Bank to the future

As the bank half year earnings reports are announced in Australia, some common themes are already evident - and hardly a shock.

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Economic and hence bank asset growth is flat. Compliance and other regulatory costs are rising. The credit cycle remains favourable although there are pockets of stress. And technology as a change agent is becoming more and more prominent.

"Already competitive markets were less attractive to BigTech - a surprising incentive for incumbents to favour more open markets.”

The outlook for incumbent banks is challenging in the short to midterm but beyond that, even when economic growth picks up, the successful banking institutions of the future won’t look the same.

A few key forces will be fundamental:

  • Data and software will drive business decisions - even more so when so-called “open banking” rolls out widely.
  • With richer data will come a demand for far better customer personalisation, on both the institutional and retail fronts.
  • Constant innovation will be essential and impossible to deliver all in-house so an ability to develop and exploit partnerships will be critical.
  • An ability to simplify operations - to reduce complexity risk - despite an ever more complex financial system.

Competition of course is always a factor but competition in the future will not just be from peers or even adjacent sectors but tech giants like Amazon, Tencent, Google, Apple who can marshal both the tech and massive data sets (and customers) - unlike fintech startups which may have great tech without scale.

The next fintech

For example, in a new report, BigTech and the Changing Structure of Financial Intermediation, the global banking regulator, the Bank for International Settlements, argues “BigTech” is likely to initially disrupt payments but could ultimately permeate the financial system.

“BigTech firms often start with payments. Thereafter, some expand into the provision of credit, insurance, and savings and investment products, either directly or in cooperation with financial institution partners,” the BIS said.

Payments is critical because it is variously understood to be associated with between 30 and 50 per cent of bank revenue.

And according to Euromonitor, Asia Pacific drives consumer payment trends.

“Asia Pacific is driving global consumer payment value and forecast to account for 52 per cent of total consumer payment value globally by 2023,” the consultancy said in a report, Global Consumer Finance Landscape: Trends Disputing Payments.

“Cash is expected to decline in every region in absolute value except the Middle East and Africa, with Australasia making the most aggressive move to other payment channels. Cash payment value in Australasia is expected to see a -12 per cent compound annual growth rate between now and 2023.”

Positive but cautious

Interestingly, the BIS found already competitive markets were less attractive to BigTech - a surprising incentive for incumbents to favour more open markets.

“Focusing on credit, we show that BigTech firms lend more in countries with less competitive banking sectors and less stringent regulation,” the report said.

How open banking - where, broadly, consumer data held by one institution has to be available to rivals - plays into competition is clearly significant but an unknown quantity.

And how that plays out in Australia (where open banking is yet to be rolled out) is another question.

According to consultancy EY which produces an Open Banking Opportunity Index, Australian consumers are “positive but cautious about open banking, requiring regulators to control security and participants to innovate”.

“Australian consumers tend to be early tech adopters but also have conservative attitudes toward privacy and security,” EY found. “Trust around security of data came through as a key concern.”

Open banking is considered a key opportunity for financial technology startups - “fintechs” - because it offers the scale of consumer access such firms lack and should lower barriers to entry in established markets.

Fintechs though face a different kind of trust issue. According to EY “while Australians ranked ninth on sharing transaction data with fintechs; they jumped to fifth when asked the same question, but with a further assurance that there would be effective controls over the security of the data exchange”.

Transformation of banking is inevitable even though the “bank of the future” is a concept rather than a tangible target.


Highly regarded commentator Chris Skinner has just worked on a new report with a European consultancy on the subject and his views are sensible.

“Whatever the shape of the future financial ecosystem and the type of relationship - competitive, cooperative or mixed - between the different actors (banks, Big Tech and fintech companies), it is certain that banks will have to take the challenge of self-transformation very seriously,” he affirms.

Two forces stand out for Skinner:

On one side, the transformation of customer relations, with the bank becoming truly customer-centric. For example, smartphones have become a privileged channel for accessing financial services. In 2017, the share of users who utilised the Internet or mobile banking in Italy was 62 per cent of the entire clientele, compared with 43 per cent in 2012, while visits to physical bank branches fell from 1.5 to 1.05 times per month between 2012 and 2016.

While Italy-specific, those trends are broadly similar in advanced economies.

Skinner’s other point was digital transformation, with its implications of new technology and open IT architecture.

“In fact, the advent of new digital technologies - such as artificial intelligence, application programming interfaces (APIs), blockchain, cloud computing, 5G and the internet of things - will accelerate the change in the provision of financial services in terms of simplicity, availability, security, reduction in the cost of services offered and ability to gather more precise feedback, more quickly.”

Deep relationships

These forces of course are fundamentally subordinate to the ultimate objective: the customer.

Technology, data, products, networks are all about winning and holding customers. Sometimes that’s forgotten.

Consultancy BCG re-iterates the point “personalisation” is not just about designing targeted products and setting differential prices.

“[Personalisation’s] true potential lies in transforming all of an organisation’s customer interactions by using data and analytics to anticipate individual needs, target segments of one, and build deep relationships that stand the test of time,” according to BCG.

“To be sure, personalisation in banking is not primarily about selling. It’s about providing service, information, and advice, often on a daily basis or even several times a day. Such interactions, as opposed to infrequent sales communications, form the crux of the customer’s banking experience. Yet many banks still tend to focus their personalisation efforts on the sales arena.”

This is a challenge for banks because sales is ultimately fundamental - yet the best way to achieve sustainable revenue is not through opportunistic and short term marketing. It is through genuine customer engagement and service.

Interestingly, the rigorously academic BIS paper addresses similar themes: “A bank acquires soft information from its clients by developing long-term relationships. By contrast, credit scoring with advanced analytics does not necessarily rely on long-term, one-to-one relationships, but exploits patterns of consumer preferences and behaviour using big data.”

The BIS doesn’t come down on either side, warning a full credit cycle needs to run before more complete assessment. Sure, tech can improve service and bring banking to underserved markets - but it can also exclude, lead to greater market competition and ultimately systemic risk.

So the shape of the bank of the future remains uncertain…

Andrew Cornell is managing editor of bluenotes

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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