In our last post, we looked at the key points from Deloitte’s recent study entitled “2020 Banking and Capital Markets Outlook”, and we promised that we’d go into further detail in a later post. So, given its importance for such a fundamental and strategic sector, in this post, we’ll dive deeper into their analysis.
It’s worth pointing out that, obviously, all these predictions were valid before the global crisis caused by the COVID-19 pandemic. They’re still valid as far as they mark the road ahead in normal conditions, although ‘normal conditions’ are doubtlessly something which will be hugely shaken in the next few months.
The complexity of regulating a global market
One of the challenges facing the sector is how to deal with ever-increasing globalisation alongside diverging regulatory standards. This challenge doesn’t just relate to the different interests on a local, regional or continental level but also to the matters that it should address, whose priorities will vary in different places around the world: accounting regulations, data privacy and protection, transparency in access to information, cybersecurity, interbank rates, stress tests, etc.
Added to this is the pressure from new players on the market. “As fintechs become mainstream, the issue of how best to regulate them has become more urgent”, claim the authors. “On one hand, incumbents and fintechs want the latitude to experiment and innovate without the weight of stifling regulation. On the other, innovators also want a degree of regulatory certainty to ensure that their investments will pay off over the long run”.
They go on to conclude, “Amid global regulatory fragmentation, financial institutions – especially those with large global operations – are under significant pressure to reconcile local jurisdiction demands and their home country regulations. Smaller institutions are also not immune to these regulatory ebbs and flows. With divergence expected to continue, coupled with some geopolitical instability and the possibility of an economic downturn, banks can best prepare by continuing their compliance modernization journey using the latest governance, risk, and compliance technologies.”
Gaps, the human side and corporate culture
Whether we like it or not, we’re now in the middle of a period of digital transformation, and for banking, this involves matters such as data management, infrastructure modernisation, the adoption of artificial intelligence (AI) and migration to the cloud. But not everyone is moving at the same pace. North American companies are dedicating of their IT budgets to new technologies whilst their European counterparts are only allocating a quarter. This difference creates an incremental gap which will only be more difficult to reduce as time goes on.
On this matter, the authors claim that “2020 could be the year of “build and migrate”” and that the adoption of artificial intelligence is more profitable when implemented holistically across the organisation. They go on to say that, in order to make the most of this potential, it’s particularly necessary to “rethink their data architecture” if they truly want to transform from a product-centric to a customer-first organisation.
To this, we need to add the human side and corporate culture, which are non-negotiable aspects of the digital transformation. “More often than not, the success or failure of a digital transformation effort may depend on cultural issues rather than technical ones. Only those financial institutions that build a collaborative and innovative culture to drive change can achieve real returns on their technology investments in the next decade.” They could use more words, but they couldn’t say it any clearer.
Committing to technology
A maxim that is often attributed to Einstein says that you can’t keep doing things the same way and expect different results. When talking about banking, we’re talking about risks, both financial risks, which are internal, and non-financial risks, which are external but still have a big impact. The next decade will put to the test the industry’s capacity to continue modernising its risk management practices.
But if an organisation wants to succeed, they need to start by eliminating siloed and redundant risk management practices, which are inefficient both in terms of cost and process, so that the first line can take on more responsibilities. The next step would be to make true use of new technology that “helps banks reshape their risk management program in more meaningful ways”. This means looking at robotic process automation (RPA) and machine learning coupled with natural language processing, amongst others.
However, it’s important to be mindful that new technologies can also create new risks as a result of third-party relationships which could potentially expose banks to misuse of information, theft, system failures, business disruption or regulatory noncompliance.
All of this means putting an end to the historic proliferation of disparate legacy systems which have limited the ability to capture, measure and report data. Quality data can only come from enhancing data architecture.
New players, platforms and a broader range of services
We end this journey through the Deloitte report with a matter which definitely demands our attention: retail banking. The behaviour of this subsector in the last few years has been interesting, to say the least: minimal or negative interest rates, growth in deposits and consumer debt and, at the same time, a constant reduction in the number of banks and branches.
Aside from commercial changes, banks are now looking to create a “customer experience”, and this is something which is resisted despite the growth in the use of digital channels. Amongst other reasons, this is because of the emergence of non-banking organisations that are capturing a large market share, such as Quicken Loans, which is the largest mortgage originator in the United States. Similar things are happening in Asia with fintechs now becoming the dominant players, and in places like Australia, the United Kingdom and the European Union, open banking is becoming ever stronger.
The authors speculate that, by the end of the decade, “fewer retail banks might exist”. “As a result, the nature and degree of competition will likely change; the surviving fintechs should become mainstream players and traditional incumbents will recalibrate their strategies.” It’s not at all crazy to see banks and third parties teaming up to create dominant platforms in the ecosystem with an ever-broader range of services.
It is expected that product innovations will focus on clients’ financial well-being and closely connect lending, payment and wealth management services, creating a superior customer experience, greater connectivity and an ecosystem of APIs to offer contextual “advice” in real time, whilst protecting critical factors like privacy.
In any case, for 2020, which has started so shakily due to the COVID-19 pandemic, the initial expectations that open banking will strengthen, which could “amplify and accelerate banks’ digital transformation efforts and the emergence of new business models”. “While the potential upside is vast, the stakes are high”, so it’s also about being “selective” in how they implement open banking practices.