Technology has reshaped not only the way we interact with money, but even how we think about money. The banking and financial services industries are being transformed by Fintech as peer-to-peer lending, digital banking, and robo-advisors upend long standing structures. These trends have only accelerated during the pandemic.
Shifting consumer expectations, an evolving regulatory and data protection landscape, and advances in emerging technology are driving a course for a fundamental and revolutionary transformation of the banking and financial services industries – and meanwhile, employee expectations are also shifting: A Deloitte study found that 76% of respondents working in financial services stated that it is very important for them to work at an organization that is a digital leader. Success depends on the ability of companies to iterate quickly while leveraging the technology with a deeper understanding of human behavior. At the same time, they need to balance regulatory and compliance concerns with the financial risks that come with innovating.
The transformed landscape of banking and financial services will inevitably hold new and unknown challenges, but each change in terrain also offers fresh and exciting opportunities.
While there’s a confluence of many different forces affecting the industry, there are several that can’t be disputed, each of which we’ll explore below.
1.) Digital Banking Will Fully Replace Traditional Modes of Paying & Saving.
When the Internet became nearly ubiquitous several decades ago, most banks built some sort of digital platform that allowed customers to perform a handful of functions online. But as the digital revolution has continued, those platforms have expanded and new ones have popped up. The next chapter portends a world where old-school, brick-and-mortar banks are nearly an endangered species.
Big, traditional banks have held their prominent position for a long time because of the trust they engendered in people, because of the respectability of their stately columns and recognized names. But trust has eroded: a survey from the World Economic Forum found that only 28% of Millennials and Gen Z trust their banks to be fair and honest — and most of society just isn’t going to a physical bank branch anymore. This doesn’t just apply to young people: according to one 2020 survey of 1,329 Americans, 100% of those over the age of 66 had completed a financial transaction online in the past three to six months. Compare this to another survey from just the year before that found that two-thirds of seniors with a smartphone reporting that they did not use their phones for banking or other financial services. With the pandemic raising concerns about the safety of in-person banking (or in-person anything), this trend isn’t expected to taper off. Going forward, it will be a non-starter if any bank, even a once-revered legacy institution, fails to offer an entirely digital experience.
However, this doesn’t just mean that banks need to let people check balances and make deposits online. They need to evolve on a core level to keep up with the new ways people interact with money. For one thing, there’s the digital wallet, or the ability to make payments with a phone. In one survey, about half of Millennials said that they’d rather pay for items with their cell phone than by traditional means, whether that meant using a service like Apple Pay or a peer-connected app like Venmo. The pandemic has accelerated the rise of cardless transactions, with more people opting to tap their phone than take out a credit card and insert it into a card reader. For upcoming generations, startups hold as much sway as long-established banks. What matters most is ease of use and a good match between product features and current habits and expectations.
The fact is, there is a wide assortment of apps out there that can run a balance now, which are not technically financial apps at all. That paves the way for a new frontier in open banking. With companies like Plaid, which allows any app to seamlessly integrate with a user’s bank, people are keeping their money in various places on their phones. For instance, they can keep a balance on Amazon or other shopping apps as well as in their peer-to-peer payment apps, or in any other app that allows users to make in-app purchases and run a balance. Then there are the new banks, or the “neo banks” phenomenon. These lean institutions don’t have any physical branches or a traditional banking infrastructure, which frees them to offer competitive rates and other attractive features.
Fitbit for your Purse Strings
We are also now about to enter an era of smarter AI and machine learning zeroing in on the phenomenon of Autonomous Finance. In this model of financial services, clients define their financial goals and then let the AI take the reins. These algorithm-based automations can create personal efficiencies in your finances and make investment decisions that earn and save you money toward your stated goals – it’s like a Fitbit for your financial future.
The Democratization of Financial Literacy
Digital banking also presents an enormous opportunity for helping the unbanked. Worldwide, there are almost 2 billion adults without bank accounts, and the unbanked population in the U.S. is expected to rise as a result of the recession. The bright point is that many of the barriers that prevent these people from having bank accounts — balance minimums, antiquated bureaucracy, needing to be near a physical bank — are eliminated with user-friendly banking alternatives and financial literacy programs disseminated through smartphones.
Digital banking isn’t just about moving banking online, it’s changing the way that banking is done, period. This means that banks both old and new need to think seriously about how they can gain share of the digital wallet and become a seamless part of users’ everyday phone behaviors.
2.) A Frictionless Customer Experience Will Make Banking and Managing Finances a Pleasure.
It’s not news that people’s attention spans are shorter than ever and their expectations for products are higher than ever. A momentary pause, an inopportune pop-up, a redundant login experience: all of these things can cause today’s user to abandon a product or service.
Because banking and financial services involve something naturally weighty — money — it once seemed acceptable for them to be a bit slower-moving. That time is over. As things like one-click checkout, gamified investing, and cashless stores become more widespread, people expect their every financial interaction to be as intuitive and user-friendly as any other app or website they frequent. In fact, a survey from Gallup found that 43% of users would likely switch banks if they had a poor account opening experience.
And it’s not just about gaining or retaining customers; frictionless customer service also increases engagement (if something is easy to use, people are more likely to use it, right?), and engagement, in turn, boosts revenue. That same Gallup survey found that fully engaged customers contribute 37% more annual revenue to their primary bank than disengaged customers.
All of this means that providing intuitive platforms and apps with seamless self-service capabilities is essential. One of our financial service clients in the Fortune 500 came up against this challenge when they set the goal of increasing charitable giving among the HENRY (High-Earning-Not-Yet-Rich) demographic. BLDG25 stepped in to help them meet their target where they were by creating a fully integrated ecommerce-like customer experience that eliminated friction, replacing it with an enjoyable giving experience based on behavioral science that built trust through transparency. The result? Within 12 months, they were seeing an average transaction value of 150% above industry baseline.
Employers can also bring a frictionless experience to payroll through salary on-demand. In this new model, there’s no need to hold onto earned wages until an arbitrary amount of time has passed — instead, employees can access their earned wages instantly as they need them.
3.) AI & Robotics Will Automate Processes So That Financial Management Become Almost Second Nature.
Repetitive, data-heavy, detail-laden tasks are intrinsic to the banking and financial services sector — think customer on-boarding, generating financial reports, running background checks, processing loans, and more. Assigning these tasks to people is not only a huge drain on resources, but also introduces the possibility of human error. On top of that, it causes a bottleneck that slows down the whole process, leaving customers impatient and preventing employees from focusing on more substantial projects.
Today, AI, machine learning, and robotics process automation (RPA) are changing that. Through these technologies, the realm of what can be automated has greatly expanded, and Fintech companies can expect to streamline and offload many tasks that were once manual. JP Morgan, for example, introduced a machine learning-enabled interactive Chatbot system that can retrieve data from a vast database of legal documents in seconds. Bancolombia, the biggest bank in Colombia, introduced an RPA tool that gives investors real-time insights into the market and portfolio performance and offers insights and advice.
This trend won’t stop. In fact, market experts project that the global AI in Fintech market will grow from $5.3 billion in 2019 to $13.6 billion in 2025, and the Digital Banking Trends Survey from Kofax, a survey of 100 leading financial institutions, showed that insiders expect substantial increases in RPA to handle numerous compliance functions, such as customer identification, fraud detection, and monitoring. According to a report from the financial research firm Autonomous, traditional financial institutions can expect to shave off 22% of their operational costs by 2030 by using AI technology.
Further along this road, we’ll find ourselves with “hyperautomation,” which combines AI and RPA to automate processes from end-to-end, even automating the automation itself, with bots detecting repetitive functions and then automating them.
It will take some upfront effort for companies to learn how to best integrate automations into their services, but the rewards will be substantial. Not only will efficiency soar and errors plummet, but employees will also be free to focus their energies on innovation and growth. Next up, watch out for quantum computing which will take processing speed to a whole new level. We’re not quite there yet.
4.) Real-Time Data Analytics Will Be Driven by The Edge.
The process of moving everything to the cloud is over. In the era of Cloud 2.0, it’s time to expect more of the cloud: namely, that it can be a source of valuable data that can be leveraged to power future innovations and optimizations. The untapped opportunity here is big, with one report estimating that 60-73% of the data in a given enterprise never makes its way into analytics. These massive troves of information are a virtual playground for Big Data that 5G is ready to unleash.
The next frontier is now about accessing and leveraging all of the data in the cloud. One technology that could be key is edge computing which moves storage and computing power to the edge of the network so that it’s closer to the end user and easier to access. Edge computing is somewhere between the cloud and a physical server, bringing data closer to where it’s needed so that information travels more quickly. Without being weighed down by the massive trove of data stored in the cloud, edge technology enables machines to act nimbly and access and act on data in real-time. Read more about the future of Edge technology, plus some insights from BLDG25’s SVP of Edge Product.
Simply getting access to the right data doesn’t answer the question of what to do with it. That’s where a real understanding of human behavior comes into play. After all, what good is it to access information about human behavior without insight into what the behavior signifies? Understanding the science behind human bias and motivation is key to creating the next generation of experiences.
5.) Cryptocurrency Will Be Mainstream.
We’ve all watched volatile currencies like Bitcoin ride the roller coaster of market fluctuation. Because of the volatility and the fact that cryptocurrency and blockchain technology are poorly understood by most, it’s been easy for major financial institutions and smaller, newer players alike to dismiss them as flashes in the pan. But in recent years, it’s become clear that both are here to stay.
One of the most compelling characteristics of crypto is that it’s built on blockchain, which means security and transparency. In a world where cyberattacks are quite common, and hackers continue to become increasingly sophisticated, security is of paramount, and this is more true in Fintech than anywhere else. Today, data breaches in the financial services industry cost an average of $12.1 million per year, and blockchain could quickly lower that. This makes cryptocurrency, which relies on the hyper-secure, tamper-proof technology, all the more attractive.
The rise of cryptocurrency aligns with the mistrust of legacy institutions that we referred to earlier. Upcoming generations do not have any loyalty to traditional currencies or the way things have always been; they’ve only seen these systems fail colossally. Where they’ve found security, consistency, and ease of use are the apps on their phones and other digital platforms. As such, crypto becomes more and more attractive.
6.) Blockchain Will Power a More Secure, Efficient Future.
The power and possibilities of blockchain don’t stop with cryptocurrency. Because blockchain is, on the simplest level, a type of distributed database, it can be used to store and facilitate any number of different types of information, from detecting fraud to tracking transactions to processing loans. As a tamper-proof technology, it will become an integral part of protecting consumer data, contracting, and securing documents. Today, 69% of banks are experimenting with blockchain technology, and the global blockchain market is expected to be worth $20 billion by 2024.
The decentralized ledger of blockchain also removes the needs for gatekeepers, paving the way for a far more efficient future. Without the middlemen, operational costs go down and transactions speed up. The entire process of borrowing money becomes more transparent and secure, and interest rates can subsequently lower.
Lastly, blockchain allows for a more equitable, frictionless financial ecosystem through the process of tokenization. In tokenization, blockchain tokens are issued to represent a real asset, be it a security, real estate, fine art, or something else. These can then be sold and traded on any secondary market, increasing market liquidity and giving more freedom and access to investors.
Adapting to each of the trends above will require hard work, deep insight, and the support of industry experts, and there are additional challenges that are specific to the nature of Fintech. While they each add another layer of complexity, they’re all part-and-parcel of succeeding as a financial company in the modern era.
7.) Regulation and Compliance Will Continue To Evolve With The Proliferation of Data & Connectivity.
Every company under the umbrella of the financial industry must comply with regulations, no matter what shiny new technology is being used. This has always been a challenge, but as more and more new regulations get rolled out, it’s even more difficult to stay up to date. Of particular note is KYC (Know Your Customer) compliance, which requires that financial companies institute a process for establishing the identity of each customer, performing due diligence on their risk profile, and then continuously monitoring them.
Of course, that’s just one of many regulations that these companies must consider. There are countless others, including some specific to regions or countries, and in a global world, it’s necessary to comply with all of them. This can be particularly challenging for newer companies that don’t have the streamlined compliance processes or resources of legacy institutions. The key here is to view regulations as a framework for building best practices, cultivating a strong culture of compliance that results in products and services that naturally fit the bill.
8.) There Will Be a New Urgency To Be ‘Always On’.
Connectivity matters a great deal with any sort of digital service, but when the action being performed involves money, it takes on even greater importance. Markets and transactions move quickly. This presents a challenge for global Fintech companies who may provide service to people in areas with inconsistent connectivity or WiFi. As more people expect to do their banking and financial transactions on mobile with 5G, the whole world will benefit. This is a game changer for unbanked populations who have faced a lack of connectivity and the inequity of the digital divide. It’s already happening in developing countries which have seen a rise in financial apps that are empowering communities. At the same time, it’s not happening fast enough. Getting more people connected will be crucial for advancing technology to be an asset to all.
9.) Security is Paramount.
Security is of utmost importance where finances are concerned. This can sometimes seem at odds with the desire to have a customer experience that is fast and seamless, but the two things must coexist in order for a company to succeed. To do this, financial institutions need to leverage powerful, cloud-based tools that can protect consumers and themselves from cyber attack. The hyper-secure nature of blockchain offers one approach here. Of course biometrics is also playing a huge role in securing the end user bypassing hacks made to passwords and one day we won’t have to ‘count crosswalks’ as part of clumsy captcha UI.
10.) Speed to Market Matters.
People want things yesterday. There is no longer patience for the bureaucracy and slow-moving nature of big financial institutions, regardless of the barriers that may exist in moving quickly. These barriers, in today’s landscape, are no longer barriers. Financial institutions need to think creatively, discarding the old way of doing things, in order to bring results fast. Perfection is less important than speed.
Not to worry though, speed, transparency, and automation will create economies not just in the customer’s wallet, but in the business models of banks and financial institutions, turning the front, middle, and back office into data-driven connected and dynamic operations. According to Autonomous Research, AI will save the financial services industry 22% in operational costs by the year 2030. Accenture estimates that AI will add $1.2 trillion in value to the financial industry by 2035.
11.) Everyone’s Taking a First Step Into the Future.
As a partner at Andresen Horowitz put it, in the future, every company will be a Fintech company. The trends explored above aren’t going to be short-lived, and there is no opt-out. Technology and changing consumer needs and expectations have transformed the way that we interact with our money, and there will be no reversion to the mean, so to speak.
Our last trend for the transformation of the financial sector and the way people interact with banking lies in this scientific discipline:
12.) The Impact of Behavioral Science Will Transform Experiences for the Better.
In order to ride the wave of changes sweeping through the financial sector, companies will need to enlist the help of partners who have an understanding of both your business and its complexity as well as how to use today’s technologies to create measurable business outcomes. At BLDG25, we have access to the full range of emerging technologies, but we are tech agnostic and don’t believe in tech for tech’s sake. We know that it’s essential to understand the nuances of human behavior and what motivates people to act.
This is where we bring in our game design DNA and background in behavioral science. As thought leaders in the space of behavioral research as it relates to technology, we’re always hyper focused on how any new technology speaks to core human needs and expectations. With deep enterprise management experience behind us, we also understand the parameters of large enterprise, and how tech can best fit into them. The combination of these factors enables us to create immersive digital experiences that not only meet customers where they are, but also pave the way for new innovations that fuel revenue and growth. Get in touch about your digital transformation challenges today.