As we stood at the threshold of 2021, I found myself ruminating about the future of digital banking. In keeping with the spirit of the season, I paused to reflect, peered into the crystal ball and peered into the future.
The demise of traditional banking has been much touted in the past decade. Likewise, the dominant forces of Tech rampantly taking over all forms of banking has also been much heralded. Neither has come to fruition. The mass exodus of customers to new entrants has not occurred. Despite regulation paving the way to friction-less account switching and third-party access to customer data, the main high street banks still command an enviable stronghold in the business areas and performance metrics against which they have been historically benchmarked — deposits, new lending, receivables and so on. Without a doubt, technology has enabled a better customer experience and greater convenience. This is not new though: banks have always been at the vanguard of technology and innovation. Dispensing cash through automated teller machines, making payments using the telephone, swiping a credit card at a point of sale were all breakthrough innovations in their time. Using the internet or a mobile banking app to conduct day to day transaction banking is, some would say, just the natural progression of banking and innovation.
What is not apparent in this narrative is the shifting of the underlying tectonic plates in banking, and financial services more broadly. A tsunami of innovation and a fundamental rewiring of the ecosystem, unprecedented in more than a century, is already revolutionising banking. I predict that digital banking, as we have come to define and know it over the last decade, will change beyond recognition in the years to come. For starters, most banks outside the global and pan-regional tier-1 cadre, will cease to operate their own digital banking offerings. Instead, retail and corporate customers will access their banking needs via a seamless, finely tuned and highly integrated ecosystem of synergistic relationships.
The forces of customer choice, technological innovation, data privacy, regulation and trust have been in a state of elevated tension and constructive combat in recent years. Having just entered a state of equilibrium, I believe we are at the cusp of an era where a predilection for integrated specialist services delivered via seamless and superlative customer experience will dominate as the model of choice; universal or generalist banking models will phase out, models where institutions have felt obliged to manufacture and underwrite a pallet of services, of their own bat.
To keep things simple, let’s consider the twin areas of retail banking and global transaction banking (covering corporate payments, cash and liquidity management).
Even before digital entrants and regulators threw the field wide open to competition, banking products and solutions that involved taking deposits, making payments and providing convenient access to transaction banking needs for both consumers and corporates were considered table-stakes — the fulfilment of these entry-level needs with a high degree of fidelity earned banks the right to delve further into the more complex capital intensive banking requirements of these customers: Personal loans and mortgages, investment advice and retail brokerage, global payments, FX, corporate lending, syndicated loans and so on. This latter category — let’s call it ‘foundational banking’ — is capital intensive, yields relatively low Return on Equity and is subject to intensive regulatory scrutiny. In comparison, the former category is not as capital intensive and yields higher Return on Equity.
The last decade has seen a fair amount of experimentation from full-fledged digital banks, peer-to-peer lending business models, traditional banks spinning up their own independent digital natives, digital currencies, remittance and FX services, block-chain based international payment networks, to name but a few examples. The cut and thrust of these skirmishes have been fascinating to witness and were necessary for the ecosystem to find balance. We are now beginning to see the early positions of what I believe will ultimately settle into a stable symmetry of sorts. I find it instructive to consider a few examples from the last 18 months:
a. Ant-Group — the evolution to a distribution, underwriting and fee-based model across its payments, lending, asset management and insurance businesses.
b. Apple Card — front-ended by Apple, while Goldman Sachs underwrites and runs the card management programme
c. Google Plex — similarly, front-ended by Google, with a host of quasi white labelled banking products and services offered by tier-1 and 2 banks and credit unions
d. Stripe Treasury — evolution of what originally started life as an online merchant checkout and payments acceptance solution to a fully integrated platform of transaction banking products and services delivered via a backbone of banking partnerships
The underlying trends are fascinating:
1. If you cant beat them, join them: In the rapidly evolving digital universe, traditional banks have come to the realisation that a win-win partnership trumps misguided universal banking ambitions. The relationship, like any good partnership, is symbiotic, leveraging the strengths of each of the partners to deliver superior outcomes for customers.
2. Follow the customer: Customers have been demanding the seamless, friction-less integration of banking into their daily existences for a while — it’s high time something was done about it. Banking products and services need to be available and accessible at a place and time of the customer’s choosing and not the other way around.
3. Trust is everything: Customers are not so much wanting banks to be their best friends, as much as reliable and trusted parents or guardians who will be there in their times of need. They want to know that their money, their data, and financial futures are in safe and trusted hands. Banks need to continue to be the custodians of this trust.
4. The data is there, use it wisely, for the customers benefit: With the availability of a wealth of data and information, banks and providers of financial services need to be innovative and responsible in how they assess risk, so that the reach of products and services can be expanded beyond today’s, what some would call restricted, pastures.
The writing is on the wall: With these trends in mind, I am hesitant to use the word ‘predictions’ for some of these are clear and obvious. Nevertheless, if I were a betting man, I’d say the smart money is on the following:
A. Outside of the global or pan-regional tier-1 players, banks will cease to operate their own digital banking channel. The economics will not stack up and customer engagement will dwindle over time.
B. Platforms that customers already frequent for their quotidian needs (in many cases, outside of banking) will provide integrated access to banking products and services. The platforms will provide a screening / light-underwriting plus distribution service for a fee. They will determine the rules of engagement — the underlying products and services will be offered via a panel of banking providers. They will also be the gatekeepers and critical determinants of flows for transactional banking products and services.
C. The gold-rush in the coming decade will be in incumbent platforms looking to make the industry cross-over to banking. Established and nascent platforms include Amazon (US, UK, some international), Facebook / Whatsapp (US, UK, Brazil, India), Singtel-Grab (S.E Asia), Alibaba (China), We-Chat (China). Arguably, the Chinese examples have already reached steady state. Successful platforms and partnerships will expand the reach of banking products and services into hitherto underserved segments such as SMEs and entrepreneurs.
D. The rapid pace of innovation in global payments will continue unabated for the next decade. Already, the world has witnessed unprecedented advances in payments in the last 10–15 years with the breath-taking expansion in near-real time payment networks and the emergence of instantaneous push-payment mechanisms underpinned by an explosion in the granularity and quality of transaction related data. With regulatory frameworks such as Open Banking and Payments Services Directive 2, the upcoming ISO20022 compliance deadlines and the move to further API integration, the pace of change will only accelerate. I expect further in-the-moment payments integration to occur, such as Apple Pay for all purchases made in the Apple ecosystem and further proliferation of Buy Now Pay Later schemes accompanied with immediate effecting of global payments and FX including last mile execution and real-time transparency to payment flows.
E. Banks will retain and protect their traditional areas of strength — arranging complex banking products and to that end, they will want to forge and maintain a relationship with the customers in need of these non-utilitarian services. For reasons mentioned previously, it is unlikely that the new entrants will want to challenge incumbent banks in these areas. Banks that have a heavy reliance on utility products and services will either consolidate to attain scale or wither away. Conversely, global banking players who have invested and built assets and networks over decades will benefit from this incumbency. As an example, unless a new trustworthy replacement is available in short order, banks such as Citi, Bank of America, JP Morgan and HSBC will continue to benefit from the corresponding banking networks and relationships they have built over time.
For anyone looking to hazard a guess of what the future holds for digital banking, the canvas is as broad as it is deep. Likewise, for those of us in the business of banking and technology, many of these trends are self-evident. As obvious as they might be, they continue to enthral and fill us with excited anticipation of their promise and potential.
But in keeping with the spirit of the season, this being a time to reflect and gaze into the future, these are my succinct, if not cursory, observations.