The Top 10 Trends For Banking In 2023: The Gravity Of Rising Interest Rates Returns (2024)

The last time banks experienced steeply rising interest rates off an almost-zero base was back in 2005—before the launch of the iPhone. The past 17 years, historically speaking, have been profoundly unusual for banking. Sustained near-zero interest rates shattered the fundamental equation of the industry—that deposits drive lending power.

In response, most banks shifted their focus from a holistic view of the customer’s financial needs, (through an integrated deposit and lending model) to isolated products that continued to generate revenue in a low-interest environment. This severed the connection between related offerings at banks and strengthened product silos.

Low rates also brought banking’s drawbridge clattering down. A constellation of digital-only banks and fintechs was born. Awash with capital and eager to challenge conventional wisdom, some of these proved to be brilliant innovators. Almost all of them focused on parts of the banking value chain rather than the whole customer experience.

The overall impact was a Big Bang of competition and digital disruption. Sustained low rates turned banking’s gravity off, and the parts of the fractured customer experience drifted apart. To receive the most value, consumers had to expand their portfolio of financial service providers and use a mix-and-match of the best products drawn from the various silos.

Last year, the gravity of rising rates returned. Deposit accounts are once again the fuel powering the industry. Balance sheets matter.

But rising rates will do more than restore a traditional revenue stream for banks. The knock-on effects will reorient almost every part of banking, from tech investment to talent strategy and beyond.

Here are the 10 trends we see poised to reshape banking in 2023. Most if not all of them are affected, if not outright caused, by the return of gravity.

1. Rising rates catalyze product innovation

Now that deposits matter again, so too does deposit stickiness and minimizing deposit beta (the portion of changes in interest rates that banks pass on to depositors) — but many of the barriers to switching that once made deposits sticky have been weakened or eliminated by technology. For example, interest rate comparison sites like Bankrate.com in the US and Bankbazaar.com in India make it easy for consumers to follow the best rates.

That’s why banks will need to innovate this year to retain customers, quickly scrapping their product silos and redirecting their focus to the totality of their customers’ financial needs. 2023 will see several banks attempt to create the Amazon Prime of banking—a personalized, connected set of products and services that deliver value amplified by a multiplier effect (and draw on both sides of the balance sheet). We expect the innovators to be creative—offering things like a discounted Netflix subscription for new accounts.

2. The renaissance of the branch

The pandemic demonstrated that without face-to-face interaction, banks struggle to maintain close, loyal relationships with customers, especially on the SME and commercial side. The digital revolution made banking a lot less personal—and personal connection with customers is what banks need today.

Look for banks to reinvest in their branch networks in 2023 in pursuit of building and reinforcing durable connections with customers. This will involve retraining and re-orienting the workforce, as well as crafting more tailored customer journeys that help customers with challenges in areas like housing.

3. The metaverse demystifies

The metaverse won’t transform banking in 2023, but it will continue to attract interest and investment. With some analyses suggesting the total addressable market will be $8.8 trillion in the next eight years, the opportunity is simply too big to ignore.

Just as mobile did 20 years ago, the metaverse is creating a new universe of possibilities for banks. Expect them to continue to enable, engage, invent and imagine new metaverse possibilities in 2023.

4. Right culture, right talent

There’s an awkward truth at the heart of banking’s talent situation right now: many of the pandemic-related work policies that employees value the most sit uneasily within banks’ current culture. The rigid, top-down way things are done at most banks is straining as employees increasingly want to work in fluid, transient teams, acquire new skills, and make frequent changes to their career paths.

Today’s altered operating environment calls for a new mindset and different approach. In the year ahead, expect to see more banks changing their talent strategies to acknowledge the realities of what employees—not only in-demand tech talent but also those in key revenue-generating roles—want from their employer.

5. Risk everywhere

While banks came through the pandemic relatively unscratched in terms of credit losses, new risks bubbled to the surface in 2022. By the end of September, banks had set aside $318 billion to prepare for a possible increase in delinquencies—despite being in the midst of low global unemployment. They clearly believe risk is back, and it’s hard to argue the point. War, climate change, energy shortages and inflation are all making the future uncertain for banks and their customers.

In the past, banks have turned to their collections departments at moments of heightened risk. This time, with gravity returning to markets and the distortion of zero rates easing, things will be different. Banks that focus on helping customers solve their problems will outperform their peers—not only by minimizing losses but by strengthening their relationships with valuable but distressed clients.

6. Data becomes a product

To a large degree, the promise of data in the digital age has failed to materialize for banks. Data lakes and central data teams were supposed to facilitate it, but the demands of maintaining the data and its repositories have left most data teams little bandwidth to respond to the business’s data requests.

The first step to overcoming these problems is a change of mindset. Data needs to be seen as fuel for everything a bank does rather than a byproduct of things it was doing anyway. Data needs to be managed like a product with a product owner, against a series of commercial uses. Thankfully new models, like a data mesh are emerging that make this possible without rewiring the entire bank. A true data mesh combined with a product owner mindset connects the data in a bank and democratizes access, which means anyone within the organization can use it to create value for the business.

7. Fintechs: from disruptors to innovators

What you might call the golden age of fintechs seems to be coming to a close. After years of sky-high valuations and a limitless flow of capital investment, the tide has turned—with the market cap of public fintechs falling by 36% since the end of 2021. There are many reasons for this. One of the most important is the rise in the cost of money.

While fintechs may be less of a direct competitive threat to banks in 2023, incumbents still can’t afford to ignore them. Start-ups will continue to innovate, and forward-thinking banks will look to put those innovations to use—either through partnerships or acquisitions. The banks who aren’t complacent will have the opportunity to retake share in markets like credit, offering unsecured lending to consumers and small businesses.

8. Green gets real: the search for common ground

As I wrote in my last column, banks are under more pressure than ever to do something about the climate crisis. But they can’t deliver net zero commitments on their own. We believe that the search for common ground and a more measurable approach to net zero will be priorities in 2023—among politicians, bank leaders, regulators, activists, and everyone else involved. We also project that green hype will give way to a clearer, more realistic allocation of roles and responsibilities.

9. Life-centricity—from journeys to intent

Service providers for years have focused on customer journeys. The benefits of this have been huge, but they also come with disadvantages. Banks perfected mobile and remote banking by offering speed, simplicity and convenience. In the process, they made their customer journey functionally correct and emotionally devoid. The loss of a human connection eroded customer trust, boosted bank switching, and sharpened the competitive focus on price.

The return of appreciable interest rates will push banks to search for an antidote to this by looking at customers not only as users of specific banking products but as multifaceted individuals doing their best to adapt to circ*mstances beyond their control. We call this life-centricity. If they can leverage data in the right ways, banks will be able to predict what their customers want before they ever interact with the banks and in the process deliver the most relevant solutions and demonstrate authentic empathy and purpose.

10. Core modernization: a change of heart

For years most banks have resisted pressure to modernize their core processing systems, which are often 30-40 years old. 2023 will be when we reach the tipping point and we’ve found that more than half of the world’s largest banks are either in the process of moving their cores to the cloud or getting ready to do so.

What’s behind the change of heart? Rising rates help restore one of banking’s significant revenue streams (deposit accounts), making replacing their cores more affordable, while the demand for product innovation at speed (which strains old systems) will continue to rise. Banks will also fear being left behind by the competition or facing a talent drain as their aging, irreplaceable mainframe support team nears retirement.

Tech modernization is a “forever” process, but we believe that 2023 will be a watershed for the start of core modernization.

A time for new hope

Banks will face a unique set of pressures and demands in the year ahead. The windfall from their revenue-generating deposits will give them some leeway to respond effectively. The decisions they take in the months ahead and how they decide to invest that windfall will set the course that will shape their destiny for years to come.