Reflections on the EIU report
Technology is no longer an enabler but a driver in retail banking.
Technology is no longer an enabler but a driver in retail banking. For the first time in its five year history, the Economist Intelligence Unit report entitled ‘Whose Customer Are you: The Reality of Digital Banking’ reveals that bankers are now more concerned with technology-driven trends than they are by regulation.
Retail banking continues to be most impacted by changing customer behaviour and demands. This shift is more urgent in emerging markets than the developed ones, perhaps a reflection of the popularity of mobile banking there. Banks are responding by focusing on the full front-to-back digital experience. Product agility gains precedence over migrating from physical to digital channels as a top strategic priority. Banks want to be able to launch new and personalized products and services quickly to satisfy demanding customers used to dealing with the Amazons and Ubers of this world.
Open banking is gathering pace, as the disintermediation of the value chain continues. Banks see payments as the main area of disintermediation and new payment players (Paypal, Apple Pay, Visa) as well as technology and ecommerce disrupters (GAFA , Alibaba) as their biggest competition. Neo-banks, P2P lenders and aggregators are also seen as a threat. The platformisation of banking will steer the market, 80% of our respondents say.
As a result, banks are having to restructure their business models. A raft of different strategies are in play from offering third-party products in addition to their own in an aggregator model, creating digital eco-systems with value-added product comparison and switching features, to opening banking services to third party developers. A third of the respondents are investing in API-based open banking initiatives.
As custodians of financial data, banks understandably have concerns related to open banking. Data security, the risk of cyberattacks, vulnerability to third parties and reputational risk all feature in this list. Interestingly, more than a third of the respondents cite the inability of existing IT infrastructure to support open APIs as a major concern; higher than lack of API standards.
Today, many banks run multiple systems for different products and customers. Adapting each to allow third parties to access customer account data or to initiate payments is a complex, time-consuming job. They must upgrade to flexible, open banking architectures that support seamless consumption and delivery of banking products and services through the use of APIs.
Cybersecurity, digital channel delivery capabilities and cloud-based technologies to improve performance and scalability are the key investment areas for banks. Some see modernizing both front and back office systems to support end-to-end customer journeys as a focus area. Others are developing a new digital proposition as a standalone entity. Israel’s Bank Leumi has launched Pepper, the digital-only bank for millennials.
This year has seen the rise of new technologies such as artificial intelligence (AI) and blockchain as the second biggest trend. The value of AI in particular is driven by the importance of analytics and data in the digital and open banking world. Customer-centricity dominates the preferred AI use cases with improved customer engagement, personalization and smoother on-boarding winning over fraud and compliance. A third of the respondents cite developing digital advisor platforms based on AI as an investment focus area. Top concerns relating to AI include risks to customers’ personal data security and privacy.
In conclusion, our survey leads us to believe that while retail banks are facing significant challenges in terms of customer behaviours, competition and regulation, they still hold and will retain their customers’ trust – a huge advantage. Last year’s report said banks have on their side, the three “big C’s” – customers, compliance and capital. This still remains true. Therefore, banks must build on their historic strengths to become more agile, reduce friction points and pursue platform strategies of their own while keeping costs down. All of these imperatives are predicated on a modern technology infrastructure and hence we at Temenos believe that the time for true end-to-end digital transformation has finally come for retail banks.