Banking and FinanceIssue 02 2023MAGAZINE
GBO_ banking in 2023

Banking in 2023: Gear up for these changes

A large percentage of today’s banking customers are open to using online and mobile banking apps to do more than monitor their finances

COVID has set the financial sector on the path of digitisation and banks have responded to the changing trend by bringing fintech elements like instant and personalised customer services, apart from heavily investing in AI and data analytics, to streamline and smoothen their decision-making.

In 2023, expect the financial sector to continue its transformational path.

“The most obvious change in consumer banking behaviour has been the surge in online and mobile banking activity. As branch locations closed due to local and national lockdowns, online and mobile banking became the primary channels for people to interact with their bank. Fidelity National Information Services (FIS), an organization that works with 50 of the world’s largest banks, noted a 200% increase in new mobile banking registrations in early April 2020, and an 85% jump in mobile banking traffic,” remarked a report from StarDust CTG.

“Even as lockdowns ended, the general surge in online and mobile banking did not come to an end as many customers continue to avoid using their local branches. According to an international survey by Accenture, 50% of consumers interacted with their bank through a mobile app or website at least once a week in 2020, compared to about just 32% in 2018,” it said.

“Additionally, a large percentage of today’s banking customers are open to using online and mobile banking apps to do more than monitor their finances. Around 47% of consumers surveyed by Accenture stated a preference for using a mobile application or website to open a new bank account while 37% preferred using a desktop or laptop,” the study continued.

“The pandemic is also having a strong effect on the way people are making purchases. Since the start of the pandemic, the use of contactless payments has jumped 40% worldwide. More than 50% of people living in the United States began using mobile wallets like Google Pay or other contactless payment methods. In France, 42% of consumers are using contactless payments more since the beginning of the pandemic,” it commented.

Since the banking sector is all set to accelerate its transformation journey further in 2023, here is a list of things to expect from financial institutions.

A possible boom in embedded finance

For 2023 and beyond, big legacy banks’ strategies will centre on generating new revenue streams. These institutions will start offering financial services to consumers through embedded finance (the term represents a paradigm shift in how financial services are delivered, characterised by incorporating financial services into non-financial products and services, such as mobile applications and digital marketplaces). Banks will acquire new customers through the brand of a non-bank entity like a retailer/fintech. In 2019, Apple started offering the Apple Card through American multinational Bank Goldman Sachs.

“Embedded finance is a win-win for all stakeholders involved. Customers benefit from frictionless banking experiences, such as the ability to make purchases using buy now, pay later (BNPL) options. Merchants and brands also benefit from the ability to attract customers with digital financing options and expand their business. Banks, on the other hand, can expand their services to more customers without incurring the costs of distribution,” said PaymentsJournal, while explaining the phenomenon.

“Progressive banks are approaching embedded finance with a product management mindset. They are building ecosystems of digital platforms, fintechs, e-commerce players, and other entities to offer a wide range of financial services to their customers. This enables them to offer new products and services, such as digital wallets, mobile payments, and other digital financial services in a cost-effective way. By partnering with digital platforms, banks can also gain access to new customers and markets that were previously out of reach. In addition, embedded finance enables banks to increase revenue from existing customers by providing them with additional services such as lending and insurance. This allows them to increase customer loyalty and retention,” it remarked further.

Banks may also start offering non-bank entities the necessary digital infrastructure to enable the latter to start their own offerings. Digital lender ‘Society One’ is offering its customers transaction and savings accounts, backed by Westpac’s banking-as-a-service platform.

The above-mentioned models helped Apple’s customers to become part of the Goldman user base, and SocietyOne’s customers to become Westpac’s. Banks are now looking to attract new customers through cloud-based platforms, which provide the connective mechanisms for such partnerships.

Data will drive revenue opportunities

In 2023, expect banks to make full use of data analytics to boost their revenues. The focus will be more on providing personalized and relevant customer services, apart from meeting regulatory requirements and securing new monetary opportunities.

The demand for improved data quality will go high, as it will be crucial to understand the customers’ financial behaviour and ensure enhanced regulatory compliance. There will be a requirement for better internal data integration as well, in order to generate a complete analysis of the consumer’s requirements, before drawing up personalised financial products. The whole operation can be performed through the connection of customer data sets across internal information silos.

ING and Bank of Montreal are currently leading the trend of improving data quality and integrating internal data.

Financial institutions issuing private-label credit cards to retailers will combine their own high-quality and well-integrated internal data on their small and medium business customers with alternative data from third-party data providers and the retailer. This will empower the banks to help retailers optimize sales by generating actionable insights that identify the target customer base.

“Regulatory pressure has been forcing banks to invest in more data acquisition, storage, licenses, security, AMCs and people to manage the data. Practically every bank today has a big data implementation in terms of Hadoop running on their IT systems. But not all can generate revenue from data – turning a liability into an asset,” a Wipro report stated.

“Banks and themselves at the intersection of advanced technology and sophisticated customers in a world gone digital. The data coming in from IVR, web, mobile devices, ATMs, kiosks, CRM, surveys, social networks and partner services can lead to superior personalization of services,” it elaborated further.

“Using advanced analytics on top of Big Data, customer data can help retail banks solve business problems far more complex than those faced by Nicolas. Banks are in the process of transforming their traditional data warehouses into information delivery platforms or ‘Insights-as-a-Service’ – an area that can aid service diversification and improve profitability. ‘Insights-as-a-Service’ will help retail banks go beyond non-interest income products. Banks can also improve top-line growth by acquiring new customers, efficient customer servicing through customer lifetime value maximization, by cross-selling/up-selling new products and services, and preventing customer attrition,” the study commented.

Self-service will change the game

A 2022 Gartner study stated that conversational artificial intelligence would reduce contact centre agent labour costs of legacy banks by USD 80 billion by 2026. The use of virtual assistants and chatbots will increase further. Innovations like Kore.AI and Uniphore can send a link to a customer’s mobile phone to walk them through the self-service workflow. At the same time, banks will redefine the self-service experience based on better utilization of data analytics.

A 2019 Nasdaq report said that building a full-service office facility can cost legacy banks over USD 1.5 million in the United States, with an annual operating cost of almost USD 1 million per branch. While it means labour costs getting increased, operational costs also remain at the higher range of digital alternatives, thus making the whole purpose less profitable.

Capgemini’s World Retail Banking Report 2022 says that 75% of its surveyed customers believe bank branches are an important part of their financial plans, but they want these buildings to have more than just transactional capabilities. Some 64% opted for these branches to have self-service options, while 31% indicated an interest in a more immersive (augmented reality/virtual reality) experience.

Focus will be on brand value

Venture capital funding drove strong growth among emerging payments companies and fintechs in 2022. However, some of these businesses registered inefficient growth. Now for 2023, expect to see market contraction and consolidation, apart from banks acquiring fintech and payment portfolios.

Payment start-ups and fintechs will focus more on having profitable and sustainable growth trajectories. These businesses will continue working with external partners to improve operational efficiency, apart from ensuring seamless and automated customer experiences. They will look towards a ‘business-process-as-a-service’ mechanism to allow a partner to execute certain processes end-to-end on their behalf, such as payroll management/accounting.

The banks will also look to increase their resilience in the area of process efficiency. The ongoing cost-of-living crisis, a product of inflation and monetary policy tightening, combined with a tight global labour market, has led to corporates witnessing a rise in the cost front, as they have spent more to provide inflation-adjusted salaries to their staffers. To address this, entities like banks will opt for streamlining and automating their operations.

Santander UK recently increased customer satisfaction by 5% and reduced its cost-to-income ratio by 10% by accelerating customer onboarding and corporate account closure processes through the help of automation and AI. Banks will increase AI, cloud and analytics usage to fight fraud. Buy-now-pay-later channels will see a continued rise in the number of transactions. In short, with banks opting for the digital route to cut down on operational costs, online fraud will go up as well. So expect the financial sector to increase its investments in cloud, analytics, and AI-based security solutions, in order to drive robust fraud prevention and maintain clean brand names.

According to a 2022 Fortune Business Insights study, the above developments will result in a 22.8% growth in the global fraud detection and prevention market by 2029, with the sector expanding from USD 30.65 billion in 2022 to USD 129.17 billion in 2029.

Shift to entity-centric monitoring of financial crimes

“In 2023, companies will be increasingly focused on efficiency and cost reduction. Not surprisingly, then, the roughly USD 274 billion spent globally on financial crime compliance per year will be a key target for cost-cutting. So, we expect to see a seismic shift in the sector’s focus from event-driven to entity-centric monitoring, which is best served by advanced digital technologies,” remarked BK Kalra, Genpact’s global head of banking and capital markets, in an article written on the Global Banking and Finance Review.

“With event-driven monitoring, a customer’s legitimate transaction (the ‘event’) is often flagged as suspicious, resulting in a ‘false positive’. By some estimates, around 95% of system-generated alerts are considered false positives. In 2023, however, banks will use artificial intelligence to replicate the complex reviews of these false positive alerts that humans had previously performed. This will result in the same regulatory-defensible case files produced at greater speed and reduced cost, while freeing up analysts and human investigators to do more value-added work,” the official remarked further.

An entity-centric approach is basically data presentation from the perspective of entities and their relationships, rather than using individual events. So, it also looks at many more factors than previous methods. This type of contextual assessment results in better fraud detection, investigations, and outcomes. Contextual understanding is all about having the correct data and intelligence, so it requires a large-scale use of cloud computing. Expect banks rapidly opt for this solution in 2023.

Data will drive credit card businesses

Amid inflation and monetary policy tightening, expect an anticipated increase in credit card defaults and this will lead banks to make more use of alternative data to evaluate borrowers better.

“In the first half of 2021, consumers were not spending as much due to lockdowns, and they were flush with cash. So, default rates, which usually hover around 4%, plummeted to 1.8%. And happy banks were focused on growth for their unsecured lending products. This year, credit card default rates will likely head back towards a more normalized 2-3%. Along with that normalization, banks will make fewer promotional offers, such as big bonus points, longer introductory periods, and temporary zero-interest periods, to encourage new customers to sign up for their credit card products,” Kalra said in his article.

“Instead, bank executives will focus on lowering the average cost of acquisition by up to 20%, which means getting the right credit card product to the right person at the right time. To do that, they’ll need to analyze a full range of metrics —some traditional ones based on their own internal data, such as credit card transactions, and some new ones from alternative data sources, such as a customer’s social media commentary or product reviews. And they’ll need to make use of advanced digital technologies, such as artificial intelligence,” the official added.

Hybrid advisors to help banks

Since the economic slowdown and policy rate changes are taking a toll on stock markets, more people need to seek financial advice than ever before. What used to be a job requiring human expertise is seeing a rise in the participation from robo advisors, like Citi’s Wealth Builder and JP Morgan’s Automated Investing, which automatically create, monitor, and rebalance a diversified portfolio based on an investor’s goals and risk appetite.

A report from ParameterInsights found that US investors’ use of robo-advisory services dropped by nearly one-quarter to 20.9% in 2022 from 27.7% in 2021. However, things may change in 2023, as to deal with growing investor inquiries, banks will opt for hybrid models, where a client’s investment portfolio will be managed through a combination of human and robo advisors.

Auto financing models to undergo changes

“The growing adoption of electric vehicles (EVs) will change the auto-finance sector. Already, longer battery life, more charging stations, tax breaks for EV manufacturers, new environmental regulations, corporate ESG goals, success with EVs among commercial fleets, and better affordability for consumers are driving higher rates of EV adoption,” writes Kalra.

“In 2023, the switch to EVs will dramatically change the ownership model and hence the financing. Vehicle buyers will own the chassis, but rent the battery, which accounts for up to 60% of the cost. Separately, many drivers will increasingly opt for subscription-based car usage models – like Netflix, but for cars — rather than ownership, leading corporations to finance fleets of vehicles. Zipcar started a similar operation over a decade ago, and we expect more to catch on in 2023 and beyond,” the senior banker concluded.

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