There are forces at work aiming to reshape the banking sector, and retail banks need to choose whether they want to brace for impact or lead the charge. With 2018 winding to a close and retail banking in a state of perpetual change, everyone's eyes are currently on 2019.
According to Roberto Ferrari, Chief Digital and Innovation Officer at Mediobanca Group, 2018 saw “a more mature application of fintech solutions and a greater use of digital payments.” 2018 also saw the global tech giants having a significant impact on the financial services sector, and this will undoubtedly continue throughout the next 12 months.
Whilst 2019 might be seen by Europeans as the impending “year of Brexit”, there is far more at play on a global scale. Indeed, many retail banks are rolling with the changes and preparing themselves for the trends that will dominate the sector over the next 12 months. Here, we examine the five of those trends that will have the greatest impact on the banking sector in 2019.
The Instatik Data-Center predicts that global spending on AI will more than quadruple by 2021 (to $57.6bn, up from $12bn in 2017). This reflects the high expectations businesses associate with the technology. There are few sectors that won't be affected by AI in 2019, but retail banking will see a slew of specific benefits by using technology that removes human error. Banks in 2019 will use AI to cut costs on the bottom line and improve profitability via improved efficiency and automation, and to generate revenue via front-end innovation.
On the subject of front-end innovation, many retail banks have already adopted AI chatbots to deal with customer service as a “first port of call.” Whilst the rudimentary nature of early chatbot AI meant that an AI chatbot would generally have to refer customers to a human being after a few cursory questions, AI advancements being made in the field mean that, in 2019, banks will start relying more heavily on AI chatbots to deal with more complex customer service enquiries. According to Juniper, this could potentially save the sector over $8 billion annually by 2022 and would be particularly useful in debt collection, where customers generally feel uncomfortable dealing with a human being (even over the phone).
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Indeed, many have argued that AI is the answer to better debt collection, particularly in Southeast Asia, where the lack of infrastructure and different cultural expectations surrounding debt have led to some rather serious difficulties. In these countries, where digital transformation is still in its infancy and field collections are still the most common method of debt collection, AI can also assist by helping field collection agents plan intelligent routes that prioritise the collections that are more likely to be successful. This likelihood is calculated based on information such as what day (and what time of day) a debtor generally pays and an overview of their repayment history. In 2019, we will see more banks and debt collections agencies utilising these advancements for their benefit.
Customer service is becoming more immediate and user-focused, with AI chatbots and live chats helping give the customer a greater sense of agency regarding how they handle their accounts. UK-based Metro Bank is arguably at the forefront here. Whilst they might have hit headlines as the first new high street bank to open in the UK in a century, their real USP is an AI called “Insights”. This AI tool applies predictive analytics to users’ spending patterns and translates this information into bespoke user tips and alerts so personal mobile customers are prompted to manage their money more effectively.
Monzo, meanwhile, is a mobile-first banking company that has laid its very foundations on the principles of customer-centricity. According to Tom Blomfield, the founder and CEO of Monzo: “Every bank claims to be customer-centric, and they are invariably not. They’re product-centric. And I think we are striving to be even more customer-centric”. The app at the centre of the company has been designed to help people and treat them fairly. Considering that Monzo hit over 100,000 users in 2017 and is continuing to grow, it’s a business model that’s obviously working.
A customer-centric approach is something that could also potentially revolutionise debt collection, a sector that has been notoriously underserved when it comes to customer-centricity, perhaps due to its very nature. In the APAC region, debt is still seen as a significant source of shame. In developing countries like Indonesia, there is also a great deal of negative sentiment surrounding debt collections, due to historic cases of violence being committed by third-party debt collection agencies on delinquent debtors. This could be mitigated somewhat by banks changing the narrative and becoming “debt resolvers” instead of debt collectors.
A recent study by PwC found that 61% of bank executives believe a customer-centric business model is important, and that 75% of banks are making investments in this area globally. So, it would seem the top brass are starting to understand the long-term potential of customer-centricity.
Blockchain/distributed ledger technology
Blockchain is notoriously complicated, but its potential is staggering. The technology allows multiple parties simultaneous access to a digital ledger that is always being updated and cannot be altered. Banks are constantly finding new ways to utilise blockchain to transform major parts of their business. Payments, verification, cleaning and settlement and many more areas could be affected positively by blockchain tech in 2019. Blockchain firms managed to raise a combined $240 million in venture capital in 2017 and most of this was from banks, so there is obvious interest already mounting.
If used strategically, blockchain has a lot to offer the banking sector and many major banks are starting to take advantage. Santander is launching One Pay FX in Europe; the first international money transfer service over blockchain that offers fast, secure and commission-free multi-currency transfers. CEO Anna Botin said: “Blockchain technology offers tremendous opportunities to improve the services we offer by providing a fast, simple and secure way to transfer money internationally.” In the US, meanwhile, J.P. Morgan recently filed a patent to use blockchain technology to speed up cross-border payments.
Blockchain is maturing at a steady rate and is becoming a more mainstream technology. Early adopters (including fintech firms such as solarisBank) have already shown us what is possible, so the market could (and should) follow their lead. However, the likelihood is that, whilst there are many things that could work, non-strategic uses of blockchain by those that don’t fully understand it could lead to disillusionment.
With the tech and banking landscapes changing at such a pace and more things ‘going digital’, the focus on cybersecurity has never been stronger. Of course, it’s been a major aspect of most banks’ agendas for years now, but multiple new technologies are exposing customer data to greater risks than ever before. What is really required is some proactivity. In a recent PwC survey on cybersecurity, it was found that that 71% of banking CEOs consider cyber insecurity a major threat to their business prospects and, as such, it’s an area that requires some serious action.
Cybersecurity regulation is increasing, of course, but banks will need to do more than just ‘follow the rules’ if they want to keep up with threats that are constantly changing and evolving. According to an Accenture survey of security executives, global banks faced an average of 85 serious attempts to breach their cyber defences in 2017 alone, and 36% of these attacks succeeded in stealing data.
With burgeoning digital technologies such as digital ID, AI-powered customer and voice controlled options opening up a number of fresh avenues for cybercriminals to exploit, banks need to better focus their cybersecurity resources to adapt to the shifting landscape.
According to the 2017 study “The True Cost of Fraud” from LexisNexis Risk Solutions, global banks that employ multi-layered cybersecurity measures (including modern, digital identity-based authentication technologies) can experience less than 50% of the total fraud costs the sector faces on average. Cybercriminals are always hunting for new ways to attack and banks need to be just as (if not more) savvy if they want to stay two steps ahead.
Digital transformation - A trend for all seasons
Each of the four trends above have one common denominator; digital transformation and a growing reliance on it. This is something that is made possible by the aforementioned trends and will continue to disrupt the sector in the coming years. Indeed, digital transformation spending will approach the $2 trillion mark in 2022, according to IDC.
At its core, digital transformation means finding ways to solve traditional problems in a more efficient manner via a digital solution. It's a trend that has taken root for years in the western world, but 2019 looks to be the year where the trend finally makes significant inroads in the more traditional market of Southeast Asia. In the next year, digital tools and assets look set to change the way APAC banks interact with their customers and each other.
Digitisation has already proven to be incredibly disruptive in Hong Kong, where virtual banks and a major digital identity programme have transformed the way citizens interact with financial institutions. Meanwhile DBS, one of Singapore’s leading financial services groups, has been embracing digital transformation for years. CEO Piyush Gupta said: “The experience of telcos, transport, and retailing shows that we’re changing the way we communicate, the way we commute, and the way we consume. So why would banking be immune or be safeguarded from any of this? Banking is arguably the most ‘digitisable’ industry of them all, so in some ways, it’s surprising that we haven’t been more disrupted”.
It’s only a matter of time before the trend spreads further afield. Research conducted by EY has found that 37% of APAC banking customers prefer to use online banking options to manage their finances on a weekly basis, compared to 19% who would prefer to use a physical branch and 10% who would prefer a call centre.
This shows that there is a real hunger in the region for digital transformation. Digital transformation is also poised to cause a major disruption in the APAC debt collection sector, where cultural differences and complex court systems have led to overwhelming complexity. There might be some consumer resistance, but instant electronic payment options are taking off in a number of APAC countries such as India, Sri Lanka, Singapore, Malaysia and Hong Kong. In 2019, the developing countries in the region will surely begin to follow suit.
With brick and mortar banks becoming more antiquated by the day, the banking sector is starting to catch up with the rest of the world. This is a world that likes things to happen fast, without errors or friction. Our technology might not define us, but it is certainly beginning to define the way we interact with the world around us and, if the trends set to take the sector by storm this year are to be believed, the world of retail banking is finally ready to swallow the red pill.