2021: banking on a better future

January is the time for outlooks and forecasts but of course we only need look at what was said last January to appreciate the inherent fragility of predicting the future (indeed, even without a global pandemic).

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Nevertheless 2020 delivered some tangible shifts which will play out in 2021 and beyond. Some, such as the workplace of the future, we can foresee in general – there will be more automation, more localisation and more working remotely where possible – but the practical detail remains unclear.

"Such partnerships with fintechs – and established financial technology companies – are increasingly recognised as central the business models for financial institutions in the future.”

In financial services, 2020 accelerated existing trends of digitalisation, automation and more integrated and holistic risk management – for example, the widely documented, global, shift towards contactless payments at a physical point of sale.

How these trends will play out in 2021, while not exactly predictable, is more clear because we can already see the emerging preferences of customers, the aspirations of employees and the investments being made by businesses.

The first edition of the bluenotes newsletter for 2021 features a range of stories and research around digitalisation in financial services. Meanwhile, a useful sketch of these developing trends comes from the worksheet for the global banking regulator’s innovation program.

Themes for a new era

The Bank for International Settlements Innovation Hub (BISIH) says it intends to focus on six themes this year.

Those themes are: suptech (supervisory) and regtech (regulatory); next-generation financial market infrastructures; central bank digital currencies; open finance; green finance; and cyber security.

Benoît Cœuré, BISIH Head, says projects will include a proof of concept solution for a regulatory reporting platform employing data analytics and data visualisation to provide supervisors with deeper and more timely insights to address risks – which indeed reflects exactly what many commercial banks, including ANZ, have been working on.

Environmental imperatives are recognised by work on a distributed ledger technology prototype for distribution of tokenised green bonds to retail investors.

Also echoing work being done in the commercial sector is the G20 TechSprint enabling central banks and financial regulators to collaborate with fintech firms on technology solutions to resolve operational problems in regulatory compliance and supervision.

Such partnerships with fintechs – and established financial technology companies – are increasingly recognised as central to the business models for financial institutions in the future. ANZ’s announcement in December that it will form a partnership with global payments specialist Worldline to operate its merchant payment processing business is an example.

Positive trends

Payments is perhaps the clearest example of accelerated evolution. According to analytics firm GlobalData, department store and mall owners have been positive towards ‘digitisation’, ‘contactless payments’ and ‘sustainability’ in company announcements with discussions around mobile payments and digital growth having grown in 2020 earnings transcripts.

GlobalData’s Filing Analytics platform identified earnings transcript mentions of mobile payments and sustainability increased over five-fold in 2020 compared with 2019 while “digital” was mentioned 15 per cent more in the same period. Declining foot traffic forced companies to go digital by launching virtual malls and driving contactless payments.

Payments industry veteran Grant Halverson of McLean Roche Consulting made a submission to the Australian Federal Treasury’s review of the payments system in which he forecast more radical change in the next five years than the last 30.

“Technology influence on payments will expand dramatically in the next five years,” the former Citibank and Diners Club executive argues with the major drivers of change being the IoT (internet of things), AI (artificial intelligence), biometrics, autonomous computerised cars and transport which “all need to be understood and regulated”.

Australia will be caught in the upheaval Halverson says: “Australia has an expensive US/Anglo legacy-based payments system which will be challenged by new technology, new data uses, new players and the need to protect consumer rights and data.”

Meanwhile, like myriad financial institutions, the BIS is also steering work on artificial intelligence and cryptocurrencies.

The other crisis

Central banks and prudential regulators have already been driving forces behind the financial sector’s need to address climate change – both as a financial risk in its own right and a flag signifying how closely banks are aware of more general risks to their earnings and licence to operate.

That means – and we are already seeing this via global accounting standards – Environmental, Social and Governance (ESG) policies will become more entrenched in corporate reporting and more important for those deploying debt and equity capital, be they banks or investors more generally.

Meanwhile, as technological change and digitalisation accelerate, some think we are actually on the verge – and this is good news – of a “Roaring Twenties” of technical innovation which will deliver the next productivity surge. And hence an improvement in global standards of living.

The Economist, for example, argues “the pandemic has also accelerated the adoptions of digital payments, telemedicine and industrial automation. It has been a reminder that adversity often forces societies to advance. The fight against climate change and the great-power competition between America and China could spur further bold steps”.

Improved standards of living are not just a nebulous concept but increasingly recognised as central to a sustainable business model. As we saw in Australia with the financial services Royal Commission or the hundreds of billions of dollars paid by global banks in misconduct fines or the community and investor backlash against companies which ignore social responsibility, free-riding on consumer ignorance or short term exploitation of resources are not sustainable business models.

ANZ’s Chief Executive Shayne Elliott has articulated a strategy for the bank built around growing the wealth of customers – which, if successful, delivers better shareholder returns. ANZ is not alone.

Highly regarded financial services commentator Chris Skinner reported on research by Salesforce he participated in over the last year which found this attention to customer welfare was more and more important for the financial services sector.

Skinner says among the key findings:

  • Financial services institutions (FSIs) acknowledge importance of customer well-being but fall short on taking action. 74 per cent agree focusing on financial well-being is important but only 43 per cent are taking action on either financial or overall well-being.
  • Growth-oriented FSIs have higher expectations of customer benefits of autonomous finance than “stabilising’ FSIs because it will deliver improved financial wellness, better personalization, simplified financial decisions, proactive customer service and better access to financial advice.

There are over-arching themes in financial services however which will determine the precise nature of the year ahead. Economic recovery is the most significant as it determines not just revenue but also the ability of banks to unwind some of the provisions made for worse case scenarios.

Assuming these less-bad trends on economic activity and employment continue, corporate collapses won’t be as severe and housing market disruption minimal. That would translate to lower bad debts and higher dividends.

But even if this pans out it will be no bull market and that means continued pressure on cost reduction, simplification, automation and digitalisation – critical themes of the last decade, even more critical in this one.

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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ANZ and Worldline have created a new joint venture to enhance the payments experience for both consumers and merchants