Banks have undergone significant transformation in the last two years, witnessing a remarkable acceleration in their digital transformation programs. Banks are now highly digitized, and digital adoption among customers is at an all time high. Innovation within the banking industry remains strong, as banks continue to evolve and adapt to changing customer demographics and preferences. At the same time, they must continually adapt to ovecome the challenges presented by the banking democratization trend – where bigtechs and fintechs present a new form of threat to traditional banks.
The game has now shifted to one of survival first and growth next. As 2022 approaches, the key question for banks is about its relevance to customers – and how well equipped they are to meet changing customer needs and preferences.
Digitization without the intelligence
The rate at which banks have embraced digitization in the last 24 months has been nothing short of phenomenal. Before the Covid-19 pandemic, programs that were expected to take a decade or longer to complete were finished in less than two years. There is no doubt that we now live and work within a truly digital world. But as we begin upon a new year, the banking sector still faces a core problem. Whilst banks are highly digitized, their inherent nature means they are not as technologically or data savvy like many of their fintech challengers. A recent report by Accenture revealed that out of nearly 2,000 directors in more than 100 of the world’s largest banks, only 10% of board directors and 10% of CEOs had any professional technology experience.
While banks may have become ‘digital,’ they’re now in a position where they lack the experience and intelligence to drive forward their digitization efforts and reap rewards for themselves and their customers. As traditional data kings, banks now must learn how to leverage their data, and use it innovatively and conveniently while ensuring it is secure. Unfortunately, many banks still lack the technology to truly use this data intelligently – which is a massive missed opportunity.
The importance of data exploration and extraction
To overcome this challenge, data exploration and extraction will become vital and prove a turning point for banks in 2022. We’ll see banks undergo large-scale data exploration programs to scruntize and examine the data they retain so they can fully understand their data assets. This includes everything from transaction and payroll data through to foreign exchange data.
Currently, big banks are not ready or able to leverage all of the data they hold to their advantage – an area where the smaller players and fintechs excel. Many banks simply do not want to abandon their core banking focus and don’t have the key to unlock the data and realize its full potential. But there is little point in holding such indispensible data if a bank can’t use it to create real change or value. In the coming year, banks will need to step up their game, adopt a technology-first approach to data science and forge partnerships with external service providers to truly deliver a frictionless customer experience.
However, this doesn’t come without risk. Once data moves to third parties and is beyond the bank’s control, it could lead to data misuse and mishandling. If not managed properly, such partnerships can pose an obstacle – so it’s vital that banks implement well-defined policies to mitigate and eliminate risks that may compromise customer trust.
Ultimately, banks of the future will need to differentiate themselves by demonstrating they are connected, present and relevant to customers as they navigate their daily lives, and focus on becoming trusted advisors in the eyes of those users.
Effectively using artificial intelligence (AI)
While banks have a wealth of data, many also have significant technology gaps. Luckily, one of the most influential technologies today can help them address gaps between merely holding and effecitvely using data: artificial intelligence.
The use of AI in banks is not new – many banks have been using AI to build their own chatbots and virtual assistants for years. A large global bank previously introduced a humanoid on its bank floor to assist customers in its flagship branch on Fifth Avenue in New York and later in Miami, FL and Beverly Hills, CA. It handles customer support activities like teaching customers how to open accounts, relaying credit card details and more. There are solution providers like Simudyne that help financial institutions run large scale stress tests using AI. While the use of AI was initially restricted to front office scenarios, with time banks have begun to use AI in middle office tasks like fraud prevention, customer segmentation, KYC verification, credit underwriting, lending risk management and much more.
In its next stage of evolution, AI is bound to reinvent the way pricing is done across industries, including the banking industry. This sector has numerous products and services even within the same category, making it challenging for the pricing teams to keep track. Above these complexities, pricing teams must constantly deal with changing market conditions and dynamic customer behavior, which often makes it a super human task to make the optimal pricing decision. By tracking the buying trends and competitive product prices, AI will be able to help banks drive optimal pricing decisions and bring more transparency in pricing by clarifying the variables behind each decision, doing away with the ‘black box’ effect which can introduce mistrust on price recommendations.
If banks are ready to think out of the box, the possibilities can be endless. AI can help banks combat friction in customer experience. For example, banks can leverage AI to shorten the KYC and AML compliance requirements by conducting the necessary checks and following all the processes, just like digital bank Monzo did for its onboarding. It focused on optimizing verification accuracy, lowering signup abandonment rates, reducing manual review and improving verification speed. Banks can now get one step ahead and create a bank that is driven extensively by algorithms that nudges its customers at the right time to make the right decisions that consider customer financial goals.
A bank’s ecosystem remains a vital cog in the engine
Whilst many have said a bank’s Achilles heel is its legacy systems, they are still fundamental to progression and innovation in the banking sector. As we enter 2022, a bank’s ecosystem must remain highly robust while simultaneously becoming more agile. The current lack of ecosystem flexibility creates an opportunity for APIs and niche challenger players to compete in the banking landscape. If banks continue to rely solely on these robust, but rigid core systems, can they remain relevant to customers? And what are the different ways in which big banks with a rich ‘heritage’ of applications can remain relevant to new-age customers?
What banks must do in 2022 is deploy a middle layer that has the intelligence to translate data available in their core ecosystem into actionable insights. This middle layer will amplify the effectiveness of the robust core system making the bank more agile and flexible to meet customer needs while leveraging the benefit of a robust core. This can help banks effectively deliver value while taking informed decisions to remain profitable.
For traditional banks, and the banking industry, to remain relevant, they must also compete with bigtechs that offer a complete solution to customers’ problems. And the only way for banks to do that is to quickly adopt a platform strategy, build their ecosystems and own their customers’ journey while extending their solutions like those of their partners to holistically solve customer problems. This type of interaction conducted on a highly efficient platform will ensure there is an effective value exchange between the customers, banks and its partners. The value exchange is everything: it’s where the customer and the bank meet on common ground at the right price, at the right experience for the customer and, importantly for banks, at the right level of profit.
It’s true that 2021 generated significant digital innovation in banks and a new approach to their customer experience strategies – but 2022 has the potential to truly harness the power of this innovation and allow banks to lead from the front.