The Future of Retail Banking

It's all about the customer in retail banking IT

Analyst Perspective

David Tomljenovic,
MBA LLM CIM

Head of Financial Services
Industry Research
Info-Tech Research Group

“The customer is always right” has never been truer than in the current era of retail banking. Competition for customers continues to escalate among incumbents as well as from new digital start-ups and non-financial market entrants who have deep technology capabilities, extensive data sets, and existing relationships with customers.

As a result, retail banks are under increasing levels of pressure to elevate and simplify customer experiences across all channels; in-branch, online, mobile, and call centers. They must accomplish this while simultaneously identifying new areas of customer needs and building appealing products and services to meet demands. The result is that the pace and complexity in retail banking is rapidly escalating and having a similar impact on technology.

Info-Tech’s approach focuses on an analyst’s investigation of strategic foresight. This methodology helps the IT department, and the business, process what is happening in the organization’s external environment in a way that guides ideation and opportunity identification. As a methodology, strategic foresight flows from identifying signals to clustering the signals together to form trends and finally to uncovering what drives the trends to determine which strategic initiatives are most likely to lead to success on an industry level.

Executive Summary

Info-Tech Insight

Retail banking is reshaping itself. Banks are intensely focused on customer experience and product innovation. They need to leverage advanced technology to better understand their customers and anticipate their needs. To become trusted partners, banks will need to launch more sophisticated technologies that push into new areas such as NLP, AI, and ML.

Client needs are rapidly changing

Clients are demanding more from their financial institutions

Customer needs are evolving. Customers expect their financial service experiences to equal those they are having elsewhere. To connect with clients, banks must create products and services that are tailored to each customer’s lifestyle. To become a trusted partner, banks must also provide guidance and advice for clients to feel confident about their financial decisions.

Branches now support digital. The traditional model of a bank branch is changing. Digital once supported branches; now branches are redesigning their locations and premises to meet new client demands.

New market entrants are meeting client needs. Limited regulatory oversight, new risk models, and new business operating models provide advantages for new entrants over traditional financial institutions. These entrants are nimble and focused on meeting client needs.

Consumers are attracted to the changing product landscape. New products and services are uniquely meeting customer needs, such as point-of-purchase financing where goods are financed into equal payments.

Address transactional and advisory needs

Digitize transactional services that make banking more convenient. Launch advisory services for more complex products such as mortgages and investments – younger generations are still looking for advice on these products.

Deliver a fast, simple, and flexible customer experience that is accessible across channels. This will require more complex technology such as AI, ML, and NLP.

Advisory services require a deep understanding of customers. Leverage predictive analytics to deliver a personalized experience at every touchpoint. This requires a strong data center that is integrated across all platforms.

40%

Traditional banks are struggling to stay relevant

traditional branch banking is expensive and offers diminishing value versus digital

Traditional banks are using fees to boost revenue. The average quarterly US bank profit per household is $180 (Forbes, 2019). Excessive fees for simple events like non-sufficient funds (NSF) checks are prevalent and easily preventable using basic digital technologies that can alert customers before charges are incurred. This leaves traditional banks exposed to new digital entrants.

Consumers are increasing their number of financial service relationships. Individuals now have at least four financial relationships (Forbes, 2019). Traditional banks are losing their trusted and more exclusive status with customers. Branchless digital start-ups using a mobile app and a debit card combined with simple account opening are rapidly changing the competitive landscape.

In 2019, smartphone-based banking transactions surpassed branch-based transactions (Forbes, 2019). Globally, 200,000 internet enabled smartphones are sold per hour. The shift to mobile is an unstoppable trend.

Environmental, social, and governance (ESG) principles will accelerate the growth of mobile banking. Since 2009, more than one billion people in India and Africa have gained access to stored value products (Forbes, 2019). In developed nations, a significant portion of the population is unbanked and new mobile-based financial services are addressing this market.

New focused products such as embedded financing are challenging traditional banks. New technology-powered products like embedded/captive/point-of-purchase finance are superseding traditional bank products such as credit cards, lines of credit, and car loans by offering structured payment-based financing instantly at the point of sale or online checkout.

25%

The reduction in the number of FDIC-insured branches since 2009 (Arca, 2022).

Competition is reshaping the banking landscape

Scale, relationship management, and digital offerings are key

Mergers and acquisitions (M&A) continue. Scale is becoming key to viability for banks. Bank assets are a proxy for revenues that heavily influence IT budgets. The complex technology underlying modern banking requires significant IT budgets. Smaller organizations may struggle to keep pace.

Digital challengers are reshaping retail banking with their low-cost digitally enabled products, low-cost digital operating models, and viral growth. New products such as embedded and point-of-purchase financing threaten traditional banking revenues derived from credit cards and lines of credit.

Banks are shifting toward advisory-based relationship management. Advisory revenues will become more important as banks move away from transactional-based revenues. New advisory-focused products and services will eliminate some transaction revenues such as NSF and overdraft fees. New products and services that align bank and customer interests can compensate for these lost revenues.

Technologies that are Transforming The Retail Banking business

• Natural Language Processing (NLP)
• AI
• Automation
• Business as a Service (BaaS)

Top Retail Banking IT technology trends to Explore

• NLP combined with AI to better understand customer sentiment and need across all engagement channels
• AI applied to masses of customer data to drive insight leading to new products and services
• All things data, classification, governance, and insights to support data-driven decision making
• Mature DevOps, Agile, governance, project management capabilities to drive deeper alignment with business goals
• Reengineering/automation of repetitive and low-value activities
• Smaller organizations may need to explore BaaS or incumbents to start up a digital brand

80.4%

The estimated penetration of digital banking in the US by 2025 (Insider Intelligence, 2022).

Banks need a “one team” approach

Alignment between technology and the business is essential for success

Business and IT functions are converging. It is increasingly difficult to distinguish business goals from the technology that enables them. Providing successful financial products and services requires deep coordination with IT resources.

Elevated need for technology governance. Effective technology governance is increasingly important as the number of demands on IT grow and become more complex. The business needs to effectively manage its technology priorities to ensure that IT can properly align and maximize its resources.

Ongoing communication is key to success. The speed of market changes and the complexity of products and services make ongoing communication between business and IT essential.

Agile/DevOps continue to gain traction. At their core, these methodologies are about frequent engagement, alignment, and continuous conversation. Certain adaptations are required to meet banking specific challenges.

49%

The percentage of CIOs who report that poor alignment with business hampers development of products and services (ActiveBatch, 2021).

The future of retail banking is increasingly technologically complex, advisory-focused, and powered by data-driven AI

The traditional retail banking industry placed a heavy focus on segmented/siloed business lines and a branch-based customer engagement model. The result was a heavy fixed-cost infrastructure supported by a highly transactional revenue model. The prevailing regulatory environment encouraged and protected this approach. Customer convenience and service was highly influenced by the branch's location and personal relationship with customers who had limited alternatives. In most cases, banks and their products, services, processes, and business models were created well before the internet.

The Past

The technology that powered banks was costly to purchase, program, and support. These characteristics created significant barriers for new banks entering the market. They also created significant risks for existing banks to change or consolidate platforms.

Brick-and-mortar banks were expensive to build and maintain. New entrants needed a physical footprint.

Savings and loans were a primary source of revenues that were sustained by a non-competitive environment. Depositors and borrowers had limited choice over where they banked and what they paid.

The Present

Incumbents still rely on legacy foundations that flow to the general ledger but are leveraging application programming interfaces (APIs) to integrate overarching capabilities. APIs have mitigated risks and provide new opportunities for traditional banks to compete with start-ups.

Cloud/platform computing is transforming retail banking. The democratization of technology has massively accelerated the growth of neo-banks (non-branch, digital-only). Business as a service (BaaS) hosted in the cloud has enabled small banks to compete with larger ones.

The Future

The future of retail banking is client centric. Banks must anticipate client needs and focus on convenience, personalization, and advice.

Banks will deliver value-based revenue streams and move away from transactional revenues and punitive fees. The emerging needs of customers, such as digital assistants that monitor accounts, are being met by data analytics and technology.

Deep customer insight is required to drive the future of retail banking. Access to AI and ML is becoming easier. Cloud services expand access to analytical tools. Banks will anticipate client needs before the client does.

The future of retail banking is…

Customer-Centric, Integrated, and Predictive

Customer-Centric

Banks must evolve to meet customer needs. The growth of neo-banks, fueled by new low-or no-fee business models and innovative products and services, are escalating competition.

Data is driving hyper-personalization. In the new customer centric world, customer insights are key.

Technology companies are meeting client needs. Their sophisticated technology, deep customer data, minimal regulatory oversight, and ability to meet customer needs is driving innovation.

New products and services must proactively engage customers. Design alerts, bundles, and advice to meet client needs.

Integrated

Financial institutions are integrating into their clients’ non-financial lives. Location data, search history, and social media activity play an increasing role in product development and targeted offers.

Non-bank financial products are evolving into new domains. Embedded finance, point-of-sale financing, and peer-to-peer money transfers are being integrated into shopping workflows and challenging traditional banks.

Peer-to-peer is on the rise. WeChat provides payments in their highly integrated social media application. Peer-to-peer money transfer and payment options exist throughout the app.

Predictive

The advisory relationship is increasingly based on predictive approaches. Banks have access to multiple data sources.

AI is used to analyze customer interactions across all channels. AI and ML are being applied to large data sets to gain deeper, more valuable insights.

External data use is growing. This includes internal data such as spending patterns on checking and credit, but also external data such as credit bureaus and third-party lifestyle segmentation.

Digital assistants are “looking out” for customers. Banks are analyzing spending and behavioral patterns to make recommendations to their clients.

Foundational IT elements are transforming

Digital Technology is Driving Transformation

Identify potential sources of competitive advantage. IT should work with business-led strategy teams to identify areas of competitive advantage to digitize existing products and services or build new ones.

Focus on systems architecture in the context of the ongoing strategy, product, and service creation process.

Develop competitive market analysis to participate in ongoing business reviews.

Lead a culture of innovation with clearly defined roles and responsibilities.

Physical spaces are evolving

Branches are becoming advice centers. No longer do all branches require the expense and risk of managing cash.

Help clients migrate through in-branch education that teaches the benefits of going digital. In-branch transactions can be exponentially more expensive than digital.

Retrain and restaff to meet the demands for advice and to educate staff on the digitally enabled client base.

Rationalize where necessary. Staffing needs are changing. Some staff levels can be reduced as inefficient legacy activities are replaced by digital self-service tools.

Platforms improve the ability to compete

Ensure you have the right platform(s) to enable the bank to compete now and in the future.

Evaluate the organization’s financial placement. It’s important to understand the scale of a bank in the context of the market.

Develop an IT strategy that is right-sized for the organization to improve performance against competitors.

Prepare for mergers & acquisitions if required. To quickly achieve scale, a business may pursue M&A. IT should be deeply involved in this process and prepared for potential platform integrations.

Six trends driving the future of retail banking

Analytical Tools: NLP, ML, and AI

Develop deeper insights to improve decision making. Use NLP, ML, and AI to better understand customers’ needs, intent, and emotional state, and to deepen the brand connection.

Branch Transformation

Address changing client needs that are transforming the role of the branch, building deeper relationships, and leading to a better client experience.

Mergers & Acquisitions

Understand the economics of retail banking. Retail banking IT leaders need to become better acquainted with the economics of the business.

Innovation

Pursue different approaches. Banks approach innovation in unique ways. Factors such as size, maturity, type of customers, and products are among the top ways that innovation is being shaped.

Shift Toward Advisory Services

Advisory services are driving relationships. Being the fastest, easiest, or most convenient transaction facilitator is not enough to keep customers. Banks are trying to become a partner and advisor for customers to cement their relationships.

Non-Bank/Embedded Finance

Non-bank players are aggressively innovating. Increasingly, fintech/non-bank competitors are innovating in financial services. Embedded finance is a considerable threat. It captures credit transactions before bank products are considered.

Next Step

Use this trends report as a key input

Retail Banking of the Future
Trends Report

As part of your next-steps checklist, leverage the trends report for priorities that drive measurable top-line organizational outcomes and the unlocking of direct value.

Business Context & IT Strategy

The future will bring more trends and technologies, making it pivotal that your retail bank continues to establish itself as the disrupter, not the disrupted. This can be accomplished with a structured approach to innovation management that considers external trends as well as internal processes. Info-Tech’s Define Your Digital Business Strategy and Build a Business-Aligned IT Strategy blueprints offer the tools to effectively process signals in your environment, build an understanding of relevant trends, and turn this understanding into action.

Trend 01

Driving customer experience through natural language processing and AI

Retail banks must understand their customers in order to better serve them

Understand what customers need using NLP and AI

Needs can be understood even before in-person engagement happens

NLP and AI are increasingly being deployed to allow retail banks to better understand their customers before actual in-person engagement occurs.

• NLP and AI are being applied across banking services – transaction activities, alerts, and automation are driving deeper relationships and improving brand connection.
• Banks can more effectively customize offers using NLP and AI to gauge a customer’s mood, product/service needs, urgency, frustration, and other emotional dimensions – not only predicting the next product sold, but how to sell it.
• Anticipating needs will improve sales as banks using NLP and AI will act before a competitor does.
• Product design will improve using NLP and AI to better understand client needs.
• Banks are customizing their engagement channels to be more specialized for different types of customers.
• Proactively making offers to meet client needs through NLP and AI demonstrates that the bank knows their clients, has a tailored and personalized service for them, and is a partner in financial health.
• Customer experience, net promoter score (NPS), and brand consideration will improve as clients deepen their relationship.

USING NLP AND AI TO DRIVE CUSTOMER EXPERIENCE

Source: "Top 3 Use Cases," Uniphore, 2022.

57%

of customers chose call support as their preferred initial contact channel ("Top 3 Use Cases," Uniphore, 2022).

33%

of banks are developing AI-based digital advisors/voice-assisted engagement channels (The Financial Brand, 2020).

Signals

What We Are Seeing

Customer experience is key to customer acquisition and loyalty while the digital tools powering it are essential to reducing costs

Customers are using more financial options. The days of single checking/savings accounts are gone. Customers are experimenting with a growing number of financial products from a growing number of financial service providers.

Convenience is key to customer loyalty. The growing number of financial product options has made customer convenience among the top indicators of continued customer loyalty.

Differences in customer acquisition costs. It has been estimated that digital neo-banks can acquire customers for as low as $5 whereas traditional branch-based banks can spend as much as $350, making customer satisfaction essential ( “How to Deliver,” Uniphore, 2022).

Types Of NLP and AI driven customer experience and innovation

• Conversational AI
• Emotional AI
• Workflow and process AI
• Customer journey AI

Source: McKinsey & Company, 2020.

Drivers

Why You Should Care

Digital customer experience is key to new low-cost digital based customer acquisition.

Digital engagement tools have produced a 600% increase in customer retention compared to lack of digital tools.

Using AI and NLP to drive hyper-personalized offerings is driving differentiated experiences and customer loyalty.

Source: "How to Deliver," Uniphore, 2022.

Benefits and risks

Benefits

• Reduced Customer Acquisition Costs
• Increased Customer Loyalty
• Faster Growth

• Digital customer acquisition costs are greatly reduced. Digital business models are built on very different financial assumptions/cost structures. For low-/no-fee and other product and service innovations to be profitable, digital metrics (which cost substantially less than traditional metrics) are required. Low customer acquisition costs are key.
• Customer loyalty/retention is essential. Existing customers should be among your most profitable, so their retention is essential. As other organizations elevate their customer experience, winning lost customers back will be increasingly difficult and expensive.
• Exponential growth is a defining attribute of digital business models. NLP and AI are key enablers of modern, hyper-personalized products and services that allow for rapid and profitable growth.

Risks

• Poor NLP/AI Implementation
• Impact on Other Systems/ Processes
• Reduced Growth/Profitability

• Implementation is easier said than done. NLP/AI are becoming mature and more widely available technologies. However, their design and execution are still vulnerable to bias, design errors, and other complications.
• The approach to NLP/AI must be holistic. If the implementation of NLP/AI technologies focuses narrowly on customer engagement versus the entire customer journey, the results will be disappointing.
• Failure to implement NLP/AI can affect growth/profitability. High costs and slower growth rates associated with non-NLP/AI/digital customer acquisition can impact the longer-term profitability of retail banks.

What the new market development trend means to Info-Tech members

CIOs

• Become deeply connected with their business partners. To effectively support the successful launch of new products, services, and overall business lines, IT must be involved in their design from the beginning.
• Stay up to date with business focused innovation to ensure that they are well informed before business partners engage them in the development and execution of new products.
• Invest time into understanding the enabling technologies that are required by new products, services, and business lines.
• Understand business drivers of customer satisfaction and how to improve key measures such as Net Promoter Score (NPS), brand consideration, and the key attributes that define success in their organizations.

IT Departments

• Prepare for an increasing pace of change likely requiring an increasing number of activities that may be new to them.
• Become an active observer of changes that are occurring in their organization. Rather than waiting for opportunities to become apparent, IT team members should seek out ways to participate in new initiatives and volunteer for cross-functional team participation.
• Proactively embrace training/retraining. In a dynamic environment characterized by continuous new product/service/market development, IT team members need to proactively engage training in areas that they anticipate will be in high demand.

Recommendations

• Partner closely with the business. Successful new development will require IT to be closely and deeply aligned with the business. Exceptional governance and project management skills will be essential to success when entering new markets.
• Create an open and agile infrastructure. New market developments require existing infrastructure to be agile and responsive to changing conditions. Invest in API management tools and pursue a service-oriented architecture to future-proof existing infrastructure.
• Security must be a top priority. Info-Tech security diagnostics can help IT service providers evaluate the current state of client security management and governance areas, including security policies and processes.

Info-Tech Resources

• Build a Winning Business Process Automation Playbook
• Reduce Manual Repetitive Work With IT Automation
• Business Process Automation Playbook
• Build Your First RPA Bot
• IT Automation Roadmap
• Automate Work Faster and More Easily With Robotic Process Automation
• Define Your Digital Business Strategy AI Technology

With large customer data sets from multiple sources, incumbent banks are in an ideal position to reap the benefits of NLP/AI-based innovation. This gives them a competitive advantage to transform their customer experience and financial performance.

Trend 02

Branch transformation

Traditional branches need to be dramatically transformed to align with the new economic realities of modern retail banking while providing a differentiated customer experience

Digital banking has changed the role and economics of branches

Branches are moving away from being transaction-focused and toward being centers of engagement/advisory services often supporting digital

25%

The percentage of branches expected to be eliminated by 2025 (Spiceworks, 2022).

The role of branches is under further strain as generational changes in preference accelerate. Millennials avoid branches and ATMs, preferring to use mobile apps and websites.
Source: Bankingly, 2023.

Signals

What We Are Seeing

The role of branches is changing and so must their economics

• Generational differences are beginning to disappear. COVID-19 brought about an almost immediate transition in customer behavior as everyday financial transactions had to be done online. Since COVID-19, these patterns have persisted even among customers 65+, 60% to 85% (depending on region) of whom reported that they will continue with predominantly online services according to McKinsey & Company (2020).
• Revenues need to align with costs. Branch based activities are expensive. As a result, banks are refocusing their branch-based products and services around higher value, more profitable engagements such as mortgages, wealth-management, insurance, and other advisory based services.

Branch transformation is taking many pathways

• There is a movement toward scaling down the size of branches.
• Increasing and enhancing self-service capabilities in branches to reduce transaction costs while increasing convenience.
• ”Tablet tellers” replacing traditional teller lines.
• Tellers becoming more of a “universal banker” capable of advising on many more complex products and services.

Drivers

Why You Should Care

According to a 2020 study by Accenture, only 14% of individuals turned to their bank for financial advice following a significant life event (Accenture, 2020).

Branches are enhancing self-service capabilities while reengineering their staffing to handle a broader range of more complex, high-value advisory-based services.

Smartphone transactions have now surpassed branch-based banking transactions (Forbes, 2019).

Benefits and risks

Benefits

• Aligning Costs With Revenue
• Enhancing Customer Service
• Multi-Channel Support (Especially Digital)

• New branch economics. Digital banking has reshaped the entire banking industry with its incredibly low-cost transactions. Branches must align themselves with this new reality as well. Self-service options must be combined with other innovative service delivery options (such as tablet tellers and universal bankers) and new digitally supported products that better align higher branch costs and personalized service with higher-revenue products and services.
• Reshaping customer service. New branches must cut costs while redefining customer service. Customers still want to visit branches for advisory services. It’s critical for banks to integrate products, services, and customer journeys seamlessly. Customers may want to research products online and may complete initial applications or processes, but they still want to visit a branch and speak to a representative before making a final decision.
• Branches as hubs. Branches are now customer service hubs where customers can help themselves, learn, and use a growing variety of tools developed using data generated and captured throughout the entire organization.

Risks

• Not Moving Fast Enough
• Misunderstanding Market/Customers
• Alienating Some Customers

• Competition is driving action. Banks that have yet to address branch transformation issues are seriously behind. At some point, continuing with a legacy branch approach could jeopardize the viability of a bank. The unfortunate reality is that traditional branch economics are increasingly unsustainable.
• Knowing the customer is essential. Undergoing branch transformation without first understanding customers and how they prefer to use goods and services can undermine even the most well-intentioned branch transformation effort.
• Communication is essential. There will always be a customer segment which does not prefer change. Communication and effective change management along with staff training can minimize the potential damage to customer satisfaction that this group may experience.

What the branch transformation trend means to Info-Tech members

CIOs

• Work closely with branch business owners. To effectively support the successful transformation of the mergers & acquisitions process, CIOs need to become an important part of their redesign.
• Work closely with business and enterprise architects that are required for M&A innovation, with a specific focus on automation and data tools.
• Keep up to date with industry best practices on branch transformation. The financial services industry tends to provide limited guidance to IT. For this reason, CIOs need to ensure they are well-informed and able to work in an ambiguous environment.

IT Teams

• Actively work in cross-functional teams focused on product and service innovation. This is likely to require an increasing number of activities that may be new to them.
• Develop deeper knowledge of branch-based operations to provide input into branch transformation efforts. Rather than waiting for opportunities to emerge, IT team members should seek out ways to participate in new initiatives and volunteer for cross-functional team participation.
• Pursue continuous learning in key areas related to branch transformation. In a dynamic environment characterized by continuous new product, service, and market development, IT team members must proactively engage training in areas that they anticipate will be in high demand.

Recommendations

• Reevaluate branches and their core purpose. Customers who visit the branch are different than they have been in the past. They have likely done more research, used digital tools, and will require different services.
• Branches should be built upon digital tools as well as in-person engagement. In-branch experiences are increasingly an extension of the consumer’s online digital experience. Branches need to be built and staffed in accordance with this new role.
• Confronting the economic realities of branches is essential. Physical locations are expensive to build and operate. In order to continue, branches must reduce costs through digital tools while at the same time helping to drive higher-value revenues from products such as mortgages and wealth management.

Info-Tech Resources

• Define Your Digital Business Strategy
• Build a Digital Workspace Strategy
• Empower Members Through Digital Engagement
• Achieve Digital Resilience by Managing Digital Risk
• Drive Digital Transformation With Platform Strategies

Branches need to be reimagined to become more deeply integrated into new and evolving value streams that are characterized by great utilization of digital tools.

Branches need to improve at making customer experiences easier, faster, and more convenient. Achieving these goals may require significant changes to the people, processes, and technologies involved.

Trend 03

M&A, addressing the issue of scale, and related challenges

When it comes to technology delivery, achieving critical mass is essential.

Bank assets drive IT budgets

As banking product and service delivery becomes more complex, IT budget requirements continue to grow and so must asset sizes

Bank assets may be the best determinant of IT budgets. IT organizations within smaller banks will find it increasingly difficult to provide customer experience focused products and services with the budgets that their banks can support. As a result, mergers and acquisitions are becoming increasingly common across all segments of the banking landscape.

1. M&A is the fastest way to achieve the critical mass needed to support larger IT budgets.
2. Many banks are choosing to acquire innovation instead of attempting it in-house.
3. M&A allows banks to achieve scale and profitability by running a best-in-class technology infrastructure that can lead to increased sales and profitability post-acquisition.

US Banks are using strategic M&A to get scale and technology

Source: McKinsey & Company, 2019

40%

Growth of US bank strategic M&A from 2015 to 2020 (McKinsey & Company, 2019)

25%

Percentage of banks believed to be acquired by 2025 (Spiceworks, 2022)

Scale will be a strategic consideration for banks, especially as it relates to their ability to adequately fund technology delivery and ongoing innovation. Scale, innovation, and market expansion will continue to drive increasing levels of strategic M&A.

Signals

What We Are Seeing

Our financial service customers are increasingly involved in M&A

• IT participation levels are low early in the M&A process. IT leaders inside smaller retail banks are not often involved early in the M&A process, especially in the areas of target criteria development, deal negotiation, and post-merger value creation. Most efforts are still focused on later-stage due diligence and post-merger integration activities.
• Unnecessary technological complexity. Lack of early involvement in the M&A process can result in unnecessary technological complexity. Greater consideration should be given to the technology stack of potential targets. Where multiple targets of equal suitability exist, technology alignment should be a key decision point and will reduce post-merger integration and value creation efforts, resulting in better aligned technology in the combined entity.

Drivers Behind the M&A Trend

• Easy, fast, and convenient banking experiences require more complex, connected systems.
• Technological complexity must be sustainable based on an IT budget that can be supported by an organization’s assets.
• More convenient products and services result in more complex systems that require a larger and more sophisticated IT team to design, build, and run.
• The interconnected nature of more simplified customer experiences, technology complexity, and IT budgets is a key driver of M&A activity in banking.

Drivers

Why You Should Care

Failure to maintain the required scale within your organization could lead to a decline in the business.

M&A is a driving force in banking and this trend is likely to continue, so IT leaders should consider it an opportunity.

M&A presents a real opportunity for IT leaders to become more deeply involved in a critical business process.

Benefits and risks

Benefits

• Achieve Scale/Critical Mass
• Acquiring Innovation and New Capabilities
• Drive Profitability

• The size of banks is becoming essential to their continued success. Through active and targeted M&A, IT leaders can become a key enabler, helping their organization achieve a scale that is rapidly becoming essential for continued survival.
• Some organizations believe that innovation is best achieved by acquiring it. Many banks are trying to solidify their approach to innovation. Typically, larger organizations have more actively used M&A to achieve innovation goals. However, smaller banks are also beginning to address their innovation requirements through M&A.
• Banking is increasingly technology dependent so IT must play a larger role in the M&A process. IT must be an active participant in an organization's M&A plans. As a partner of business, IT can identify better targets, perform deeper due diligence, and identify potential areas for value creation. Also, they can deliver better post-close integration to help actualize planned synergies leading to greater overall value creation.

Risks

• Failure to Act
• Poor Target Identification
• Unnecessary Integration Complexity

• M&A must not be overlooked. M&A action is becoming imperative for banks of all sizes. While the goals and outcomes may vary, the need to be active is the same. Failure to act can lead to ongoing customer losses and reduced revenue and profitability. Failure to be the acquirer can lead to the bank becoming a target itself.
• M&A can be unnecessarily complex without IT involvement. There are multiple consequences and risks to making poor targeting decisions. If IT is not an active participant in corporate M&A, the business is likely to focus on more financial-centric attributes rather than taking a holistic approach which is inclusive of IT considerations.
• Strategic target alignment can accelerate integration. Poor target selection can lead to considerably more effort for IT to integrate and operate following closing. This could lead to a failure to achieve value creation goals with IT being blamed for a sub-optimal outcome.

What the M&A trend means to Info-Tech members

CIOs

• Improve familiarity with the M&A process. M&A is its own discipline, with its own language and subtleties that CIOs must learn to become a true partner of the business in this activity.
• Learn about the financial decisions driving M&A. The M&A process is driven almost exclusively by financial decisions and its most essential purpose is to drive value creation. To truly partner with the business (especially the CEO and CFO), the CIO must become financially literate.
• Develop materials to help business leaders better understand technology considerations in M&A. As the representative of the technology team within a bank, the CIO must assist with educating other non-technology-centric leaders within the organization about the importance of technology in delivering successful M&A outcomes.

IT Teams

• Familiarize themselves with the types of activities they will be asked to complete following a transaction. M&A is usually a team activity with members from across the whole organization. IT team members should embrace this opportunity and wherever possible learn skills that will support this vital activity within their organization.
• Develop expertise in key systems that are most frequently acquired to accelerate integration and value creation. If the CIO is successful in becoming a proactive member of the M&A process and team within their organization, they will need their team members to contribute to successful IT participation in the process. Developing specialized knowledge around systems such as core banking platforms, customer relationship management (CRM), etc. will help the CIO confidently assert that if they are consulted earlier in the process then there will be better overall outcomes.
• Standardize some IT activities around industry and vendor best practices to accelerate post transaction integration. IT teams should follow vendor and industry best practices, so their technology stack better aligns with potential targets leading to faster and less complicated post-merger integrations.

Recommendations

• Become an active member of the M&A process and team. CIOs can learn about the earlier stages of the M&A process that are traditionally the domain of the non-technical senior leadership team. By better understanding the process, CIOs can begin to influence the entire process and help improve M&A outcomes.
• Educate business partners about how IT can enhance M&A value creation. Banking’s heavy reliance on technology should result in IT having greater input in earlier stages of the M&A process. The best way for IT to enhance their role is to educate their business partners about key areas where technology can produce better value creation outcomes throughout the entire M&A process.
• Build a standardized IT based M&A-ready infrastructure and process. If IT leaders can participate at earlier stages of the M&A process such as target identification criteria, then they can build standardized processes to accelerate post-merger integration.

Info-Tech Resources

• Design an Enterprise Architecture Strategy
• Implement Systems Management to Improve Availability and Visibility
• Build Your Data Practice and Platform

IT leaders need to be involved early in the M&A process. Input into target criteria development and approaches to value creation must be added to their traditional role of due diligence and post-acquisition integration.

Trend 04

Innovation

Many banks continue to struggle with what and how to innovate.

Innovation has many paths

Business size, complexity, culture, and existing products and services are among the top factors influencing innovation

Banks are investing in innovation across the enterprise, and they are using tools such as API ecosystems and data/analytics, biometric authentication, and cloud hosted environments to modernize and transform.

1. Delivery channels must innovate and integrate across all customer journeys and focus on all aspects of the customer lifecycle to drive customer engagement, experience, and ease of use.
2. Digital/new business model development should leverage the new economics of digital capabilities.
3. The universal banking model requires digital assistance. Providing all products and services to all customers though the same employee requires more targeted digital support to drive a client experience that will build loyalty and profitability for banks.

US banks are using strategic M&A to get scale and technology

66%

Percentage of banks planning to significantly increase innovation activities in 2021 (Infosys/Finacle, 2021).

Signals

What We Are Seeing

Innovation is a top topic among our customers who are inquiring about:

• Technology/infrastructure. New business needs driven by new and updated customer/product journeys are reaching the limits of most existing technology stacks, especially core banking systems. Technology strategy is key.
• Approaches to innovation. The scale of innovation has moved beyond an incremental improvement approach and now requires an independent team to focus on deeper transformation needs. People want to better understand the options and the pros and cons associated with each.
• Governance. The high pace and depth of change coming from the business is overwhelming technology teams. Non-existent or immature technology governance processes leave IT overwhelmed trying to make prioritization decisions that should be made by the business. This often results in low stakeholder satisfaction and frustration. Agile and DevOps approaches also fall under most governance discussions.

Drivers Behind Innovation

• COVID-19 played a massive role in accelerating customer adoption of digital banking capabilities. Older customers, who were statistically less likely to use digital products and services, were forced to do so, and they are not returning to their old ways.
• Increasing levels of competition from non-financial (increasingly technology focused) and fintech competitors has accelerated the need for innovation.
• The intensified focus on customer experience as a defensive tool requires vastly different technology.
• Rapid expansion of digital tools is reshaping the economics of transactional banking. It benefits incumbents to adapt.

Drivers

Why You Should Care

Innovation is one of the most important issues facing retail banks and IT plays a critical role.

As products and services become more sophisticated their reliance on technology increases.

IT leaders must become much more connected with business details and the roles of IT will continue to rapidly evolve.

Benefits and risks

Benefits

• Secure Ongoing Success
• Enable Market-Leading Products/Services
• Enhance Role of IT Within the Business

• Ongoing success depends on effective innovation. Traditional banking approaches are rapidly losing market relevance as new challengers enter the market. Without meaningful innovation, many banks will struggle, some will close, and others will be acquired for their customers.
• Offering innovative products and services is essential to staying competitive. The retail banking industry is focusing on customer experience as a key competitive metric with specific emphasis placed on ease of use, convenience, and access. Dramatic innovation is essential to attain these goals.
• Technology drives banking, so IT needs to play a larger role in the M&A process. Innovation in retail banks strongly depends upon IT for enablement. The greater the innovation, the more significant the role of IT. This is an ideal time for IT leaders to deepen their alignment and integration with the organization’s business leaders.

Risks

• Outdated Products and Services
• Loss of Customers
• Continued Decline in Competitive Relevance

• Falling behind your competitors could be fatal. Innovation plays a vital role in modernizing a bank’s products and services. Without adequately investing in innovation, a bank will experience ongoing decline in customer satisfaction.
• Innovation must become a continuous process. Innovation efforts focus on the core of the most important issues within a bank. Inadequate investment in innovation is likely to trigger a negative spiral that ultimately impacts customers’ satisfaction and potentially causes loss of their business.
• Competitors are focusing more resources on innovation. The competitive intensity in banking is extremely high, and it will only get higher. Without focused, sustained, and well-planned innovation, banks will lose competitive relevance.

CIOs

• Educate themselves about innovation. Many existing CIOs have a very functional approach to their role within the organization. This often means there is less time for strategic thinking. CIOs must dedicate more time to learning about innovation and applying that knowledge to their organization.
• Better understand the role of technology to bank centric innovation. In banks it is difficult to separate innovation from technology. Therefore, the CIO needs to understand the broader organizational plans for innovation and develop strategies to implement and support the organization’s goals from a technology perspective.
• Collaborate with industry peers/organizations. Peer based innovation groups are an excellent way to develop industry-specific knowledge, leveraging the experience of others to accelerate an organization’s goals.

IT Teams

• Become familiar with the bank’s innovation plans. The impact of innovation will be felt in almost every area of a bank and is likely to affect roles within IT. To become prepared, teams must be proactive in understanding their organization’s innovation plans.
• Understand what innovation means to your role within the organization. Innovation is a process rather than an event. Once initiated, it is likely to continue indefinitely. Team members should be proactive in adapting their role to support the organization’s innovation efforts.
• Participate in cross-functional innovation teams. Because innovation impacts all aspects of the bank, many choose cross-functional teams to drive communication/collaboration. If an organization follows this approach, team members should consider joining a cross-functional innovation team.

Recommendations

• Accept the need for innovation and make it a continuous process. It’s unrealistic to deny the need for innovation when market conditions have made it necessary on an ongoing basis. Embracing innovation as a continuous process is likely to produce the best long-term outcomes.
• Be proactive. Acknowledging that innovation will be ongoing and continuous can help create a proactive mindset. Innovation is generally a top-down effort, but individual contributions focused on how innovation can occur in a specific role can augment the organization’s innovation efforts.
• Develop strong communication and collaboration capabilities. Change within an organization is complicated and requires continuous, consistent, and effective communication and collaboration. Communication and collaboration should be central to an innovation plan and its execution.

Info-Tech Resources

• Design an Enterprise Architecture Strategy
• Implement Systems Management to Improve Availability and Visibility
• Build Your Data Practice and Platform

Active and ongoing senior leadership is an essential ingredient in executing successful innovation. However, the most profound results are achieved when everyone in an organization is empowered to be an agent of innovation.

Trend 05

Moving toward advisory-based products and services

Banks are no longer just transaction enablers; now they are partners and advisors to their customers.

Providing transactions isn’t enough

The battle for customers based on experience is a top area of investment for banks and AI-powered personalization/digital advisory is key

Executing financial transactions faster through more channels is no longer a point of differentiation. All banks regardless of size and maturity can deliver these basic functions effectively through many channels.

Banks must become trusted advisors to their clients.

1. Fewer personal touchpoints available for banks to reach their clients. It is estimated that 80% of transactions and 66% of sales could be digitally fulfilled using minimal engagement with bank employees (McKinsey & Company, 2020).
2. Sales interactions are migrating to digital. In 2019, the top 10 banks in developed markets generated 65% of their sales from digital channels, up from 38% in 2016 (McKinsey & Company, 2020).
3. Banks need to design digital interactions that build relationships between the bank and its customers.

Consumers have demonstrated low loyalty and have opened their financial relationships like never before. They now have a broad base of bank/fintech relationships and switching friction is eroding. Customer loyalty is now determined by a bank’s ability to proactively/predictively observe and advise its customers.

Banks are heavily investing in digital assistants, and it is working

77%

Bank executives who believe AI will determine winners and losers (“Banking Execs Say,” The Financial Brand, 2020).

As digital and mobile banking usage accelerated during COVID-19, user experience expectations have escalated. Existing features and functionality have become commoditized. Great user experiences and loyalty are now being driven by advisory-based engagement.

Signals

What We Are Seeing

Competition is driving rapid change throughout the banking value chain, and fintechs are rapidly segmenting and transforming the market.

COVID-19 provided a catalyst for accelerating change. During the pandemic, the focus of every financial institution was on online, mobile, and call center engagement. Organizations that had underinvested in these areas had to catch up, especially as their longer-standing customers were forced to use these channels. The result was the commoditization of these channels, which caused a shift in the way banks competed for new/existing customer loyalty.

Customer experience is the focus, not products/services/channels. Data-driven insights combined with AI are driving new customer experiences, which are largely being delivered through digital agents and advisory services that favor incumbent banks who have the data required to derive customer insights.

Drivers Behind the Advisory Trend

• Banks need to leverage their relationship with customers to prevent customer and revenue loss.
• Incumbent banks need to move quickly to secure their relationship with customers. They have a unique data set that provides a competitive advantage, but this will erode with time.
• Consumers of financial products have demonstrated a growing acceptance of using products and services from non-bank providers and fintechs, which will eventually eliminate incumbent banks’ data and customer knowledge advantage.

Drivers

Why You Should Care

Failure to invest in customer experience-based technologies is likely to lead to customer loss as well as lower product and service sales.

Digital advisory services are reshaping all delivery channels throughout the value chain, especially branch economics and design.

If the business has not begun to transform their customer experience, they likely will soon, and it will be a top priority.

Benefits and risks

Benefits

• Strengthen Customer Relationships/Loyalty
• Provide New Selling Opportunities
• Modernizing is a Key Component of Emerging Value Chains

• Advisory services are essential to customer engagement. Customer experience is the leading edge of competition. Entirely remote account opening and onboarding, self-service automated attendants, and holistic digital advisory tools are needed to make customers feel like their bank values them, understands them, and cares about their financial well-being.
• New insights are critical to knowing/serving customers better. Data-driven, AI-powered agents/advisors are leading to the development of new products and services that previously didn’t exist. By having a deeper understanding of customers, the bank can make them tailored offers that feel less like selling and more like solutions to challenges.
• The way banks create value is changing. Digital tools and agents are now an essential piece of the banking value chain. Without them, other parts of the value chain cannot modernize as easily. For example, digital tools are transforming retail bank branches in ways that were not previously possible.

Risks

• Potential Customer/ Revenue Losses
• Deepening of Technology Deficit
• Negative Impact on Other Areas of the Value Chain

• Traditional transaction-based products and services are in decline. Failure to account for new digital-powered customer experiences will eventually lead to declining revenues as customers choose more modern and convenient options. In the long term, customer loss is also likely.
• Inaction can no longer be tolerated. Most banks are underway with their digital customer journey transformations. Banks which have yet to start their journey accrue a greater technology deficit the longer they wait. If they wait too long, the size of this deficit will eventually be insurmountable.
• Customer experiences need to become more interconnected. Banking value chains are deeply interconnected. Digital assistants and tools are a foundational piece. Without them, other parts of the value chain will suffer.

What the shift to digital advisory service means to Info-Tech members

CIOs

• Be part of their bank’s digital transformation efforts. CIOs need to be an integral part of their bank’s efforts to develop and implement new digital advisory/assistants as well as general digital enablement. While digital assistants/advisors will be developed by the business lines, CIOs need to be part of the planning and development from inception. Their team will be a key enabler of these efforts.
• Invest time in understanding the software, systems, and technology required to support the business. The development of digital advisory-based services will require significant changes to the entire technology staff that could take years to implement.
• Prepare their team for the changes that will be required. Hiring new staff, retraining and upskilling existing staff, and getting their team members involved in cross-functional teams. This will allow them to better understand the many dimensions of digital tool/advisory-based services.

IT Teams

• Become familiar with the ways in which digital advisory services will impact their roles and start preparing for change. Working in conjunction with the CIO, team members need to become prepared for changes that will impact their areas. Be sure to account for the staff training that will be required to develop the new skills necessary to execute the bank’s plans.
• Develop expertise in key systems and technologies that may be needed to support the development and operation of digital assistants/advisors as well as other digital tools. It is likely that many new vendors, software, and infrastructure will be required to support business changes. New systems will need to be evaluated and requests for information (RFIs) issued. Requests for proposal (RFPs) must be carefully evaluated and the proper time taken to enable better decision making. The further in advance IT team members are informed, the better they can prepare.

Recommendations

• Immerse yourself deep in the business. Regardless of any transition to advisory services, IT leaders and their team members need to immerse themselves in the businesses they support. Aligning IT with business processes is essential for IT success.
• Be proactive with advisory services. Having a proactive approach in a bank’s transition to advisory services will ensure that you are well-informed and prepared which will allow the best possible partnership with business stakeholders.
• Focus on collaboration within your team as well as with the business. The transition to advisory services reaches deeply into every area of a bank’s people, processes, and technology. Organizing collaborative teams is the best way to align efforts and to maximize communications. Leading the collaboration efforts will help ensure IT is always a key stakeholder as products and services become more advisory based.

Info-Tech Resources

• Design an Enterprise Architecture Strategy
• Implement Systems Management to Improve Availability and Visibility
• Build Your Data Practice and Platform

The magnitude of technology shift, especially when combined with accumulated technology debt, means that it could take years to update and transform the technology to a state where it can enable transformation.

Trend 06

Non-bank/embedded finance

Embedded finance is rapidly expanding, and banks need to respond. IT will be a key player.

Non-bank and embedded finance

Financial transactions are increasingly happening through non-financial channels such as social media and e-commerce. Banks need to respond.

Embedded finance is the delivery of financial products and services via non-financial organizations, by embedding direct payments or credit access directly into an organization’s digital sales channels.

Buy now, pay later (BNPL) is not a new concept. Its earlier form was layaway, but that required you to pay the full value before you got your product. The dramatic rise in consumer spending/debt has fueled the growth of this industry, which has largely been built by unregulated, venture-capital-financed, fintech start-ups who have capitalized on changing market dynamics.

1. Customer engagement with traditional banks is declining, which has accelerated with generational changes in preference away from banks toward more convenient alternatives.
2. Alternative financial options are on the rise, such as peer-to-peer payments that emerged as part of the rapid rise of social media platforms.
3. There is a dramatic increase in ecommerce and embedded payment systems.
4. A large segment of the population are unbanked, under-banked, or have lower credit scores.

how people buy and pay for things is rapidly EVOLVING

+400%

Growth Rate of US BNPL Market 2019-2021: $34 billion to $120 billion growing to $576 billion by 2026 (Statista, 2020)

BNPL and embedded finance represent a considerable challenge for banks who have yet to respond to this rapidly growing market. These services threaten traditional credit cards, lines of credit, car loans, and other consumer financing products traditionally provided by banks.

Signals

What We Are Seeing

Banks are rethinking their value chains. They still focus on traditional customers, but there are emerging value chains to consider.

• Alternative financial options present a risk. Many alternative financial products are developed by technology companies, not financial companies, and leverage existing relationships, data, and brand loyalty. Their products are designed to leverage the viral nature of digital platforms such as social media and rapidly expanding markets such as e-commerce and are built on leading-edge technologies which deliver cost as well as scale advantages.
• Limited regulation benefits non-bank financial products. Many areas of non-bank financial product growth are new and often unregulated. This provides many advantages for companies who build and operate these products. The cost of regulatory compliance for banks is high.

Drivers Behind the NON-BANK/Embedded finance Trend

• Generational changes in how younger consumers shop and consume financial services will become increasingly relevant in the banking marketplace.
• Financial products and services are no longer a standalone category. They are increasingly tied to other products and services such as social media, e-commerce, and peer-based activities.
• A slow-moving regulatory framework benefits competitors and will likely continue to support growth in this area.

Drivers

Why You Should Care

BNPL financing products can grow rapidly by leveraging social media and other low-cost digital customer acquisition methods.

Alternative financial products often supersede traditional products. The more deeply they penetrate the market, the more difficult it will become for banks to compete.

Non-bank financial products and services directly challenge core markets of traditional banks.

Benefits and risks

Benefits

• Leverage Cost of Capital
• Extend Brand Into New Markets
• Protect Existing Core Markets

• Banks are well positioned to compete in this market. Banks have a major advantage over their competitors. Their cost of capital is much lower, which should allow them to compete in the same markets while having greater profitability. This should be further enhanced by depth of experience in credit adjudication and risk management.
• Time to consider redefining and extending the value chain. Banks already have established brands with customers and markets, which should allow them to compete more effectively for merchants/commercial businesses and individual customers. They can also leverage existing relationships and products to effectively compete with new challengers.
• Action must be taken to protect some key lending areas. Banks need to launch competitive products in the BNPL and embedded finance markets, if for no other reason than to slow down the success of challengers and protect their core markets from further erosion.

Risks

• Risk to Many Traditional Banking Markets
• Further Erosion of Customer Relationship
• Providing Additional Opportunities to Challengers

• Failure to respond will result in a loss of revenues. The rapid growth of these new products, services, and markets represents a threat to existing bank products and services. At a higher level, the rise of these markets further marginalizes the role of banks as the cornerstone of the banking and financing market.
• Competitors are engaging your customers before you have a chance. Many of the new business models are successful because they can make offers to customers much earlier than traditional banks. Strategically, this is a bad position for banks. Even if banks have better products, services, or pricing, their challengers are engaging with customers before banks have a chance.
• Pay attention to competitive market forces. If current patterns continue, challengers will gain an opportunity to build on the relationship they have created through their BNPL/embedded finance offerings to move into other areas still controlled by banks.

What the non-bank/embedded finance trend means to Info-Tech members

CIOs

• Monitor emerging markets. CIOs should follow a path of continuous learning to maintain a broad awareness of industry developments that may not affect them now but could in the future.
• Participate in industry groups to stay current with the market. Keeping active in professional associations and organizations is an ideal way to stay in touch with what other organizations are doing.

IT Teams

• Continue to mature core processes. In uncertain market conditions, maintaining a high level of overall maturity will allow IT teams to minimize their response times to changing markets.

Recommendations

• Continue to actively monitor market developments to gauge the potential implications on your organization and assess how your IT strategy and planning may be affected.
• Consider the potential response from your bank. Before a formal response is adopted by your bank, make sure that you are in touch with the fundamentals of how competitive products and services are built and operated to jumpstart any new initiatives that may be coming.
• Embrace an agile approach. Adopting an agile approach will help IT to respond as quickly as possible to changing market conditions.

Info-Tech Resources

• Building Key Enablers in Real-Time Data Integration for Industry 4.0
• Design an Enterprise Architecture Strategy
• Implement Systems Management to Improve Availability and Visibility
• Build Your Data Practice and Platform

Challengers are evolving traditional banking value chains with new offerings. BNPL and embedded finance markets are experiencing viral growth. Banks must consider the long-term strategic implications of not responding in this market.

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