By Peter Torrente, National Sector Leader, Banking & Capital Markets, KPMG U.S.
Technology has long been the spearhead of progress, ultimately driving industries and individuals to adapt and evolve their business and operating models. This type of change has been a consistent and common theme throughout history. If history is any guide, transformation can take time.
We are witnessing a new dynamic in which banking executives are embracing programs to digitize their enterprises across all functions while deploying strategies that create new digital opportunities for both their customers and businesses. In the face of economic headwinds, investments in digital transformation carry more weight than ever before. Forward-looking companies will use this moment to make strategic investments that set them up to beat the competition.
While growth opportunities remain top-of-mind, banks are closely monitoring loan demands, liquidity and funding mixes, credit risks and costs. Top-line revenue growth will become more challenging for most banks, with economic uncertainty not yet in the rearview mirror. Through it all, though, there is room for cautious optimism in the banking industry.
Banks are increasingly investing in the digitization and automation of core processes, the transformation and cloud migration of core infrastructure and the development of “digital-first” business models for segments such as commercial and small businesses. API (application programming interface)-led open banking, embedded finance, open platforms and banking-as-a-service (BaaS) strategies are, for most institutions, nascent at best but likely to drive significant earnings growth in late 2023 and beyond for institutions that invest and execute decisively now. These initiatives will require up-front capital expenditures and have longer payback periods, but they will yield more efficient and scalable business models over time.
While risks often accompany new technologies, it has been shown that banks can find meaningful returns on investment when expanding their digital capabilities. From creating defenses against cyber-threats to leveraging cloud technologies and artificial intelligence (AI), banking executives will need to strike the right balance between customer experience, higher operating costs, risk management and challenges facing the broader economy.
At the heart of banks’ desires to speed up and streamline payments, core-infrastructure modernization through leveraging advanced payment-platform technologies provides great opportunities. Customers benefit from quicker, more user-friendly transactions; banks can improve customer relationships and reduce costs by limiting processing redundancies and accelerating operations.
2023 will likely see even more alliances between traditional banks and both non-bank and third-party organizations to enhance agility and bring more technical talent on board. Additionally, the industry can anticipate a greater emphasis on progress toward adherence to ISO 20022, the global standard meant to enable interoperability among financial institutions in an attempt to eliminate today’s plethora of proprietary payment formats.
As the use of digital banking increases, so does a bank’s exposure to cybersecurity threats. Continued growth and transformation will certainly accelerate cybersecurity needs, hence the need for a special focus on client identity and process management to protect customer data and reduce fraud. As technical debt grows, so do cyber-risks. Although the economic slowdown is certainly creating pressure to dial back on spending, the increase in cyber-related vulnerabilities presents banks with the need to invest in capabilities to reduce this technical debt.
Investors, regulators and other stakeholders increasingly demand transparency about how companies manage evolving cyber-risks to better understand the factors that could materially impact a company financially. Activity by organized cyber-criminals is also expected to rise in 2023, likely prompting regulators to turn up the pressure on banks to expand data-protection capabilities and improve data-management processes. This increased pressure will be met with continued talent shortages as banks compete with other industries for a limited supply of cybersecurity specialists.
These issues will only be exacerbated as banks expand their use of third parties or vendors, proving third-party assessment programs to be a critical challenge in 2023. Vendor risk management will become increasingly important as banks increase their use of third parties as part of their efforts to cut costs and offer new digital products and protections.
AI and the metaverse
More and more banks are utilizing cloud technologies and AI projects as part of their holistic transformation efforts. In financial services and across other industries, firms will need to consider the risks and challenges that accompany new technologies, including intellectual property rights, bias, fairness and more.
As basic content generation increasingly becomes automated through various generative AI (Gen-AI) tools, we could see tremendous efficiency gains in knowledge work alongside these risks. On the other side of the coin, real success and market differentiation will increasingly require contrarian bets and perspectives on the part of knowledge firms. Gen-AI creates content out of what is already floating around the digital ecosystem, so firms will have to become more specific and specialized while bringing greater expertise to the market beyond what already exists.
Whether such applications will have enormous impacts on the top and bottom lines is unknown at this point, as we remain in the early stages of what is still potential adoption. Relatedly, the metaverse and Web3 are reshaping the ways businesses and consumers engage, transact, socialize and work. While it remains somewhat uncharted territory, banks that begin taking small steps in the metaverse can start to build a brand, acquire new or targeted customers and learn how to leverage the platform to deliver key products and services. The precursors to the metaverse—extended reality, blockchain and new payment rails—can provide a glimpse into the future possibilities for the banking industry as a whole.
In tandem, banks can mitigate potential risks and reduce uncertainty around AI and the metaverse by implementing broad education programs aimed internally and externally. Uncertainty underscores a central message I believe is vital for every bank to hear: If this industry is going to make long-lasting and deep connections with the primary target audience who will use these digital capabilities for banking services and products, then the industry must take it upon itself to educate the public and industry workers about what the metaverse is, what it is not and what it can be.
Find your footing
The technological advances made by banks in recent years have laid a strong foundation for growth by delivering improved, digitally enabled banking solutions and innovative products. As we continue in the digital age, banking executives will have to walk a tightrope between driving innovation and growth in an increasingly cost-conscious environment and finding the right tech-savvy talent and risk-management tools to help maintain momentum.
As per KPMG’s “2022 CEO Outlook” survey, when asked to identify elements holding back their progress on business transformation, banking respondents’ top areas of focus included deciding on the right technology (67 percent) and managing risk and compliance of the said transformation (65 percent). Clearly, banking executives are laser-focused on digital-investment strategies; however, the rapidly evolving and challenging economic environment is producing hurdles that must be faced head-on.
Any company, not just a bank, with the technical ability to grow, manage and move consumer money is competing for market share. Non-banks and fintech (financial technology) companies are aggressively going after traditional banks’ customers at a time when there is zero cost to switching.
Banks have a great opportunity to respond to this challenge by embracing change and building upon their established foundations to exceed customer expectations while arming themselves with effective risk-management frameworks. There is no denying that digital is here to stay. Banks that enable themselves to thrive in this hyper-competitive ecosystem will be best positioned in the long run.