By Paul Fermor, UK Solutions Director, Software AG
The adoption of online banking in the UK has risen consistently year-on-year for over a decade, with over three quarters of consumers in the UK now banking online. This adoption story is mirrored across other aspects of consumers’ adoption of financial services. Consumers have generally become far more trusting of new financial services firms, and more willing to adopt a wider range of products which align with their beliefs and outlook.
For financial services firms looking to capture consumers’ appetite for new innovative products and services, here are some key trends that may emerge or mature in financial services over the next year.
1. FinTechs: trusted more than the incumbents?
Consumers are creatures of habit, and the adoption of new experiences or technology across the consumer landscape takes time. But attitudes are changing. A study from EY found that, contradictory to past perceptions, FinTechs were more trusted than regional or national banks by consumers under the age of 65. Over twice as many 18-24 year olds declared higher levels of trust in contemporary digital financial services than incumbent banks.
Consumers have a hierarchy of needs. The most basic of these is trust, and is invariably derived from consumers’ confidence that their most basic expectations will be met. Historically, these expectations were practical concerns about not losing deposits, but as these base expectations are met, they have evolved to centre around higher level goals such as quality service provision, product differentiation and customer experiences.
Evidenced by the results of customer satisfaction, FinTech’s and challenger banks are winning trust by consistently delivering greater customer satisfaction than their incumbent competitors. Incumbent banks understand that their greater heritage and physical presence are diminishing differentiators in the challenge of winning trust and will rise to the challenge of competing on product differentiation and customer experience.
2. Exploring new channels and SuperApps
Big tech has been a looming threat over the banking industry for some time now, founded on its ability to create and maintain the attention of very large consumer audiences. With such audiences in place, fertile environments are created to sell additional products and services. With $2.2billion of M&A activity in FinTech in 2020, payments and other financial services are firmly in big tech’s cross hairs. 2022 will likely see financial institutions take a leaf from big tech’s playbook and look to invest heavily to explore different channels that help to build and maintain relationships with their customers. JP Morgan recently bought the restaurant review site The Infatuation, and Stripe bought IndieHackers.
With the mainstream adoption of digital/mobile banking, the crossover of the financial and technology sectors has become larger and larger. Whilst these acquisitions may seem strange, they are consistent with the school of thought that tech companies must also become media companies in order to facilitate direct conversations with their customers. With an issue so critical to an industry countering the threat of disintermediation from their customers, it will be interesting to see how activity in this space evolves.
3. Digital transformation will continue at pace
The Operational Resilience legislation (ORI) announced by the UK’s Prudential Regulation Authority will provide a litmus test for the operational awareness of large swathes of the financial industry. Specifically, Capital Requirement Regulation (CRR) firms will be required to demonstrate “…the ability to prevent, adapt, respond to, recover, and learn from operational disruptions…”.
To achieve this objective, firms must become more connected to drive operational awareness and see the service they are providing in a much broader context. Connectedness does not just apply to the operational IT systems, but also how these systems support processes and people to deliver critical financial services. This is a regulatory mandated digital transformation manifesto. The Covid pandemic has significantly accelerated digital transformation, but regulatory pressures such as the ORI will see this trend continued in 2022.
4. Financial inclusion will expand
Financial inclusion hasn’t historically been a prominent topic of conversation but since the digital world is being increasingly ingrained into everyday life, the tide is changing. The Bank of England recently noted that 42% of the population visited a retail outlet that did not accept cash. Without a compelling digital banking solution, over one million of the adult UK population who are currently not using banks will increasingly become marginalised and disadvantaged – both financially and practically – as cash transactions become less available.
Fortunately, serving the unbanked and underbanked is becoming increasingly viable with the help of technology and industry participation. Digitised banking means that people can increasingly access financial services without permanent access to physical branches. Additionally, customer data can be more easily shared to extend lines of credit to people who might once not have been able to take out a loan. HSBC’s collaboration with homeless charities in 2019 spawned its new No Fixed Abode banking service which has opened over 1100 accounts since its inception. 2022 will likely see an acceleration in the proportion of the 1.2 million unbanked UK adults brought into the financial mainstream.
5. Sustainable finance without greenwashing
Net zero finance is on the rise, with the UK planning to become the world’s first ‘net zero finance centre’. To get there, new rules have been introduced that require all financial institutions and listed companies to publish net-zero plans from 2023 onwards. This marks a shift from the ‘carrot’ of positive sentiments surrounding green initiatives, to the ‘stick’ of new rules that compel institutions to quantify their carbon footprint and detail their plans to align with the UK Government’s legally binding net-zero targets.
This is likely to create many more opportunities for customers who want to receive returns on their investments in an environmentally friendly way. Investment managers will increasingly offer ‘green’ portfolios, while banks will create new green savings accounts and bonds for customers. Many question the extent to which firms will be held accountable on the environmental credentials of their green products. To mitigate the phenomenon greenwashing, the UK’s Transition Plan Taskforce will develop and mandate much more rigorous standards with regard to environmentally-centric reporting by the end of 2022.
Whilst we are unlikely to see the full effects of the net-zero initiative until 2023 at the earliest, 2022 is likely to be a formative year for the development of the next generation of environmentally friendly financial products.
There are increasingly fertile conditions developing in financial services. Consumers are becoming more demanding of the products and experiences they wish to consume, but are also becoming increasingly more willing to consume new propositions. This is a pivotal moment for firms to appeal to a wider audience and deepen their customer relationships, and firms that can flex to exploit these new themes and opportunities will secure competitive advantage.