the shift to digital payments away from cash and digital currencies (CBDC) are being developed. Up to 90% of customer needs are now being met digitally [3].
Digital challengers have increased market share by 50% since 2019 to 8% of the current account market. By contrast the traditional retail banks have seen their share fall by 5% [4]. Competition in the sector is becoming fiercer as FinTechs are orchestrating commercial banking ecosystems and as a service business products, creating robo-investment platforms to broaden the appeal of wealth management, and building B2B super apps to act as the financial front door for consumers.
Efficiency
With growth being captured by neobank/FinTechs, traditional banks need to focus on operational efficiency. The cost-income ratio has been stuck around 62% since 2008 [1].
Reducing friction and manual work is also key to delivering customer experience. Banks have benefited over the past decade from changing customer behaviors and took the opportunity to decrease the number of both branches and employees. Finding ways to decrease costs even by 1 to 2% a year from now on—after a reduction of 25% of branches and 12% of employees in the past five years alone—will be increasingly difficult [2]. To deliver greater efficiency firms will need to fundamentaly reengineer their operating models, enabled by technology.
Resilience and hybrid working is also critical on the back of COVID-19, with up to 82% of workers having to work from home during the crisis [3].
Profitability
Rising interest rates has finally increased profitability. Bank profitability reached a 14-year high in 2022, with expected return on equity between 11.5 and 12.5%. Revenue globally grew by $345 billion [1].
Increasing returns is critical as European banks (including the UK) had only around 5% return on equity (ROE) in 2019. Well below the 8-10% industry average [2].
The unpredictable new normal driven by inflation, uncertain geopolitics, technology disruption and a focus on climate change will mean continued volatility. For instance, it is estimated that changes in consumer payments preferences to digital wallets will put up to $31.4 billion of revenue at risk for US banks between 2023 and 2026 [3].