By Alex Kwiatkowski, Director of Global Financial Services, SAS
As disruptive forces continue to impact today’s financial services sector, banking executives are scrutinising the evolving role of banks and their part in creating a more purpose-driven industry.
From re-building consumer trust, to championing the green agenda and even mending a fragmented geo-political landscape, the pressure on the sector is undeniably growing.
Reshaping the banking sector
Despite most banks being able to ride out the storm of the pandemic, to successfully compete in a world where uncertainty is now constant, more must be done.
A recent SAS sponsored research report with Economist Impact highlighted a number of so-called ‘megatrends’ that are shaping the future of banking. These forces are deemed bigger than a single technology development, new regulation or global event, they are interconnected and long-term shifts. A number of these are set out below.
The digital revolution is accelerating
As digital economies built around the production, collection and protection of data continue to mature, new opportunities are being created for the sector. The Internet of Things (IoT) and the now ubiquitous network of interconnected devices will continue to power insights and innovation, as well as enhancing the power of tech companies.
In the face of rising populism, nationalism and protectionism, globalisation is under threat. The once-powerful symbols of a global economic order such as the World Trade Organization (WTO) are losing influence as tensions between the US and China rise.
Shared global challenges
Humanitarian crises are rising in number and intensity. These challenges are increasing the strain on global food and energy systems, and experts believe that the possibility of a global food crisis is growing.
With governmental efforts mixed, the private sector is expected to step up to play a more significant role in tackling the problem, investing more in their environment, social and governance (ESG) initiatives.
Ethics and efforts to combat inequalities are also moving toward the core of business practices. Consumers are becoming more vocal about social issues, and often expect companies to play a role in solving them. The banking sector is no different.
Embracing innovation to tackle these issues, head-on
In order to overcome the challenges created by the aforementioned ‘megatrends’ and achieve a more purpose-driven future, the research predicts that by 2035 the banking sector will have taken a number of drastic steps, transforming how business is done and leading to a vastly different industry.
The role of data
Business models will be built around open banking innovations and banks will open their data and related insights to third parties. Traditional banks will be reliant on these third parties and partnerships to provide a range of valuable services and products. The offerings will be part of a ubiquitous mobile banking landscape characterised by trust, personalisation and consumer protection.
For this new model to be a success, new regulations on data privacy and cyber fraud, market integrity, competition and innovation will have to be developed to safeguard customers’ data and support transparency.
Senior leaders must place digitalisation at the centre of their strategy. Banks must ramp up hiring and training around in-demand skills, while tapping outside expertise to drive technology adoption.
The rapid modernisation of systems must also involve new governance structures and external partnerships. Investments in new technology must extend to cybersecurity resources that mitigate threats relative to migration to new systems.
Taking action on climate change
With ESG performance correlating to higher returns for investors and improved long-term financial performance, businesses must embrace action to mitigate climate risks.
Fearful of abandonment by investors, companies should look to partner with outside organisations such as the Net-Zero Banking Alliance to improve data collection and reporting capabilities and comply with ESG regulations.
Overcoming the challenges created by a fragmented world
While no one can predict the future, competition between the US and China is likely to create distinct spheres of influence. China looks set to dominate in some high-tech realms, such as AI, quantum computers and autonomous vehicles, while the US leads in core capabilities such as semiconductors and operating systems.
In light of this, internet governance rules will likely splinter. The US and Europe will host an internet defined by openness, decentralisation and industry leadership, while the Chinese government will control a closed and centralised system. Meanwhile, India’s hybrid internet model involves multi-stakeholder governance, with the government retaining clear control for national security purposes.
In a fragmented financial system, banks will be unable to achieve the same economies of scale. Forward looking banks should therefore leverage technology wherever possible to simplify and automate products, services and underlying processes to reduce operating costs and provide more competitive offerings.
Rising reputational and cybersecurity risks
As the world becomes more fragmented, it will become easier for countries to evade economic sanctions and political tensions may arise between, and among, Western and BRICS+ countries.
Western-based banks need to prepare for both heightened reputational and cybersecurity risks in this environment. They should also strengthen their capabilities around risk analysis, mitigation and crisis management.
As regulations de-risk digital currencies, pushing consumer demand higher, banks will have the opportunity to become more efficient and innovative.
Digital currencies could allow established organisations to offer cheaper and faster services, becoming more competitive with fintech challengers. On the other hand, banks could lose potential customers with the increased adoption of Central Bank Digital Currency (CBDC), which would allow customers to pay and save in government-provided digital wallets without entering the banking system. Time will tell.
Massive changes are on the horizon
While it’s entirely possible that tech companies will not have taken over the banking sector by 2035, progress on climate change may have also stalled and the US hegemony of the global financial system could remain intact, what is certain is that massive changes are on the horizon.
New technologies, consumer expectations and a range of risks are forcing banks to think and act in different ways, staking out new ground strategically, technologically and ethically. Banks must also do more than merely react to customer demands, competitive threats and geopolitical events. As an essential element of the global order, the sector is well positioned to drive progress on multiple fronts.
The question is: how boldly will banks embrace change and a broader ethic to address growing economic, social and environmental instability?
Read the full report, Banking in 2035: three possible futures.