In 2023, necessity will drive banking innovation
By BK Kalra, global head of banking and capital markets, Genpact
Sometimes, companies change the world. Other times, the world forces corporations to alter their ways. In 2023, the latter will occur as necessity becomes the mother of invention for financial institutions. Big trends that will drive these innovations come from a difficult economy, a tight labor market, and the increased importance of new revenue streams. Here are 10 predictions for the banking industry in 2023:
- Embedded finance to catch fire, and banking as a service to bloom
In the year to come, big banks’ strategies will hinge on new revenue streams. More financial institutions will offer financial services to consumers through embedded finance. This will allow them to acquire new customers through the brand of a non-bank entity (such as a retailer or fintech) rather than their own brands. For example, in 2019, tech giant Apple started offering the Apple Card through Goldman Sachs. We expect these models to become more prominent this year.
The other route involves a traditional, enterprise bank offering the non-bank entity the software and security necessary to stand up its own offerings. For example, digital lender Society One offers customers everyday transaction and savings accounts, underpinned by Westpac’s banking-as-a-service platform.
With these models, Apple’s customers become Goldman’s, and SocietyOne’s customers become Westpac’s. More such partnerships will likely follow as banks look to attract new customers and as cloud-based core banking platforms, which provide the connective tissue for such partnerships, mature.
“Embedded finance is an important evolutionary step from open banking and banking-as-a-service,” says Jerry Silva, program vice president for IDC Financial Insights. “This step is critical to reach a future of industry ecosystems, where financial institutions will participate, and in some cases, govern, the sharing of data, applications, and operations with multiple industries on behalf of customer journeys.”
- New revenue opportunities will come from better data
Data will also unlock new revenue streams for banks. In 2023, banks will increasingly ‘walk the talk’ when it comes to data. They’ll look for ways to use the troves of it that are at their disposal to provide new and more personalized, timely, and relevant services and offerings to customers, better meet regulatory requirements, and unlock new monetary opportunities. This will require improved data quality, which yields more reliable customer insights and enhanced regulatory compliance. It will also require better internal data integration, which delivers a more complete view of the consumer by connecting customer data sets across internal information silos. ING and Bank of Montreal are two financial institutions leading the charge to improve data quality and internal data integration.
Ultimately, such advancements will enable the cross-pollination of data within the broader market ecosystem, which will generate monetizable insights. For example, financial institutions that issue private-label credit cards to retailers will combine their own (high-quality, well-integrated) internal data on their small and medium business customers with alternative data from third-party data providers (such as Nielsen or IRi) and data from the retailer itself. This will empower the financial institution to help retailers optimize sales. How? By generating actionable insights that identify which customers the retailer should target with which offers, and when, to achieve the best return on their marketing investments. The result? A ‘pay-to-play’ environment where those retailers that pay for banks’ golden consumer insights outpace those that don’t.
- Self-service will be the name of the game for customer support and collections
Given the impending economic slowdown, financial institutions will increase and expand their customer self-service programs. According to a Gartner study from August 2022, conversational artificial intelligence will reduce contact center agent labor costs by $80B by 2026. In particular, we expect the use of intelligent voice and chatbots to increase. Some of these, such as Kore.AI and Uniphore, can send a link to a customer’s mobile phone to walk them through the self-service workflow. At the same time, banks will redefine the self-service experience based on better utilization of data and analytics. As default rates increase, these same new and improved self-service models will also be deployed to help with collections.
- 2023, a year of consolidation
In 2022, venture capital funding drove strong growth among emerging payments companies and fintechs alike. But many firms’ operations grew inefficiently. Already, the market has upended. We expect to see market contraction and consolidation as well as banks acquiring fintech and payment portfolios.
Those nascent payments companies and fintechs that survive the reckoning will focus on profitable, sustainable growth. They’ll work with external partners to improve operational efficiency and ensure that they can provide the seamless, automated customer experiences they’re known for, even when things go wrong. For example, they’ll look to business-process-as-a-service to allow a partner to execute certain processes end-to-end on their behalf, such as payroll management or accounting.
Process efficiency will also be one of the ways that banks increase their own resilience this year. The cost-of-living crisis combined with a tight labor market has led to increased costs for corporates; notably, fast-rising wages at banks. To deal with the problem, financial institutions will look to do more with less by streamlining and automating their existing processes. For example, Santander UK increased customer satisfaction by 5% and reduced its cost-to-income ratio by 10% by accelerating key business processes, such as its customer onboarding and corporate account closure processes, using automation and artificial intelligence.
- Banks will finally break down internal silos to fight rising fraud with AI, cloud, and analytics
Fraud in online, mobile, and buy-now-pay-later channels is expected to rise as the number of transactions on these channels continues to increase. Scam fraud and authorized push payments fraud will also continue to increase due to social engineering schemes. Since last year, UK regulators have been advising banks to reimburse customers tricked by scams. Regulators in other geographies are likely to follow suit, requiring banks to swallow more of the loss.
Fortunately, cloud, analytics, and AI-based security solutions will help drive fraud prevention and detection. According to a Fortune Business Insights study from March 2022, this will result in a 22.8% growth in the global fraud detection and prevention market over the next seven years, with the market expanding from USD 30.65 billion in 2022 to USD 129.17 billion in 2029.
- A seismic shift to entity-centric monitoring will happen in financial crime
In 2023, companies will be increasingly focused on efficiency and cost reduction. Not surprisingly, then, the roughly $274 billion spent globally on financial crime compliance per year will be a key target for cost-cutting. So, we expect to see a seismic shift in the sector’s focus from event-driven to entity-centric monitoring, which is best served by advanced digital technologies.
With event-driven monitoring, a customer’s legitimate transaction (the ‘event’) is often flagged as suspicious, resulting in a ‘false positive’. By some estimates, around 95% of system-generated alerts are considered false positives. In 2023, however, banks will use artificial intelligence to replicate the complex reviews of these false positive alerts that humans had previously performed. This will result in the same regulatorily-defensible case files produced at greater speed and reduced cost, while freeing up analysts and human investigators to do more value-added work.
An entity-centric approach means presenting data from the perspective of entities and their relationships, rather than individual events. So, it also looks at many more factors than previous methods. This type of contextual assessment results in better detection, investigations, and outcomes. Contextual understanding boils down to having the correct data and intelligence. So, the large-scale use of cloud computing will be essential for this approach.
- Credit card businesses will benefit from better, smarter use of data
A slowing economy and an anticipated increase in credit card defaults will lead underwriters to make more use of alternative data to better evaluate borrowers this year. In the first half of 2021, consumers were not spending as much due to lockdowns, and they were flush with cash. So, default rates, which usually hover around 4%, plummeted to 1.8%. And happy banks were focused on growth for their unsecured lending products. This year, credit card default rates will likely head back towards a more normalized 2-3%. Along with that normalization, banks will make fewer promotional offers, such as big bonus points, longer introductory periods, and temporary zero-interest periods, to encourage new customers to sign up for their credit card products. Instead, bank executives will focus on lowering the average cost of acquisition by up to 20%, which means getting the right credit card product to the right person at the right time. To do that, they’ll need to analyze a full range of metrics —some traditional ones based on their own internal data, such as credit card transactions, and some new ones from alternative data sources, such as a customer’s social media commentary or product reviews. And they’ll need to make use of advanced digital technologies, such as artificial intelligence.
- Hybrid advisory models will help banks handle surge in investor inquiries stemming from market volatility
A tumultuous stock market and soaring inflation will drive more people to seek financial advice to protect capital. Historically, that would have meant more opportunity for financial advisors. But in the past few years, a rise in passive investing and fee compression have led to the growth of robo-advisors, such as Citi’s Wealth Builder and JP Morgan’s Automated Investing, which automatically create, monitor, and rebalance a diversified portfolio based on an investor’s goals and risk appetite. Robo-advisors have met with mixed reviews, however. A recent report from wealth-management analytics firm ParameterInsights found that US investors’ use of robo-advisory services dropped by nearly one-quarter to 20.9 percent in 2022 from 27.7 in 2021. This year, we expect to see the emergence of hybrid models where a client’s investment portfolio is managed through a combination of human and robo advice. This will both balance costs and, after a rocky 2022 investment year, enable financial advisors to use human judgement to help get investors back on track.
- Auto financing models to morph as drivers switch to EVs
The growing adoption of electric vehicles (EVs) will change the auto-finance sector. Already, longer battery life, more charging stations, tax breaks for EV manufacturers, new environmental regulations, corporate ESG goals, success with EVs among commercial fleets, and better affordability for consumers are driving higher rates of EV adoption.
In 2023, the switch to EVs will dramatically change the ownership model and hence the financing. Vehicle buyers will own the chassis, but rent the battery, which accounts for up to 60% of the cost. Separately, many drivers will increasingly opt for subscription-based car usage models – like Netflix, but for cars — rather than ownership, leading corporations to finance fleets of vehicles. Zipcar started a similar operation over a decade ago, and we expect more to catch on in 2023 and beyond.
- Platform consolidation, upgrades, and cloud adoption to increase in commercial banking
Banks’ need to achieve cost efficiencies, speed to customer response, and scalability this year will drive a continued increase in consolidation, upgrades, and cloud adoption with respect to commercial banking platforms. In the US, recently completed or in-progress mergers and acquisitions among banks with sizeable commercial portfolios will lead constituents to focus heavily on integrating their individual IT infrastructures this year. We expect to see adoption and upgrades with cloud-based platforms such as nCino and Loan IQ across originations, credit, and servicing.
“Platformification, enabled by cloud, seems to be one of the biggest trends in 2023,” confirms Jerry Silva, program vice president for IDC Financial Insights. “This aligns with the simplification institutions are looking for to become more agile, resilient, and efficient.”
Overall, executives at financial institutions will find 2023 chock full of challenges, some harder than others. To prosper rather than just survive, executives will need creative thinking, mental flexibility, and true partnerships with digital change agents.
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