Five data trends that will define the future of banking

With so many opportunities within the sector, here are five data-related trends that are shaping the future of banking.

• Banks must create digital operating models fit for the modern customer experience.

For banks to remain relevant to a new generation of tech-savvy consumers they must focus on digital customer journeys and how people are accessing and experiencing their products and services. Banks are moving as quickly as they can to power this customer experience, but as they do so they must continue to adopt technologies with the latest security protocols. The agility that new technology brings also enables banks to quickly launch new products and services, extend customer contact, make business processes more efficient and improve connectivity with ecosystem partners. For example, Open Banking protocols allow data to be exchanged (with the customer’s permission) among ecosystem players to drive greater value, benefits and innovative offerings for the customer.

The recent bank bailouts and buyouts have created an atmosphere of concern and uncertainty in the banking industry. Additionally, traditional banks face significant challenges amid changing consumer behavior, an economic landscape still recovering from the impact of COVID-19 and competition from born-in-the-cloud challenger banks. In this increasingly demanding environment, bankers have the chance to fight back by investing further in their digitalization programs.

AI, data analytics and automation technologies offer an opportunity to transform customer experience and automate repeated processes. With these tools, banks can supercharge their operations by delivering relevant data and insights at the right time and speed to the right people, optimizing and accelerating decision making. At the heart of this transformation is data. Properly sourcing, managing, interpreting and protecting data will be the key ingredient for banks to grow, manage risk and make strategic investments for years to come.

Many traditional banks are making headway, including JP Morgan Chase, which recently announced plans to open a digital bank in Germany by 2025; Lloyds banking group, which outlined a three-year digitization strategy; and Santander, which is utilizing big data to drive customer experience and digital transformation.

Deriving insights about customer experience will continuously enhance what this experience looks and feels like, creating a virtuous circle and, ultimately, increased customer loyalty. To make all this happen, banks must also re-assess their operating models: easier and better data integration, more efficient processes, faster response times and creating “plug & play” platforms make for a more resilient business and enable faster monetization of the available data.

• Protecting data from cyberattacks will continue to be a top priority for corporate banks and their customers.

At the boardroom level, the C-suite will continue to prioritize cybersecurity, knowing that any breach would have a disastrous impact on their reputation and, by extension, their bottom line. The penalties associated with failing to secure the data entrusted to them as they evolve their business models are too great for the banks to take this matter lightly. Therefore, banks will continue to invest heavily to protect against cyberattacks, data breaches and financial crime.

As banks transform their businesses, they are increasingly partnering with financial technology companies to optimize payments, underwriting and app development. Some banks are even offering banking-as-a-service to fintechs, giving them the opportunity to take advantage of the bank’s charters and deposit insurance while providing more nimble services to consumers. However, it is essential that banks have the right cybersecurity controls in place to protect themselves and their customers’ data when partnering with less-regulated companies. Equally, fintechs looking to partner with banks need to prepare for the complex regulatory, cybersecurity and risk management obligations of banks if they are to establish a successful relationship.

• Sophisticated, secure identity management will help banks manage their cost base and personalize consumers’ day-to-day transactions.

Banking communities in Europe, the Americas and Asia are moving quickly to roll out new digital platforms. Digital Identity management is key to making them secure and efficient. Indeed, there is a great deal of interest in the work DXC Technology has done in Norway to implement and run the BankID identity scheme for the country. Relying on trusted and verifiable sources, BankID has dramatically increased the speed and reliability of validating identities and processing transactions across all areas of banking in Norway: from payments to account opening and asset transfers. This work has provided deep, data-driven insights into what is possible in digital banking when infrastructures, ecosystems and business processes align, and is helping lay the groundwork for tomorrow’s model.

Elsewhere in the market, secure identity management is facilitating moves like Western Union’s (WU) integration of Mambu into its new digital bank platform, which gives WU full control to deploy new banking products and services that are easy to configure and integrate with external applications. In a single native mobile app, customers can now open an account in minutes in what is being seen as a move to transform the transactional relationships WU has with its customers into closer customer-centric connections.

• Data will be at the heart of proving the effectiveness of sustainability investments.

All businesses, small- and medium-sized enterprises (SMEs) in particular – are transforming to ensure their operations are sustainable. The scale of the task can seem overwhelming. Banks help remove some of the angst by providing the critical financial vehicles to help SMEs on their sustainability journeys, as well as fund public-private partnerships that further the sustainability agenda.

As well as being the right thing to do and a key part of the corporate social responsibility banks hold, such investment will be increasingly welcomed by customers who are more discerning of sustainable business practices. Many banks are creating ecosystems that bring together a range of relevant organizations, including specialist ESG-related public and private finance suppliers. These platforms can provide and exchange the data required to monitor progress and create innovation.

Demonstrating the impact of the banks’ contribution to such causes will depend on the ability to monitor, track, report and (therefore) adjust their initiatives for maximum effect. This can only be achieved with data: banks will invest in the proper tools, processes and reporting environments to manage the impact of their ESG-related investments effectively.

Banks need to reinvigorate their hiring practices to ensure they are reaching the talent that can take them into the future.

There are multiple scenarios that impact staffing needs. These include:

• Increasing reliance on digital technologies

• Transitioning to platform-driven businesses powered by data

• Shifting focus from shareholder relations to stakeholder relations

• Renewing emphasis on purpose-led strategies

With such a wide range of issues impacting a bank’s day-to-day operations, proper staffing is as vital as it is nuanced, and requires upskilling existing staff and hiring to plug skills gaps and service growth areas.

Of equal importance are the expectations of the people being recruited. Younger employees work and communicate very differently to those who are used to historic “analog” banking operations. To attract and retain the best talent, banks need to invest in practices and technologies that speak to this audience, and mirror the digital offerings being put to customers. Data gleaned through the recruitment process and employee staff surveys will ensure banks stay on track.

Conclusion

The banking industry is under renewed scrutiny. Not only are banks’ investment choices and business dealings under heightened oversight by regulatory agencies, but customers are being more selective about where they want to secure their personal finances. Banks need to seize the opportunity to securely digitize their operations, thereby improving offerings and enticing the next generation of bank depositors.

From creating seamless digital experiences for customers, to securing their identities, investing effectively in ESG initiatives, and ensuring staffing needs are met, the success or failure of banks in the coming years rests on their use of data.

Talk of Britcoin – a UK-based central bank digital currency (CBDC) –presenting lucrative opportunities for business has been fuelled this month by Ben Broadbent, deputy governor for monetary policy.

As we continue to digitise, physical cash and the legacy system we are accustomed to is becoming increasingly obsolete, and new products and services are rapidly being adopted by businesses seeking to stay ahead of the curve.

Estimations suggest that cash payments could fall to as little as 10 percent of all UK transactions within the next 15 years. There are even suggestions that a long-awaited digital pound is likely to materialise this decade, highlighting a growing trend towards such alternative payment options.

It now seems inevitable that a continuation of recent trends will naturally lead to the acceleration of digital payment options and currencies.

Cash is being dethroned

We can all see the inherent benefits of cash – you can hold it and spend it without record and without seeking permission. But aside from the right to privacy and the anonymity afforded by using physical cash as a means of payment, it plays a central role in illegal activity, from purchasing drugs, paying bribes, to funding terrorism.

The world of digital currencies is complex and rapidly evolving. Recent events have highlighted the palpable risks of privately issued digital currencies dominating the digital payments sphere and there are strong arguments that central bank regulation would provide greater stability, transparency, and protection for consumers, not to mention an inevitable reduction in illegal activity such as money laundering and terrorist financing. Without a robust and effective regulatory framework in place, financial crime will flourish in this space, a point highlighted by the Financial Action Task Force (FATF). FATF’s recommendations aim to strike a balance between promoting innovation and financial inclusion, while also safeguarding against the risks of financial crime.

The Alternative

A Central Bank backed digital currency would create and maintain records of all transactions, through the use of blockchain technology, which allows for secure and transparent record-keeping. This will ultimately facilitate greater regulation in the industry, something which neither cash or privately issued digital currencies currently provide.

A CBDC would also allow a more efficient and reliable payments landscape. In the Bank of England’s own discussion paper they describe this as “the potential to allow households and businesses to make fast, efficient and reliable payments, and to benefit from an innovative, competitive and inclusive payment system”. Yet at present, there is limited availability of digital payments and weak payment interoperability, particularly when it comes to global payments.

As long as the Central Bank remains stable, the funds within a CBDC will do so too. This could potentially aid to avoid financial crises such as in 2008, which was the worst economic disaster that most of us have experienced. We’re still asking whether it was right for us, the taxpayer, to bail out the banks. Before 2008, most of us viewed banks as imperishable and enduring. Nowadays, consumers have never been more aware that this isn’t the reality and are asking how they will be protected in times of financial instability. A CBDC can help to stabilise the financial system by providing a safe and secure form of currency that is backed by the central bank and by improving the efficiency and reliability of payment systems.

The Opportunity for Fintech

A CBDC presents a number of opportunities for fintechs to grasp a hold of. For starters, a Central Bank will likely be largely reliant on EMIs and PSPs, such as IFX Payments, to deliver a CBDC operationally. Tech-savvy fintechs such as IFX have a wealth of expertise and know-how; facilitating payments through technology is our niche. We are also nimble, agile and very used to implementing change quickly (compared to the industry’s large incumbents) meaning that we can adapt and adjust to the new ecosystem and deliver to end users as a third party service provider.

As long as EMIs and PSPs can fulfil certain prerequisites of participating in the CBDC ecosystem, who better to ‘add value’ and deliver to the end user? I’m confident that an organisation like IFX, with its robust compliance procedures and processes will be well-placed to participate.

Anastasia Evans General Counsel and Company Secretary IFX Payments

With the support of fintechs on its side, the Bank of England would become a force to be reckoned with within the digital payments sphere and straighten out a lot of the issues presiding at the current time. But if it fails to react, it will ultimately lose the race to privately issuing contenders, a proposition that will present further complications to an already rocky industry. So to The Bank of England, I say – time is of the essence!