Many of history’s watershed moments—the printing press, the steam engine, the internet—were only recognized as major changes in hindsight. But in banking, there is real-time recognition that the COVID-19 pandemic has irrevocably changed the industry.
If 2020 and 2021 were the years that COVID forced banks to embrace change, 2022 will be the year in which we see that change institutionalized and the beginnings of a new normal emerge. For most of the world’s leading banks, the pre-COVID inclination for incremental change and cautious experimentation has given way to a faster digital metabolism and a willingness to challenge conventional business models, even if these cannibalize traditional revenue streams. Empowered customers are becoming more demanding on multiple dimensions, from service fees to sustainability, and new entrants are becoming more ambitious in their scope of services. So, in 2022, the world’s best banks need to rise to the challenge.
Collaborating with my colleague Michael Abbott, who has taken on the Global Banking Lead role at Accenture, we have identified 10 trends that we think will drive disruption and shape the decisions that the world’s leading bankers will make in 2022.
1. Everyone wants to be a super-app
Just as the smartphone consolidated our hardware needs within a single device, super-apps are consolidating many of our retail, social and other needs. Most digital banking consists of checking balances, paying bills, and making deposits—functionality that big technology players are increasingly incorporating into broader platforms that include other services like commerce and social networks. Super-apps like WeChat cause financial services to disappear from sight as they become enabling functionality for doing more interesting things like travelling, shopping or working a side hustle.
Faced with the expansion of Amazon, Walmart, Meta and others into financial services, how should traditional banks respond?
Banks have several options, each of them with pros and cons. They can try to add non-banking functionality to their own services and compete head-to-head for customer attention, but it’s a costly endeavor with no guarantees and likely a viable strategy in only a handful of markets. Or they can partner with a super-app to provide white-label services—but in doing so accept that they are going to be a junior partner and are likely to compete with their own branded services. Their third option is to wall themselves off from the fray and defend their traditional franchise. But differentiation could be a challenge, and they will need to accept an inevitable shrinking of their share of traditional transactions as super-apps come to dominate more of their customers’ financial lives.
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2. Green gets real
Investors and regulators won’t, in the future, be satisfied with empty environmental promises as they urge financial firms to become better stewards of the planet. Proposed rules will require independent verification that banks are living up to their claims and, more importantly, banks will face immense pressure to redirect credit away from carbon-heavy companies toward sustainable energy. That will test banks’ resolve as oil, gas and other fossil fuel companies provide banks with steady and predictable revenue. Some will embrace the change and adopt a stricter stance toward their clients’ environmental footprints. Some of it will be pure virtue signaling, but we are already seeing a willingness by many banks to sacrifice their short-term bottom line. Others will try to stay just one step ahead of regulators and environmental groups in a more cautious and managed transition.
3. Innovation makes a comeback
The decade after the great financial crisis was a period of retrenchment in which many banks pulled back from introducing new products and focused on getting the basics right. Startups and digital challengers stepped into that breach, identifying promising areas for growth that legacy financial institutions had been ignoring. Think consumers who risk running out of funds just before payday and small businesses seeking advice. With the help of COVID-induced improvisation, banks are fighting back with creativity. At the industry level we’re seeing collaborations, like the one that created Zelle, to take on payment apps like Venmo. At the institutional level, banks are more clear-eyed now about when to build, when to buy and when to partner. Two of the world’s largest banks have embedded their treasury services APIs (application programming interfaces) into the Stripe payments platform, which in turn is embedded in Shopify’s e-commerce platform—decisions driven by the belief that product innovation is what is going to move balance sheet market share over time.
4. Fees … a magical mystery tour
Over the last several decades, banking fees have shifted from transparent charges for services like account maintenance, to more hidden fees for things like overdrafts. Then fintech firms arrived, promising an array of services for the magical price of free, only to reveal later that revenue must come from somewhere. One fintech simply asked customers for a “donation” that started at a suggested $1 and went up from there. Others impose punitive fees if customers miss a buy-now-pay-later installment. As customer skepticism grows, banks are rediscovering their empathetic roots and creating features that put the users in charge of fee decisions. They now have little choice but to be more transparent about fees, and fortunately digital, AI and cloud capabilities are converging to provide the perfect platform for personalized advice that will actually help build consumer trust and involvement.
5. The digital brain gets a caring heart
Banks spent the years before and during the pandemic investing heavily in digital technology to make banking easier, faster, and more efficient. Frustratingly, customers have made it clear that an app, even a good one, doesn’t exactly command loyalty. Between 2018 and 2020 the proportion of consumers who trust their bank “a lot” to safeguard their long-term financial well-being dropped from 43% to 29%. Banks now realize they have much to gain by restoring empathy and relationships to what has otherwise become a cold and impersonal business. That will mean learning to better understand and respond to customers’ financial situations and setting aside some of the neutrality banks often display on issues that customers care about. Look for AI and other technologies to help banks predict customers’ intent and respond with more tailored messages and products.
6. Digital currencies head for college
Up to now, digital currencies have been the teenagers of money: easily swayed by a stray tweet and ready to break rules just for the hell of it. This is the year digital money grows up and banks learn to take it seriously. A number of central banks are launching digital currencies and many more are thinking about it. These are accompanied by maturing regulations around cryptocurrencies and a recognition that, while decentralized finance (DeFi) is currently the Wild West of financial services, many of the core concepts of decentralized trust will have enduring value. So, expect to see more financial institutions and government agencies sharing data and ideas on how to incorporate aspects of this new type of money into the global financial system.
7. Smart operations put zero in their sights
In 2022, banks will apply artificial intelligence and machine learning to back-office processes, enabling computers to outperform humans in some tasks. This will eventually decouple bank revenue from headcount, and even now we are seeing the best digital banks lower absolute headcount and boost the productivity of their remaining staff. To date, banks have made incremental efforts to streamline their operations. These new technologies, along with the use of the cloud and APIs, can accelerate their efforts well beyond small efficiencies toward the long-held dream of “zero operations” in which waste and latency are eliminated. For example, some firms have stripped out over half the work once required to process commercial loan applications by using technology to synthesize income statements, balance sheets and footnotes into unified and adjusted statements.
8. Payments: anywhere, anytime … and now anyhow
Getting paid and sending money are now anytime, anywhere features we’ve come to take for granted thanks to Alipay, Venmo and other apps. The next step in this payment revolution is for these networks to open up. Today most networks, despite their scale and convenience, are closed—try sending money via Venmo to someone with Zelle. Soon, they’ll let senders and receivers operate across networks. China has already demanded that internet companies accommodate rival payment services, while proposed legislation in India would force digital wallets to connect to one another and mandate that merchants accept payments from all of them. Banks with payment offerings will have to compete and cooperate with rival banks, fintechs and other players as the world of networks opens up.
9. Banks get on the road again
Just as individuals are aching to get out from under pandemic travel restrictions, banks too will go wandering in search of growth both at home and abroad. Firms going abroad will be selective, aiming to acquire digital challengers which can help them go on the offensive—like JPMorgan Chase buying UK robo-advisor Nutmeg in 2021. At home, U.S. banks will continue to bulk up by buying rivals to consolidate regional markets while European regulators will encourage the same. Asia will be where banks will employ the most innovative growth strategies. One example is Thailand’s Siam Commercial Bank, which has effectively turned itself into a holding company with a bank that generates the group’s short- to medium-term revenue while investing in regional fintechs that are intended to provide its long-term growth.
10. The war for talent intensifies
As technology has become a critical enabler for banks, a much-publicized shortage of engineering, data and security talent has hidden a stark reality: banks aren’t as attractive as they once were to prospective employees of all kinds. Yes, unmet demand for technical workers is a problem, but these roles are a small fraction of the talent banks need. Younger workers in particular want flexibility and to be valued in their jobs. Yet they find the banking culture rigid, hierarchical and overly formal, causing a disproportionate share to leave the sector. Forward-thinking banks are developing integrated plans that holistically address their work and talent issues. They’re mapping the skills they need now and expect to need in the future and are using a variety of approaches to recruit and retain them. They are also re-assessing their structure, culture and work practices to improve their appeal as employers.
Time for a different approach
Banks once relied on their size and regulatory protection to weather disruption. There’s more and more evidence these factors may also be obstacles, not just assets, in today’s environment. Decades from now, the banks that navigate these waters successfully will be doing things differently. They will be shaping their businesses continuously to the needs of customers, employees and other stakeholders. Banks will have to deliver more than return on equity, and their greatest asset will be their ability to identify opportunity and innovate efficiently. We think that as the pandemic subsides, 2022 will start to see the emergence of that new normal in the banking industry.
As an industry expert deeply immersed in the transformative landscape of banking, it's evident that the COVID-19 pandemic has ushered in a pivotal moment in the history of financial institutions. The year 2022 is poised to be a crucial juncture where the changes brought about by the pandemic will become institutionalized, shaping a new normal for the banking industry.
Collaborating with my esteemed colleague Michael Abbott, the Global Banking Lead at Accenture, we've identified 10 trends that are set to drive disruption and influence the decisions of the world's leading bankers in 2022. Let's delve into these trends and explore the intricate dynamics that are reshaping the financial landscape:
Rise of Super-Apps:
- The concept of super-apps is akin to the consolidation witnessed in smartphones, where diverse functionalities are unified within a single platform. Traditional banks face the challenge of adapting to this trend as big tech players expand into financial services.
- Options for banks include integrating non-banking services into their platforms, partnering with super-apps as white-label service providers, or defending their traditional franchise amidst the growing dominance of super-apps.
Green Finance Takes Center Stage:
- Investors and regulators demand genuine environmental commitment from financial firms, moving beyond mere promises. Banks will face pressure to redirect credit away from carbon-heavy companies towards sustainable energy, challenging their revenue streams from traditional sectors.
- The industry will witness a spectrum of responses, from embracing stricter environmental stances to cautious transitions aimed at staying ahead of regulatory changes.
Resurgence of Innovation:
- After a period of retrenchment post the financial crisis, banks are now embracing innovation with a focus on collaboration. Startups and digital challengers have spurred this change by identifying growth areas overlooked by traditional institutions.
- Collaborations and strategic decisions, such as embedding treasury services APIs into platforms like Stripe, showcase a renewed emphasis on product innovation to gain market share.
Fee Transparency and Personalization:
- Banking fees, once opaque, are undergoing a transformation towards transparency. Fintech disruptions initially promised free services, but banks are now striving for empathetic fee structures that empower users.
- Digital capabilities, including AI and cloud, are converging to provide personalized advice, enhancing consumer trust and involvement.
Humanizing the Digital Experience:
- Despite heavy investments in digital technology, banks are realizing the need to restore empathy and relationships in an increasingly impersonal industry. AI and other technologies will play a pivotal role in understanding and responding to customers' financial situations.
- The shift towards more tailored messages and products reflects a strategic move to regain customer trust and loyalty.
Digital Currencies Mature:
- Digital currencies, once perceived as volatile, are maturing as central banks explore their adoption. Regulations around cryptocurrencies are evolving, and financial institutions are expected to collaborate on integrating these currencies into the global financial system.
These are the initial insights into the transformative trends reshaping the banking industry in 2022. Stay tuned for the continuation of this analysis covering the remaining trends.