As 2021 ends, the banking industry has experienced another year of unprecedented change, spurred in part by COVID-19 and the subsequent changes in consumer behavior. We sat down with Zafin subject matter experts to explore the year in review and hear their predictions for banking in 2022.
Our panel includes: Venkataraman Balasubrahamian (Bala), CTO; Chris Dickin, General Manager Propositions; Peter Kooner, Vice President, Strategic Sales; and Cameron Tickell, Vice President Ecosystem Strategy
Looking back, what are the main stories in the banking industry in 2021?
Pete: Consumers are demanding a digital experience with their bank, which has been accelerated by the COVID-19 pandemic because banks have been forced to engage with customers electronically. This shift has accelerated the need for banks to prioritize digital transformations, respond more quickly to customers and release new products to the market at speed.
Bala: However, digital transformation in banking has been more “digital” than “transformation” in 2021. That will have significant consequences for what follows!
Chris: I agree with Bala. The pandemic did accelerate the development of bank and credit union delivery mechanisms…the digital front-ends or what I call the window shop of banks, making them the main branch of those organizations. However, they have done little else to innovate on their products or packaging, which is where fintechs outpaced them in 2021.
At the same time, we did see maturing innovation on Buy Now/Pay later (BNPL); banking as a service (BaaS) and embedded finance and payments and merchant point-of-sale (POS) solutions, primarily by fintechs. These propositions attack the core infrastructures of traditional banks and disintermediate them from their retail and business customers and the related revenue. The fast movement towards these offerings has showcased how fintechs are able to innovate quickly on propositions banks should be able to do, too, IF they were on modern technology stacks.
Cameron: Like Chris noted, it was the emergence of new revenue models, like BNPL and BaaS, that were my takeaways from 2021 because they’re setting the scene for changing markets. To build on Bala’s comment, digitizing the current revenue streams, improving customer experiences and touch points, and providing better service were not enough to keep banks and credit unions up to speed in 2021. The next 12-24 months are going to be a very interesting time for traditional banking revenue models as the markets both increase and diversify with big tech, embedded finance and yes, influence from crypto.
What surprised you most about the commercial, retail and community banking in 2021?
Bala: The continued increase in acceptance of all things digital across all aspects of banking and across all sizes of banks has certainly been a significant surprise.
Pete: The ability for banks to quickly implement new technology programs in months which had previously taken considerably longer. Banks were able to adapt quickly to working remotely and engaging clients electronically through rapid deployment of digital solutions.
Cameron: For me, what was most surprising was that SME/SMB banking is still so underserved and lacking unique propositions in the market. I had predicted financial institutions would have been laser-focused on the smaller businesses, especially considering the copious amounts of government support, structured payments and new credit offerings that resulted from the pandemic. There is a swell of new clever credit scoring engines, account aggregation services and specialised neo-institutions ready to fill this void in the coming years. It will be interesting to see if the traditional banks and credit unions can innovate quickly enough in this space.
What trends do you expect in the financial services industry in 2022?
Bala: I believe the “transformation” in digital transformation will become the most significant focus for banks in 2022. This priority will bring fintechs and traditional banks closer, serving as an impetus to the key themes of interoperability and integration.
Cameron: As mentioned previously, I believe a trend will be the ‘shake-up’ of the revenue models that banking provides. This won’t just come from the FinTech players, but also from the incumbent banks. In my opinion, there has been somewhat of a lag into the world of open banking and embedded finance – heavily debated and ideated – but I believe 2022 will be the year in which they help the traditional banks drive new product offerings and revenue streams. Product packages that include your Netflix & Spotify subscriptions, subscription-based insurance and international transfers and wildly different loyalty point programs will make banking products feel a whole lot more ‘millennial’.
The other trend I expect is the notion of “ecosystems” will truly flourish. From competitors to collaborators, we are seeing more and more partnerships from the AMIGOs, BankTech players and fintech players alike. Think model neobanks, Stripe and Klarna, and white-labelled banking-as-a-service. Of course, customer experience, cloud technology and open data will all continue as significant trends. In fact, regarding customer experience, it’s only a matter of time until a super app consolidates the interaction side of things. In contrast, I think artificial Intelligence will barely be a blip on the radar in 2022. There is a still a clear lack of direction and business value drivers.
Chris: I predict three major trends for 2022:
- Banks will continue to transform their digital front-ends, but only a handful will innovate by creating packages that compete with fintech propositions. However, most are not seeing what is coming next, such as decentralized finance (DeFi), and how to play in that world over the next 3-5 years.
- Fintechs will expand to create cross-industry propositions. Take for example Klarna, which is a pure BNPL player, buying Inspirock, a neo-travel company. This will disintermediate banks from some of the larger consumer expenses, in this case, airplane tickets and lodging expenses, and remove interchange revenue from the banks’ bottom lines.
- ESG and COP26 will lead to an impetus to create packages that entice consumers and businesses to clean up their act – enabling consumers to ‘do something’ via their financial choices. This will be crucial for banks to remain in the game post-pandemic. Banks will start to look for solutions that create carrot/stick scenarios for retail and business banking. Following the path of other major private and government funds, financial institutions will be under pressure to move towards ESG initiatives and funds; that said, banks rely heavily on income from O&G investments and assets, so stronger movement to deprecate oil and gas investments will only be possible once regulation is introduced.
If you could choose just three hashtags to summarize your predictions for financial services in 2022, what would they be?
Bala: #Transformation #interoperate #externalize
Cameron: #Cloud-or-die, #MillenialBanking, #ServicingSME
Pete: # Digital Transformation #Valuable Customer Experiences #Increased Rivalry
Chris: The hashtags I would promote are ones needed to create change for financial institutions in 2022: #Cross-industry propositions #CreateMyOwnFIPackage #ESG-finance
Is there a piece of advice you would give to all banks for 2022?
Pete: Now is the time to invest in new technologies that are centered on the customer experience. Customers will continue to have more choices in 2022. The risk they will change banking providers is increased by open banking and the view from younger consumers that their bank is an app which can be easily changed.
In my view, there are four major areas banks should focus on to ensure they can compete with neobanks and expanding global technology companies in 2022.
- Retention: Ensuring valuable customers receive compelling offers which prevent them from leaving the bank. Customers have more options available to them, made even easier through open banking programs.
- Personalization: Acquire net new customers through targeting client segments with hyper-personalized banking products and services specific to their needs and circumstances.
- Transparency: Provide transparency to customers so they have control of their banking products and can move to a self-service model.
- Modernization: The use of cloud technology to modernize legacy platforms, such as mainframes, with a focus on the customer journey.
Bala: I agree with Pete. And the quickest, most risk-free way to enable modernization of your core banking systems with an end-to-end focus is by externalizing your product and pricing.
How do you see customer expectations influencing the trajectory of financial services next?
Chris: Banks have been in business for more than 600+ years, and they have enjoyed unencumbered consumer trust. Their attitude has been similar to the carmakers of the 1900s – “You can have any color in the realm of black”.
Consumers didn’t have other places to deposit their money, the ability to organize on a global scale (think Reddit and GameStop) or a driving force behind them for change (think climate action). However, these three items are changing today at the speed of the new generations who have not known of a world without the internet.
Bala: Customer expectations and experience will keep evolving ahead of the ability of financial institutions to be responsive, let alone proactive. The pressure for banks to keep pace with fintechs will force a rethink and highlight the necessity to partner more broadly.
Pete: Customers are already receiving great digital experiences from global technology providers, such as Netflix, Apple and Google, and they expect the same experience from their banks. Expect to see an increasing need for subscription-based banking services and global technology companies leveraging their existing omni-channels to offer more banking services.
Since COVID is still affecting us globally, what are you seeing as the continued and future impact on banking of the pandemic?
Chris: During the pandemic, many banks closed branches or reduced their footprint. Going forward, they will need to balance the need for physical and digital channels. As a result of the pandemic, the largest branch for any single FI is their digital channel. But consumers are still making bank choices based on physical access and branch proximity. The question is, how long will this hold true? Deploying resources from the branch to digital investments will be a crucial component of their future of banking.
Pete: The pandemic has increased the need for new digital experiences that can meet client demand, as Chris has said. Banks will need to enhance the customer journey so consumers can attain the right products and price, with the appropriate approvals and complete transparency, all at speed, removing the need for lengthy customer help lines.
Bala: This current pandemic is very likely to become endemic as a natural course. It has given pause to how institutions, including banks, have traditionally responded. The need to be compassionate first and recognize, support and reward those who put their lives at risk in order to support the rest of us has considerably increased the need for business agility.
Embedded finance continues to be a hot topic. What are the big stories you expect in 2022? How will banks compete with non-traditional banks entering this specific space?
Pete: Embedded finance offers banks the opportunity to partner with third-party established companies, such as telecommunications companies with a large customer base, to offer banking as a service. These bundled offerings can be white labelled or co-branded, distributed through APIs for real-time customer experiences to increase reach.
Bala: As Pete describes, embedded finance has been about the intersection of a given industry with the financial services industry, but I believe this will evolve to be multi-industry intersections with financial services. I fully expect banks to partner with non-traditional banks as well as cross-industry participants to create a marketplace for highly innovative products that deal with issues that go beyond just financial services.
Cameron: This is exactly right. Banks need to keep as close to the customer interaction as they can, so they need to own the offer and products, including products from retailers, insurers, Telco’s, and even FinTechs. It can be anything that entices the customer and improves financial wellbeing. This strategy will allow traditional banks to not just keep their slice of the pie but increase it. A strategy of merely attaining mass deposits will leave them at the mercy of the embedded finance market.