Banking Industry Outlook: Banking reimagined

Banking reimagined

The banking industry is going to look a lot different in 10 years time. Many traditional players now face the choice of either being disintermediated or proactively disrupting their own business models to thrive in the future. Beyond the rhetoric surrounding the topic of disruption in banking, some very fundamental questions face the industry today:

• How will past innovations (such as marketplace lending or blockchain), and the breakthroughs likely to come in the future, transform banking
• What will the industry’s competitive structure look like over the next decade—will the incumbents be stronger/larger, or weaker/smaller
• What can banks do now to prepare for these future scenarios?

In this special report, we examine how various disruptive trends we are seeing today in areas such as artificial intelligence and machine learning, blockchain technology, collaborative ecosystems, cryptocurrencies, demographics, and customer experience are coming together to influence the future of banking.

This outlook is part of Deloitte’s Financial Services Industry Outlooks series, which provides disruptive trends and bold predictions over the long term for banking, insurance, investment management, and commercial real estate.

Thriving in a disrupted world

Disruption in banking is a topic du jour. Not surprising perhaps, if one considers the prevailing belief among Silicon Valley start-ups and the banking industry cognoscenti alike—that “fintech” firms are about to disrupt banking for the better.

Whether one subscribes to this viewpoint or not, no one can deny that many aspects of banking and capital markets are being attacked by new competitors, whose chief weapon is an ardent belief in the power of technology to upend conventional wisdom and transform banking. The scale of this assault on industry incumbents from different vantage points is quite staggering. There are literally thousands of start-ups all over the world focused on perceived vulnerabilities of traditional institutions.

A new organizational paradigm: Agile, collaborative, and exposed

Many banks and capital markets firms, particularly the large, complex institutions, have been simplifying their business and operating models over the last few years, both for economic reasons and to reduce organizational complexity. There is an increasing realization that they do not or cannot excel at every activity, and that it may be easier and cheaper to outsource noncore activities.

In the new organizational paradigm, maintaining an organizational identity and creating a cohesive culture and employee loyalty when most of the talent is not in-house will be an entirely new challenge. In our view, a more global “ex-force” (external talent) will necessitate greater cultural sensitivity and the willingness to be more flexible with work protocols.

Future of brands: Need for digital savvy and a sharper focus on customer experience

It wasn’t long ago that banking brands were on par with most other industries in terms of consumer trust and brand value. The financial crisis changed that. Many banking brands have yet to recover from the reputational damage experienced during the crisis. Banks, even years post-crisis, remain one of the least trusted institutions. When compared to other industries, banks have experienced the least growth in brand value over the last 10 years. This is all the more disturbing given the importance and relevance of the banking industry to the economy and society.

In this environment, conveying a consistent brand experience will become more challenging. Marketers will be forced to be more creative in the design of service experiences. While banks may have less control over how customers experience the brand, they will, however, have access to more detailed and real-time information at an individual customer level. These new data will vastly expand the ability to tailor offerings and experiences.

The new world of payments: Blockchained, direct, and seamless

Trusted intermediaries have been fundamentally necessary to facilitating payment transactions in modern times. As transactions became more complex, so did the importance of intermediaries in the payments world. But more recently, blockchain technologies are challenging this basic world order. Concurrently, the growth of mobile payments and the push toward real-time payments are forcing traditional players to reexamine their role in the payment ecosystem. The threat of disintermediation in the payments industry is both real and imminent.

We can unequivocally say that the payment ecosystem will look vastly different as a result of continuing technological advances in multiple domains. But in all likelihood, blockchain innovations could be the most transformative, and we will likely see a number of real-life applications of blockchain applied to payments, beyond digital currencies, in the next five years.

Frictionless trading: Machine dominance and the search for relevance

The notion of “trading without traders” has been a market reality for at least a decade now. Electronification of exchanges and algorithmic trading have already diminished the role of the human trader in a number of asset classes, particularly in equities and futures. Yet this accelerated automation has also exposed new risks that have become a focal concern to the industry, “flash crashes” in stocks and treasuries being two examples.

How will machine intelligence transform securities trading in the future? And what will be the role of humans in a machine-dominant world?

Evolution of marketplace lending: Survival of the fittest

Disintermediation has been a long-running structural theme in the US banking market for some time. For instance, three decades ago banks provided a significant portion of credit to the corporate sector. But in 2014, bank loans accounted for only about 30 percent of corporate debt. This trend has been a net positive—deep capital markets form a key pillar of the US economy.

But following the financial crisis, a number of factors have combined to dampen bank competitiveness in traditional lending, beginning with the stricter regulation of banks, compared to that of nonbanks. Add to that the years of record-low interest rates, which have negated banks’ traditional retail funding advantage. There are now reduced barriers to entry through technology—new players are able to enter without huge upfront investment. And the behavior of banking customers has changed significantly, from Millennials, who are more transaction- oriented and less influenced by traditional brands, to the more tech-savvy consumer base whose expectations for immediate results are at odds with what banks can deliver with their legacy systems.

Taking advantage of these developments, marketplace lenders (MPLs) are beginning to pose a challenge to traditional players.