An obvious statement: The banking world is changing. However, it does give rise to less obvious questions: Just how fast is it changing, and in what ways? For instance, what will the banking world look like in five years? Will there be chatbots in every smartphone and every app? Will bitcoins or other cryptocurrencies be mainstream forms of money exchange?
In Bank Innovation’s State of Banking Innovation in 2016 survey, we asked the survey’s 171 respondents — the majority of whom self-identified as bankers —what they thought banking will be like in 2020.
Here are ten different ways they responded:
1. Mobile Everything, But Same Old Banking
Several respondents championed the future of mobile:“Everything you need will be done on your mobile phone,” one respondent wrote. “Mobile payments will completely displace real wallets.” Another added this could lead to the fabled cashless utopia: “More innovation but on mobile, innovations to handle micro payments—sweeping cash out.”
Another added that mobile will replace all the other channels, but it will still be the same old banking: “Smartphones will dominate service delivery and interaction. Robo advice will be standard taking human risks out. Financial markets will be even more computerised and it will be harder to change market share. As I see it, the lessons of the past will be forgotten and mistakes repeated. I was in banking when Westpac almost went under and the financial crisis of the 2000s was due to the same behaviours. However, this time a bunch of computer engineers will be in charge.”
2. Banks Absorb Fintech Startups
One respondent was skeptical that current startup culture would still be around, noting that there will be “very few large scale startups. Most will be acquired and assimilated into the larger ecosystem.” He didn’t elaborate as to why, but we might suggest funding drying up, regulations increasing, or greater synergies developing between fintech companies and innovative banks.
3. All Processes Go Digital
Before we get to mobile we have to eliminate pesky, pesky paper and other remnants of the Dark Ages, which is why some respondents claimed we will have moved entirely onto electronics in the next five years. Wrote one banker, “Branches will be obsolete or will co-exist with partnerships such as coffee shops, etc.,” while another stressed increasing “digital” evolution to come. A third expected that there would be “very limited branches, more conversational. Blockchain, internet of things and wearables will be driving bank interactions. 95% [of] transactions [will be] digital. In 2020, we will see the beginning of the end of car ownership.”
4. “Banks” Disappear
Some participants declared the collapse of the entire banking world, like one respondent who wrote, “It will be in rags after the next banking crisis and we will see a completely new financial infrastructure in its making.” Another was less dramatic and wrote that in the future one could expect to see, “Some of the same and some that is new. Many of the larger banks will be well on their way to a seamless integrated channel experience. They can’t afford not to.The smaller banks will struggle and will either have to partner with 3rd party sources or get swallowed up through M&A. Fintech will go through a period of their own disruption as smaller providers fold and larger providers either partner with banks or are swallowed up by them. Regardless, there will be a shake-up coming.” A third thought that banking in general would be gone–except not really, writing, “I humbly submit ‘banking’ is the wrong term. Customers will have one (or many) financial partners. They will have access to all of their relevant financial information in real time to help them make the right financial decisions in their day-to-day activities. Whether this is to be delivered by banks or disruptive startups is yet to be seen.” Lastly, another respondent predicted chaos, writing, “total transformation; incumbents who adapt will survive—[there will be] significant automation and even AI. Many jobs and old processes [will be] gone.”
5. Community Banks Will Still Be a Thing for Communities…
Some respondents thought community banks would succeed by serving, well, communities. (See Kasasa Chief Innovation officer John Wauph’s upcoming book Bankruption for more on this theme.) One respondent wrote, the banks’ survival will “depend on geographic location — small communities will continue to be primarily served by community banks. Large cities will see a continued shift to a virtual banking model.” A bifurcation of banking between branch and digital based on geography? Interesting.
6. …Unless the Regulators Kill Small Banks
And some respondents thought exactly the opposite, like this banker who noted the importance of regulation: “Technology is moving exponentially at this point and not linear, so it’s hard to predict. But community banking will drastically decline … unless the government regulates fintech harsher.” Regulation (or lack thereof) was seen here as protecting fintech startups and hurting community banks.
7. Staff Shrinks, and Shifts to IT
Some bankers predicted that the rise of technology would led to less staff in finance — unless they happen to do a particular job, like this one respondent who wrote, “Only 20% of current staff levels [will remain], but [banks will employ] twice the number of IT staff. Traditional banks will lose their direct channels to specialist channel providers.”
8. Channels Shift to Wearables and the Internet of Things
Some respondents predicted the rise of wearables and truly mobile banking, like this participant who kept it simple but enthusiastic, posting just, “MOBILITY AND IOT.” No need to shout, we hear you! All caps aside, the shift to internet of things seems to be coming, but fraught with difficulties. Gartner predicts 20 billion (!) IoT devices by 2020. And yet, we haven’t really figured out security, let alone identity, on the coming super-network. Banks will need to tread cautiously are — Capital One is the only bank so far on the Amazon Echo.
9. Rise of the Robots (and APIs)
I would use this for #9: “More automation and personalization. Banking as a platform,” one respondent wrote. This could mean more chatbots and artificial intelligence accelerating the onboarding process, but it also refers to API ecosystems being built on top of bank systems. To many in banking, this implies giving away the customer experience to fintech startups and the tech giants, but perhaps it will just mean enhancing the customer experience by tying in one’s finances to services and systems that are already used and loved. Plus chatbots. Lots and lots of chatty little chatbots.
10. Lower Costs and Less Money in Financial Services (Plus a Lot Lot More)
And then there was this assessment of the current state of banking (estimated reading time 5 minutes):
“Overall, a sad landscape continues. Linear extrapolation suggests it looks like today. The rate of change is actually quite slow. Hopefully, we will see at least an acceleration in the pace, but it won’t be dramatically different. Some consolidation in the industry is essential. Excess capacity makes this look like the steel industry of 40 years ago, [and that] must be dealt with. National champions are not a winning idea. Returns on capital will not improve without consolidation. Less and less money will be spent on financial services, overall. Each client segment will be pushing on fees, so only interest rate rises provide any solace [to bank financial results].
“Technology can help, but perhaps greatest assistance would be to lower the costs and risks of transition in the consolidation process. Most of the new ideas in technology are being driven by gee whiz attitudes and consequently will have limited impact by 2020. The absolute amount of risk sloshing around in the markets will hopefully be decreasing with greater transparency and a more constructive role by investors. Some investors will awaken and stop putting more money into a contracting industry, and realize they ultimately wear most of the risk at the end of the day. That is the ultimate sword to drive change. That should also drive greater separation and walls that regulators want to protect Main Street from Wall Street. Retail customers will be marginally better off as fees decline and some services improve through faster payments and easier access to credit. Retail investors will not change dramatically, and the big wire houses will still be in a strong position. [The] impact of roboadvisors will be on the fringe, not mainstream. Corporate customers will face a different situation, since interest rates will ideally rise by then. Leverage will need to decrease. More transparency on bond and loan covenants will ideally be well underway. Perhaps some greater standardization in practices. [It will be] curious to see what happens with the volume of stock buybacks. In markets like US those have been a significant source of liquidity.
“Companies have to find new avenues for capital investment to grow if they are to survive in slow growth economies. [There] could be less M&A activity, and few private companies going public. M&A in financial services could be a boom. Problems with insurance companies could also be a boon to activity for the banks. Buy-side continues to become more self-sufficient and undergoes consolidation. Active management will continue to be under attack. Economic growth and attendant improvements in returns are likely to be minimal, so generating alpha becomes a rara avis. How many beta factories can be reasonably supported? Not many. New hybrid firms will further emerge that have characteristics of both sides. This is probably the greatest source of innovation. These firms won’t trade the same way and they will want voluminous amounts of data to support investment decisions. They will likely impact how securities are issued, as well as how they are traded. Frictional costs should continue to decrease along with transparency increasing. Risks will be flowing around with this shuffle. Will the absolute amount of risk diminish or just get worn by different parties? We won’t have the answer by then, unless the major institutional investors finally wake up and understand how badly they are being damaged.
“Back offices at most firms will still be hazmat areas. Given that transition times to new platforms or new technologies are generally measured in 3+ years, simple math suggests they still look like the aftermath of a volcanic eruption. A few firms will be ahead of the curve, but it won’t be the big ones. The talent pool will continue to erode as absolute levels of compensation diminishes and other opportunities outside of banking start to look more attractive. A lower grade talent pool in the face of these challenges is pretty scary. Who’s left to lead a reformation? The clients and investors!”
What do you think banking will be like in five years?
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