Banking on Success
Top trends banks should follow to thrive in this Digital Era
Digital times have completely revolutionized the world and, thus, every single industry out there. Consequently, the banking industry is no exception. It’s no secret that today’s customers are more demanding than ever. Judging banks’ services against that of another bank, like one that compares digital experiences with brands like Netflix is becoming an everyday thing. The worldwide turbulence is constantly paying a toll on everyone’s lives. And the need for higher efficiency and technological improvements are a ‘must’ to endure these tough times as a financial institution.
That said, you’ve probably heard a million times that traditional banks will most likely dissolve in the upcoming years. With Big Tech companies and other actors like Fintechs trying to find their way in, banks must be in a constant lookout for the most relevant trends that are dominating the sector, in order to thrive in this Digital Transformation era.
Now, let’s take a look at some of those trends:
Artificial Intelligence: ‘la crème de la crème’ in banking.
From impressively humanized conversations and interfaces, to hyper-personalized products and experiences, Artificial Intelligence (AI) has the potential to add an extra value to any institution, and even more to financial institutions, for example by automating complex jobs. Thus, through AI, banks are able to optimize troublesome processes such as their back-office activities, eliminating natural human errors and significantly decreasing delays. Not only that, but this technology is also capable of providing tailored products to clients by leveraging historical data and, as a result, making up for the best customer experiences possible.
In addition, it’s well-known that fraud and money laundering controls are increasingly becoming one of banks’ biggest struggles, particularly now in the midst of a global pandemic. Therefore, AI makes a remarkable approach to prevent the dissemination of this type of issues. Visa is an accurate example of the use of AI and Machine Learning models to evaluate more than 400 real-time transactions and identify any possible fraud indicators. Through those models $25 billion of fraud were prevented in 2019.
Along with that, regulation changes can also be predicted beforehand by taking advantage of valuable data and past requirements. This can be specifically convenient for European banks, where regulations are constantly being updated and requirements are being enforced. Let’s be honest, what financial institution wouldn’t want to always stay on the safe side of regulators?
Up until this point, I’m sure you might be thinking, ‘all these AI attributes are amazing and have a huge potential, but what about money?’ If that’s the case, I probably have an unexpected answer for you.
Declining costs for data storage and processing, the increasing worldwide hyper-connectivity and the accelerated improvements in technologies such as AI, have made it incredibly more accessible than a few years back. Most importantly, many case studies have now proven that AI technologies boost revenues through enhanced customer experiences, lower expenses through highly automated processes and, naturally, reveal new cross-selling opportunities. Beyond that, AI has the capacity of releasing an estimated $1 trillion of incremental value for banks.
If Cash is not King anymore, then Who is it?
The aforementioned hyper-connectivity and access to tech, specially to digital platforms, have made us more reliant on opting for digital rather than traditional financial options for all types of operations. The ‘Contactless Age’ is here to stay, as we become more familiar with these easily reachable and user-friendly applications that allow us to access our accounts and even authorize transactions simply through the use of biometrics (e.g. facial recognition, fingerprints and even voice recognition).
Also, the so-called ‘digital wallets’ have been playing a key role for a while, even so more now with COVID-19, since the use of physical cash is the least preferred option by individuals and enterprises. In that sense, banks should really be considering options such as the renowned ‘Apple Pay’ offered to iOS users or ‘Google Pay’ for Android customers, that facilitate payments without needing to take out our wallets and even less “touching” our cards or cash bills. Don’t you find shocking how we’re nowadays able to pay a bill with the use of our smartwatches?
So, if there’s something very clear for everyone now, is that this pandemic has reinforced the trend of digital adoption, not only for payments across every demographic in the world, but also for the retail industry in general (e.g. E-commerce). Therefore, the ‘customer-obsessed’ mindset should always be taken into consideration, specially when referring to bank’s online platforms, making them as client-centric as possible and ensuring those cover all these ‘digital needs’.
A specific example of this customer centricity in which financial institutions should put a significant amount of effort are Mobile Apps. Through their use, we can make transfers, check our accounts’ balances, authorize and set up auto-payments, pay-off mortgages and even request loans with just a few ‘clicks’. Speaking of which, one of the latest features that banks have been looking into, is the possibility of sending remittances to family members across the globe via mobile applications. This definitely avoids the hassle of having to access online platforms from computers, for example, or even having to go to physical branches to transfer funds internationally. Likewise, around 99% of Generation Z and 98% of Millennials demand money management tools, such as Apps intended for budget-tracking, financial advisory and spending forecasts; being this another focal point for banks to approach.
And you might be wondering, what about those with limited to no access to banking services or a smartphone for that matter?
Well, let me introduce you to M-Pesa. To this day, it’s Africa’s most successful mobile money service and the solution for millions of locals. Basically, phones work as bank accounts and, as such, people can transfer funds, receive their wages and buy their groceries by just having a positive credit balance. M-Pesa has provided services to an estimate of 42 millions across the continent. In fact, by 2019 around 12 billion transactions had been done using this service.
Transforming the core is key: Open Banking is skyrocketing
The modernization of bank’s core systems is a crucial action in this digital epoch. Along with the enhancement of customer platforms and applications, a modernized core is what enables custom-made offerings and unique experiences, as well as continuous growth through the on-going development of new product lines.
In that sense, one of the preferred routes by most banks nowadays is the Open Banking approach, which provides financial institutions with the possibility of securely sharing data and services with Third-Party Providers (TPPs) through the use of APIs (Application Programming Interfaces). This way, TPPs are granted access to clients’ information (e.g. Accounts and/or Payments Information Services), to further execute banking operations.
Now…what are APIs all about?
APIs are incredibly useful tools for personalized services, for securely gathering and sharing data, and integrating segments with banks’ core systems. As a matter of fact, IBM offers its IBM API Connect® platform, which is an open and readily-available platform that allows financial institutions and other organizations to create, run, administer, monetize and secure APIs across clouds. Furthermore, according to “The Forrester Wave™: API Management Solutions” report released by Forrester Research in 2020, IBM was recognized as API Management Leader with its API Connect® platform. With features comprising integration, API testing and monitoring, as well as a wide cloud platform, IBM has the broadest set of offerings to go along with its API management. In truth, IBM’s speedy API investments to revamp its gateway architecture, API design and cloud abilities, continue to draw a very promising horizon for the corporation in the “cloud world”.
Why are APIs exceptionally attractive for the banking sector?
- APIs boost customer experience trough facilitating easy data and services’ accessibility across different teams/divisions; along with speedier time-to-market due to limited synchronization.
- They provide flexibility and a direct route for accelerated developments that, in turn, contribute towards the creation of innovative solutions.
- APIs pave the way for strategic collaborations with external partners. For example, banks can partner with large credit card corporations, brokerage firms, creditors, corporate clients for commercial banks, among others, through APIs’ offerings.
The use of APIs is rapidly increasing in the banking industry, mainly due to a huge pressure coming from new giant sector entrants like Apple Pay, Alipay and Google Pay; regulatory compliance requirements like PSD2 in Europe; and even government entities worldwide. Besides that, the latter are encouraging financial institutions to take the Open Banking route.
Strategic partnerships: The outlook for incumbents
It’s no secret that banks are constantly having to overcome challenges: having to stay up-to-date with regulations, being responsive to new technologies, having to provide the best offerings and experiences to their customers, being innovative and unique, while at the same time increasing profit, being cost-efficient and remaining on the top quality and now even sustainability-wise.
Selecting good partners allows for an accelerated digital transformation. Since the most feared players by financial institutions are Big Tech companies right now, joining forces with local stakeholders like other banks, governments, and even large e-commerce players has incredible benefits for banks. Along with the importance of regulations to maintain a healthy and profitable banking sector, the establishment of collaborations in the form of mergers and acquisitions, strengthen financial institutions and make them more competitive for new market entrants.
Each partnership has its benefits for financial institutions. Hence, teaming with local actors allows data sharing within the pre-established boundaries by regulators; with governments to offer payments infrastructure; or even with large e-commerce performers to assign point-of-sale loaning or shared loyalty programs as an incentive for customers. Also, APIs play a huge part in allowing the scale-up of these types of partnerships, as well as reducing complexity and strengthening the basis of the collaborations.
While we could tackle additional areas of development in banking such as risk management, treasury or trading, and even cybersecurity, it’s very clear that the traditional approach to consolidated banks is taking its toll on their PNL (Profit & Loss). More so, when the opportunities for optimization, customer retention and overall experience are proven mechanisms for new revenue sources. Ultimately, banks like any other industry, will need to adapt to the new era and its demands, if they want to bank on success.
