A variety of forces are buckling down on banks, many of which are accelerating. Long-term factors like demographic aging and climate change are becoming more prominent. Markets have become unstable as a result of shocking occurrences like the COVID-19 outbreak and the crisis in Ukraine. Banks are evolving their business models in response to these forces of change in order to engage clients in highly dynamic digital environments and fulfil new societal expectations. More fundamentally, the industry’s quick development and hazy future raise a fundamental question: What is the purpose of banks?
A new SAS-sponsored study by Economist Impact predicts three potential futures for banking, examining the risks and opportunities ahead. Depending on the sequence of events that take place between now and 2035, any of the scenarios are conceivable. The objective of the study is to shed light on how banks might change their purpose and business strategies to benefit consumers, shareholders, communities, and the environment. The study makes it evident that the banks are at a turning point in dealing with issues like climate change, economic dispersion, and chronic economic and social injustices.
Yuxin Lin, Senior Manager of Policy and Insights at Economist Impact said, “The sector’s rapid evolution amidst prevailing uncertainty begs a fundamental question: What is the purpose of banks?”
How banking leaders answer this question – and the business decisions they make as a result – will redefine the entire industry.
Alex Kwiatkowski, Director of Global Financial Services at SAS said, “Banks have the power to elevate not just our global economy but all of humankind. By embracing technology and innovation with intention, banks can pave a more purpose-driven path, where higher purpose and profitability go hand-in-hand. And if they don’t embrace this fully, a golden opportunity to make a genuine difference will be squandered, potentially with very serious consequences.”
Scenario 1: Can transformed banks regain public trust?
Banks have had issues with their reputations ever since the 2008 financial crisis. According to the 2022 Edelman Trust Barometer, financial services presently inspire confidence in just over half (54%) of the general public, making them one of the least trustworthy industries. Flashing forward to 2035, Scenario 1 envisions a world where banks wield digital transformation to rehabilitate their image. Banks have backed consumer-focused regulation and improved safeguards against cybercrime and data privacy. More open banking and collaborations that spark profitable new offers are fueled by increased transparency and consumer protections, which boost public confidence. Every aspect of clients’ financial lives are seamlessly integrated via digital platforms in personalized, adaptable ways.
Stu Bradley, Senior Vice President of Fraud and Security Intelligence at SAS said, “Consumer trust, built over many years, can be lost in an instant. As digitization accelerates, it is critical that banks create hyper-personalized engagement as they address rising risks. In balancing customer experience and risk, an enterprise decisions approach – where fraud, risk and engagement decisions integrate holistically across the customer journey – can cut costs and streamline banks’ IT infrastructures, while boosting revenue and customer retention.”
Scenario 2: Might banks catalyze cross-industry climate action and power the green transition?
It will take unprecedented levels of global cooperation and teamwork to address the climate crisis. The United Nations claims that states’ present pledges to cut greenhouse gas emissions are far insufficient to keep global warming to 1.5°C over pre-industrial levels. Action that is swift and firm is necessary to prevent the worst effects of climate change. Scenario 2 foresees that in 2035, the world community will be committed to addressing climate change, and decolonization will be a top priority for infrastructure, transportation, and energy. Cities have been redesigned to be more resilient to the effects of the climate. Green technologies and affordable renewable energy sources are becoming the norm.
Troy Haines, Senior Vice President and Head of Risk Research and Quantitative Solutions at SAS said, “Climate leadership in the banking sector will drive greater cross-industry progress toward net-zero emissions by 2050 – and it starts now with better analytics, modelling and management of climate risk. In enhancing their ability to model climate risk scenarios and understand potential impacts to their balance sheets and capital, banks can help propel the green transition and advance worldwide climate resilience”.
Scenario 3: How will banks fare in a geopolitical fragmented world?
Economic and market uncertainty continues even as the world seeks to put the worst of COVID-19 in the rearview mirror. The pandemic’s aftermath has exacerbated rivalries among the world’s economic superpowers while overtaxing developing nations, whose citizens bear disproportionate burdens. Against this backdrop, it isn’t hard to imagine Scenario 3, which depicts a geopolitically contentious world stage in 2035, colored by divergent interests and a retreat of multilateralism among the world’s economic giants. The World Trade Organization has been displaced by bilateral and regional accords. The emergence of digital currencies and rivals’ alternative payment methods has shattered the global financial system.
Theodora Lau, Founder of Unconventional Ventures says, “Deglobalisation, accelerated by recent global events, will likely widen the staggering societal inequalities that plague us today. Indisputably, banking and money are at the heart of it all. Each of us has a role to play in championing a more inclusive and sustainable future with our actions of today”.
How fintech challenges banks
The use of personal finance applications has increased recently. The app game is being played by everyone in the banking industry; app providers range from banks that offer their own services to lone developers that make stand-alone saving, budgeting, or money management apps. It is anticipated that the use of personal finance applications will be at its peak in the coming future. These app providers offer current accounts that can only be handled from a phone or tablet, and staff members give customer support via a live chat service. The option to temporarily block your card from your app in the event of loss or theft is one of the major improvements offered by challenger banks with app-based business models. Instead of phoning customer support for replacements, clients can order a replacement with a few taps on the screen. The services offered by conventional banks might be improved with such straightforward changes. By allowing consumers to just take photos of their checks rather than bringing them into the branch, some traditional banks already assist their clients in this way.
Conventional banks are catching up
There are indications that major banks are adapting to the future of banking by becoming more digitally friendly. For instance, Hello bank! by BNP Paribas Fortis which operates in France, Belgium, and Germany was the first bank to exclusively handle accounts through an app. In keeping with a shifting consumer landscape, Hello Bank! offers assistance and support to its clients via a variety of social media platforms, including an online forum.
Additionally, a lot of these services make international banking simpler than before. The number of apps that assist users in managing their finances on a daily basis has increased in other places. Yolt, for instance, enables users to integrate all of their accounts and monitor them in a single app while also getting advice on their weekly or monthly budget. Standalone savings apps are becoming increasingly common, too. This includes applications that add the difference between the amount a user spends on each transaction and the nearest unit to their savings account. If customers are unable to afford to set aside hundreds of pounds or euros each month, such straightforward developments can give them a new, simple option to save money.
Increased awareness of how banks communicate with (and inform) their customers is one of the long-term repercussions of the 2008 financial crisis. The European Union’s Payment Services Directive went into effect in 2018. The order upholds restrictions on how users can access their financial data. This is open banking, which gives banks a plethora of new ways to interact with customers and gives consumers a greater understanding of their money. Open banking basically implies that companies that offer online accounts (such as credit and savings cards) must allow their clients to securely exchange data (such as expenditure) with outside companies (such as budgeting applications), if the client so chooses.
Consumer education regarding the advantages of open banking still needs to be done in great detail. Furthermore, banks must appropriately embrace the various ways in which they might exploit these innovations. This suggests that the coming years could be significant for the banking industry’s future because several governments are now approving operating more open banking.