Experts from the retail banking and financial services industry review the primary talking points of 2016, but as thoughts turn to 2017, what will be the industry’s key growth drivers of tomorrow and beyond? Will the challenger banks take more of a market share? Will innovations continue to surprise us?
Sophie Guibaud, VP of European expansion, Fidor Bank
Historically, bank CEOs haven’t pushed innovation hard enough, preferring to satisfy shareholders than to bring new methods to customers. However, in 2016 in particular, they’re now fully realising they fall short when it comes to innovation, and are gobbling up small fintech startups faster than ever.
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Now, a quarter (25%) of global banks would buy a fintech company, and 60% would partner with one – I consider this to be incredibly positive both for businesses and customers alike.
The very idea of sharing banking data could set alarm bells ringing in the minds of many ordinary consumers in terms of security and privacy. As a result, the use of APIs in banking has largely been limited. However, Open Banking really ramped up this year and will give the European banking industry the shake-up it needs in 2017.
The benefits of sharing this data, which gained real traction in 2016 due to PSD2 – with customer consent – greatly outweigh the risks as it will help increase transparency, competitiveness and foster innovation that should ultimately benefit consumers.
This year saw the take off of a wide variety of biometric security measures, from financial organisations. From fingerprints to facial recognition, we are moving beyond the realm of science fiction to everyday banking transactions. Passwords are problematic, and in the digital age customers struggle to keep track of which password applies to which account and in many cases, these passwords can easily be hacked.
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By GlobalDataBiometric authentication is undeniably the future of mobile security and it’s a hugely positive step that large players are starting to put customer experience at the heart of their processes.
For example, in 2016 HSBC announced its plan to introduce selfie authentication for setting up customer accounts, while MasterCard built fingerprint sensors into its cards, offering customers increased security and a smoother banking experience.
Looking ahead to 2017
Up to this point artificial intelligence (AI) in banking has been a critical, but mainly backroom technology used by financial organisations, especially challenger banks, to unearth deep customer insights to offer personalised products.
However, we’re now in an era where customers expect quicker, more responsive services from their banks and in 2017 will see the full roll out of AI-driven solutions that aim to meet these heightened expectations, while ensuring consumers receive the personalised approach they also demand.
Chatbots, which answer customers’ inquiries and resolve their problems, will become the new norm for banking customers around the world next year. We’ve seen a number of test cases deployed in 2016 but many of the big players including MasterCard will be jumping head first into offering chatbot services across the board in 2017.
From an industry perspective, 2017 will be a big opportunity to really prove how effective consumer-facing AI solutions such as chatbots can be, when applied to everyday customer service.
With the Payments Services Directive (PSD2) scheduled to be enforced in 2017, it will grant access to customer bank accounts and transaction data to third-party providers via a dedicated set of application program interfaces (APIs).
As customer data opens up across Europe, account aggregation, whereby compiling information from disparate, different financial accounts for a consumer, will likely be a key growth area.
In practice, what this means is that financial institutions can become central to a customer’s daily transactions, regardless of what accounts they might come from.
Meanwhile for the industry, organisations can gain deeper insights into individual consumers and what financial products might appeal to them currently, or in the future. The wealth of data available will result in the continued innovation of financial products which will put the customer at the heart of their development.
Alex Kwiatkowski, senior strategist – banking and digital channels, Misys
Buckle up for exciting times ahead in the retail banking sector as the developments of 2016 have kickstarted the need to drive innovation in the New Year.
Key initiatives shaking up the industry include: the Competition and Markets Authority backed move to open up banking; the implementation of PSD2; and delivering on the vision of the EU’s General Data Protection Regulation.
With deadlines for all three looming in 2018 we can expect each to absorb attention and resources over the coming year. But the potential rewards to be reaped by banks extend far beyond simply achieving regulatory compliance.
Faced with these challenges the industry will see the emergence of two-speed banking. Those in the fast lane will be preparing for open standards and PSD2, collaborating with technology providers and empowering themselves with data. Banks in the slow-lane, however, will be hindered by legacy technology and risk falling behind in this highly competitive market.
With the Financial Conduct Authority (FCA) giving the go ahead for cloud computing use in UK financial services earlier this year, and a groundswell of industry research pointing to its benefits, we can expect more and more banks to embrace the cloud throughout 2017.
One step beyond that, a Platform-as-a-Service (PaaS) model which opens up core systems and brings communities together to respond to today’s app-driven economy will gain traction. Those taking advantage of PaaS strategies in 2017 will ultimately be the ones leading the way, reaching new heights of competitive differentiation and gaining access to app-driven capabilities.
Hans Tesselaar, director, BIAN
The banking industry has changed almost beyond recognition in recent years, but the digital transformation that we have experienced so far is just a fraction of the shift that is to come.
Big data, the internet of things (IoT), virtual reality, and AI are not just buzzwords.
It’s true that while some of these developments will simply fall by the wayside of tech developments that never took off (at least in the financial sphere), others will continue to fundamentally shake the industry – it’s up to banks to evaluate the potential within each of these developments. However, without the army of developers required to test these innovative developments at the pace required, banks are struggling.
In 2017, we’re going to see banks ramping up their efforts to recruit tech talent and position themselves firmly as tech companies. This isn’t as major a shift as it may seem. The financial industry has been the leader in tech for many decades.
It was one of the first to adopt automation on a massive scale. But over time, being an early adopter has translated into huge legacy issues and lumbering old systems with incremental updates, while newcomers have swept in built on modern tech from the start.
The smartest banks are working together to navigate the future of core banking IT systems – developing a standardised global framework that fits across all banks, so that consumer-facing next generation API technology can fit easily on top of this.
But failure to shout about the work they are putting into this, means the perception of banks as anti-innovation remains. In the New Year we can expect to see banks focusing their efforts heavily on addressing this perception problem.
Ben Robinson, chief strategy and marketing officer, and Dharmesh Mistry, chief digital officer, Temenos
In the past, when a sector has faced technological disruption, the dominant incumbent ends up dislodged. In 2016, we have seen that banking is currently vulnerable to technological change. Our own research earlier this year found that half of retail banks believe fintech will bring an end to branch-based banking, and the majority predict that retail banking will become fully automated within five years. That represents huge, fundamental change.
With the onset of this rapid disruption, it has become clear that increasingly stringent consumer expectations are outpacing the capabilities of banks’ creaking legacy systems. In 2017, we can expect this trend to continue – in software as well as hardware – allowing smaller providers to take on new roles in their customers’ lives.
While retail banking challengers will increasingly pursue personalisation as a differentiator, wealth managers will continue to look more to robo-advice and AI, offering personal financial advice in a semi-automated fashion, day and night.
User experience will become increasingly seamless, whilst customer interfaces will be cleaner and more intuitive.
The way we interact with each other and in business will start to see a significant impact from voice recognition, AI and augmented reality – in fact, these processes are already making their mark.
Barclays recently introduced voice recognition software for phone customers, cutting out the need for multiple security questions and passwords, while Santander has an app that allows customers to voice questions about their transaction history rather than have to search manually for the data.
The result is speedy access that can’t be matched in-branch: 2017 won’t see the death of the bank branch, but we will edge closer to it.
As we stand on the cusp of the Fourth Industrial Revolution, banking customers have seen the future and are demanding it today.
David Hamilton, CEO, eWise
In the UK, the Access-2-Accounts provision within PSD2 – alongside parallel initiatives such as OpenBank and recently published remedies from the CMA – will introduce a new wave of technology and competitive openness.
This new world of openness will likely present opportunities and challenges to both sides of the value-chain: banks and third-party processors.
PSD2, OpenBank and the CMA remedies introduce front doors to data to which banks will need to provide third parties with the keys. These freshly mandated open APIs will be a milestone in banking technology and regulation, creating a tremendous industry buzz.
However, considering the scope of each initiative and their projected implementation timetables and specification principles, it is apparent that PSD2, OpenBank and the CMA remedies offer access to the same thing: the end-user’s basic current account, albeit with different technical standards and implementations – essentially, three different front doors.
Worse still, these doors lead into the same room. While all three initiatives address the scope of the basic current account, each initiative varies in its inclusion of credit card, overdrafts and savings accounts.
Furthermore, only the CMA remedies address loan products, and these are in the context of business accounts only.
With the average consumer and small business customer possessing a broad range of financial services products including current accounts, credit cards, personal loans, leases, insurance, ISAs and various other investment and credit accounts, the scope of these open API initiatives might leave some of us feeling underwhelmed when it comes to providing end users with innovative, convenient and value-added services driven by a truly comprehensive picture of their financial relationships.
One might even ask how, without a platform able to aggregate data from a comprehensive range of target institutions and a broad list of product types, a third-party processor could build a sustainable business model given how limited and crowded the front room will be.
PSD2, Open Banking and the CMA remedies simultaneously introduce complexity and a narrow scope. We enter 2017 with more questions than answers.
Bill Sullivan, head – financial services, Capgemini
Historically the financial services industry has been a pioneer in harnessing technology for better customer service. We expect the same to continue at a greater pace in 2017.
Increased digitisation, coupled with the high penetration of smartphones, is transforming the way financial services are being delivered.
The adoption rate for mobile wallets and contactless transactions is expected to increase even further. An open-API approach will help firms in creating a financial ecosystem around customers.
Regulators are also playing their part to encourage open banking through regulations such as PSD2, as well as promoting innovation and compliance through new frameworks and guidelines and stress tests using sandboxes.
The industry is witnessing innovative solutions from leading banks and fintech firms across banking areas such as lending, payments, operations and compliance.
Banks have been quick to collaborate with fintechs to develop innovative, easy-to-use and cheaper services.
While most organisations are executing digital initiatives in some form, complete transformation to digital is yet to be achieved.
Organisations are looking to overcome operational inefficiencies through robotic process automation, which will also result in large-scale cost savings.
As we enter into 2017, advanced forms of automation utilising AI will also help banks in provide relevant and personalised solutions to customers.
The more intuitive properties of AI, along with new methods of authentication such as biometrics, are also going to prove very useful in terms of customer servicing and fraud prevention.
Richard Broadbent, general manager – banking, Wincor Nixdorf UK/Ireland
Banks have a lot to tackle in 2017 as the regulatory and compliance bars are raised ever higher. While this is bound to absorb a significant amount of time and budget focus, I believe 2017 will see financial institutions begin to lay the ground work for their branch transformation plans of the future by investing in new technology, trailing new services and better integrating their digital experiences in-branch.
So called branch transformation is by no means a new concept, but many organisations are yet to fully embark on a plan for change. While branch transformation will take several years to execute, I do expect the industry will make significant strides next year with a clear focus on improving customer, staff and cash journeys.
The competitive landscape within the banking industry will also continue to thrive. While this may not impact mainstream competition right away, the desire of challenger banks and fintechs to change how we think about financial services and what we should expect as consumers will definitely have far reaching consequences.
While this may not fully play out in 2017, it will undoubtedly have a knock-on impact for self-service which will be used to streamline operations and offer enhanced services to customers. Integrating contactless will be the first of many areas of service improvement and digital enhancement.
Finally, the Bank of England has also committed to introducing the £10 polymer note in the summer of 2017. This is a significant change programme that will affect everyone within the industry – so financial institutions need to be ready for the transition when it happens.
This is just one of many innovations that we are seeing in our industry today, making it ever more important for financial institutions to listen to their customers, leverage the data they have at their disposal and futureproof their technology for the changes that will be an inevitable part of the evolution of retail banking.
Stuart Lacey, CEO and founder, Trunomi
In 2016, personal data has become an asset class in its own right. If used correctly, it can offer value to both sides of a transaction; more immediate, personalised experiences for the customer and less risk, less cost, higher conversion and better brand loyalty to the company.
Although we have seen a growing respect for the use of personal data, many companies are still learning the hard way through data breaches, mismanagement and the loss of reputation. In 2017, the rise of the personal data economy will truly take hold in the payments sector.
This means that customers will demand that personal data that is linked to their payments is only used within the bounds of their informed consent. Payments firms must grapple with the desire to build on new revenue streams from valuable customer data versus the need to meet customer calls for more transparency and less abuse of personal information. In this regard, 2017 will be a critical year to build trust by fundamentally upgrading systems and processes to capture, store and use customers' personal data.
This is not only for the above noted benefits but, in particular for firms doing business with EU citizens, they must prepare for the imminent arrival of the new data privacy law: The General Data Protection Regulation (GDPR).
The law brings massive fines into play in early 2018. In a world where the customer relationship is no longer owned by the company, but increasingly by the customer – trust and transparency has never been so critical.
Francesco Burelli, Accenture
The implementation of regulation in Europe next year will prompt a shift. The introduction of Payment Initiation and Account Information Service Provider roles by non-banks (PISP and AISP respectively) will see the market opened up.
The implementation of APIs will introduce efficiency in payments infrastructures and connectivity, and will shake the competitive landscape. Payments will evolve, but incumbent products will not disappear. Instead they will coexist with an array of new value propositions.
New entrants will compete for customers and user preference, hoping to change consumer behaviour. Remember, real-time payment systems are not new: They have been around since the Seventies. However, never before have they acquired such prominence and potential for new payment solutions. Some may argue that payment certainty can be provided without immediate settlement or clearing, nonetheless, the roll out of real-time payment solutions will provide a base for convergence between account-based and plastic payment types.
It is likely that new blockchain solutions will keep being tested as an alternative to incumbent correspondent banking business models. Globally, we will also see continued growth in mobile payments, particularly in developing countries where mobile provides an alternative to retail banks and a cost-effective channel for basic financial services solutions.
As activity increases, central banks and the Bank of International Settlement will turn its attention to the provision of regulation. Donor funding will also play a part to drive a relationship between financial services and telecommunications-owned infrastructure.
Finally, identity management and payments will keep overlapping. Authentication and security remain critical, particularly as payments become more digital and frictionless. It is likely that fraud will keep being a growing threat to the industry.
As financial firms digitalise to meet customer demands for mobile and multi-channel access, they must work to protect themselves from new cyberthreats from an ever-expanding and sophisticated set of cybercriminals.
Matthew Key, head – customer engagement, BT
Looking ahead to 2017, I see five main technology trends in the retail banking sector:
Blockchain
While the discussion around blockchain is not new, and investment banks have been leading the way in blockchain experimentation, I expect to see significant trials and proofs of concept conducted by large insurance firms and retail banks in the coming year.
It is possible that some blockchain-powered solutions may even be launched, although I believe mainstream launches are still a couple of years away.
Cloud services
In 2016 we have seen a significant change in attitude as more and more banks have started to fully embrace cloud services recognising the cost-cutting and agility-improving benefits that they provide.
We have seen some firms even starting to adopt a Cloud of Clouds strategy that permits bringing together all the distinct, disconnected cloud services under central management, using a single network to manage all data and achieve the full set of benefits. We can certainly expect to see the increased uptake of such services in 2017, with cloud becoming the universally accepted norm.
New authentication technologies
The use of biometrics has matured over the course of last year, and biometrics will continue playing a major role in authentication in the year ahead. We are likely to see an increase in the use of a blended approach to biometrics.
For example, a bank client wishing to make smaller transactions of up to £500 ($624) might be identified using a fingerprint. That, however, might be insufficient for larger transactions and, as such, banks would be able to employ a method combining a finger print and an iris scan.
IoT
The ever-growing number of data sensors and clients becoming increasingly comfortable with the IoT idea means that banks might be able to create highly sophisticated systems never seen before.
The use of the IoT could improve the mortgage-application process by employing data intelligence pertinent to a specific property. This could include a property’s history of subsidence, flooding, weather patterns, crime history or any other historical data. Using the IoT, banks could develop a real-time analysis of risk in a specific area, making risk profiling much more personalised and quicker.
Personalisation
We have started seeing this trend unfold this year as many financial services providers in the retail space have been adopting various data-driven personalisation solutions.
From a purely technological point of view, most personalisation solutions are available and ready to use. In 2017, we will see more and more banks adopt these.
Bethan Cowper, head – global marketing, Compass Plus
As 2017 gets underway and we begin to prophesise for the future, we start to make educated guesses based on informed insights as to what is in store for payments. In light of this perpetuating question – and perhaps in spite of it – what we should be asking this new year, is not what is new for payments? But instead what is old? What is holding us back? What hurdles must we overcome?
We know card uptake is increasing globally year-on-year, as card-carrying consumers add more variation to their wallets and the unbanked population continues to decline thanks to the availability and accessibility of payments products.
We know cash isn’t dead or dying, but choice across channels is growing as we continue to embrace contactless, NFC, biometrics and, for some, niche technologies like wearables.
In 2016, I would argue we have also learnt that as the world becomes more electronic in terms of making payments, regional disparities are actually becoming more apparent, rather than human behaviours more cohesive.
Different people have different habitual characteristics, whether based on demographics, geography, religion or socioeconomics and this disparity is clear.
How can financial institutions across the globe rise to the challenges that customers, geographies, politics and regulations will bring in 2017? This brings us nicely back around to the question of what is old?
2016 taught us that while old is good – better the devil you know than the devil you don’t – it will not last forever. High-profile system crashes, well-known banks with mobile apps that stopped working, customer data being stolen left, right and centre, hackers attempting to steal huge amounts of money, banks failing stress tests and massive internet banking downtimes all suggest that perhaps it is time for FIs to futureproof their payments infrastructure, and subsequently, their business.
In 2017, we should therefore see FIs investing more in their back-office systems. The recent trend toward new payments technologies has led to an emphasis on resources at the front-office side, regardless of the knock-on strain this brings to the back-end. In order to fulfil the digital transformation promises being made to their customer bases, FIs will need to take more interest in the capabilities and shelf-life of the backbone architecture that enables these modern functionalities.
The growing regulations that must be adhered to with transparency around compliance, the sheer volume of transactions, and complex workflows that increase operational risk have led to the need for efficiency, to bring FIs control over the entire payment lifecycle, from initiation to settlement. The reputational risk is too high not to address these issues, building the best technological and strategic platform to move the business forward.
Transformation needs to take place at a platform level in order to overcome the constraints legacy platforms still threaten. Whilst there is open resistance to large-scale, expensive and sometimes disruptive in-house technological change, a scoping study to identify and prioritise the modernisation process, starting with the functions that contribute to business growth, can go a long way to getting all stakeholders on board.
With a clear understanding of business-critical issues and a strategic road map in place, incremental changes can be made in order to satisfy operational, functional and budgetary requirements. For some FIs, this may involve working with partners or even outsourcing certain capabilities, in order to maintain control, whilst retaining the ability to quickly offer new products and services.
The payments landscape has never been more exciting or fluid, and in 2017 the hope is that FIs futureproof their technology infrastructure to ensure that they can support whatever may be around the corner.
