2023 Banking Outlook: 6 key trends that will impact the industry

By John da Gama-Rose, Head of Banking & Financial Services, Global Growth Markets, Cognizant

John da Gama-Rose

Faced with a fragile economy, banks need to double down on providing guidance and high-quality customer experiences in 2023. However, their position as a natural home for financial products and advice is under threat from Fintechs and new market entrants providing banking services and a range of adjacent businesses offering broader financial needs.

Traditional banks need to become more agile and rethink operations, but many are still constrained by legacy infrastructure. To stay on top, banks must focus on developing customer-focused products and experiences that are data-driven, cross-channel, and guide during these volatile times.

Cognizant’s 2023 banking outlook offers six key trends that are likely to impact the market over the next 12 months:

1. Balancing modernising the core and tackling technical debt

In this recessionary environment, many banks will be put under pressure and face added scrutiny over investments made. As a result, some will be tempted to shift technology and innovation budgets away from transforming core systems to digital engagement solutions.

Technology investments will likely be required to demonstrate faster returns and long-term projects paused to focus on short-term wins. However, those who fail to tackle their technical debt will lose to agile rivals and threaten their position for the subsequent economic upturn.

The longer banks wait to modernise their core, the higher the risk of losing business to competitors. Those that dial-up digitalisation in 2023 will be best positioned to harness technology to drive revenue and innovation at scale in the coming years.

1. Back-office operations empowered to shape strategy

Banks have made significant advancements in modernizing their front-office, customer-facing systems, but many still struggle to align front- and back-office systems. The lack of digitization in the middle and back-office environments limits the ability to fully realize the impact of front-office investments, resulting in an inadequate user experience.

The back-office is expected to follow through on the commitments made by the front-office, which is causing tension. This is further compounded by the fact that back-office operations are continuing to affect customer satisfaction putting a strain on resources and capacity.

To address this, the back-office needs to view itself as a new front-office. However, current legacy infrastructures, technical debt and complex processes make being reactive enough to meet customer needs challenging.

Investing in front-to-back modernization, aided by cloud migration, and robotic process automation, can link customer-facing businesses with operations and back-end servicing to reduce inefficiencies.

In today’s digital age, where data management is crucial for business success, banks need to empower their back-office operations with the information and resources needed to drive strategy and shape the future of the organization in 2023.

1. Working to nurture the decentralised finance movement

The decentralised finance (DeFi) movement is intrinsically linked to cryptocurrency and distributed ledger technology. Therefore, some will, understandably, view the downfall of crypto exchange FTX as cause to take pause on DeFi.

However, this attitude could be a missed opportunity, for DeFi and crypto should be separated, and there is much potential in the former. Paradoxically, the fall of FTX and the crypto market stagnation will trigger more significant reform in this space.

DeFi, after all, uses emerging technologies from third parties to provide financial services that remove traditional centralised intermediaries. It encourages collaboration beyond traditional banking boundaries and enables a more democratic financial system.

Open finance has widened its scope to include mortgages, wealth management, insurance, savings, and capital markets. These use cases are giving rise to concepts such as embedded finance, buy now, pay later, and super apps, which allow banks to deliver hyper-personalised products and become more customer-centric.

1. Building skillsets for the future

The Future of Jobs Report from 2020 estimated by the middle of this decade, 85 million jobs may disappear, mainly due to advancements in technology. But, conversely, another 97 million roles will be introduced to supersede those soon-to-be-redundant roles.

The broader financial services industry – and the banking sector, particularly – is expected to undergo significant change regarding requisite skillsets. This year, banks should do more to future-proof their organisations and take action to narrow the current and potential skills gap.

Banks are caught between managing the legacy and attracting, retaining and developing the talent to digitise operations. The most successful banks will look to build hybrid skills pods that combine business domain expertise, DevOps, data scientists, digital engineers, coders, and agents of change. These hybrid groups will enable agile operations that drive innovation and allow for digitization at scale.

1. Conflicts between servicing a multi-generational society

Digital natives will expect a different banking experience from their grandparents and parents, who tend to be less tech-savvy. So how does the banking industry cater for multiple generations?

In 2021, the Financial Conduct Authority calculated that running a bank branch costs £590,000 per annum. In its current guise, a branch can’t compete with digital outcomes in 2023, which is precisely why there must be a transformation.

There is an opportunity to rethink branches to serve communities better. The cost-of-living crisis is likely to hit those with the lowest incomes the most – and access to financial services means there is a “poverty premium”, so the level of inequality will widen. Shifting the purpose from selling financial services products to well-being, economic enablement, and education could be differentiators.

Whether or not retail banks retain their branches, the direction of travel is clear. Several of them have recently launched banking hubs to improve accessibility and help service a range of generations. Meeting customers where they are most comfortable, either online or offline, will be critical in 2023.

1. Continued maturing of the metaverse

Whatever your opinion today of the much-hyped potential capabilities of the so-called metaverse, they may well be under-hyped in the longer term. Although Meta went large on the metaverse in late 2021, and many cynics question its value for businesses, it is only at the start of the maturity curve.

The metaverse will develop in 2023, and some big banks have already placed their long-term bets. Last February, JPMorgan became the first global bank to invest in a popular metaverse platform by establishing a presence in Decentraland. HSBC soon followed, buying a plot in the Sandbox, a gaming platform.

But the challenge most banks have this year is working out how to engage with the underlying technology and determining what platforms they want to build on to inform business strategies and visions.

A mindset shift is required. Banks must not try and replicate business models in these digital worlds – for example, by creating a virtual branch. Furthermore, interoperability is not widely adopted by the big tech companies building the hardware for digital worlds. Hence, there is a unique and exciting opportunity to provide that missing element that will trigger mass adoption and innovate around identity, verification and payments.

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