Huge changes have affected the banking sector in recent years and continue to do so. A key element in developing innovation in banking is the adoption of advanced digital tools that enable improvements in both core processes and the customer experience. From the need to manage the macroeconomic and geopolitical consequences of events of global magnitude to the inevitable awareness of the risks associated with climate change: in an extremely complex international context, investments in technology now seem to be the most effective response to a present riddled with contradictions that are still rich in possibilities.
Creating innovation in the banking sector (not just technological but especially cultural innovation) also increasingly means implementing concrete measures to build more responsible and sustainable alternative models. In this post, we will try to identify the investment areas of banks in the near future by investigating the main expressions of innovation in banking.
What are the major drivers of innovation in banking? An overview
Higher interest rates, sustainability, and technology: these are the three structural dimensions that banks must act on, not only to succeed over the competition, but to accelerate change by identifying and exploiting new growth paths.
- The rise in interest rates is among the major phenomena that are redefining the banking sector. This will catalyze product innovation and motivate firms to continuously reinvent themselves. Low and static interest rates, which have dominated the macroeconomic system for the past decade and a half, have offered businesses and homeowners cost-effective resources, but the benefits to banks and account holders have been limited. The banks that will be successful in the coming year will be those that project their products out of the silos in which they have confined them, and incorporate them into an integrated offering designed to meet the totality of individual customer needs.
- Another topic of absolute interest to all financial service providers is sustainability, environmental, social and governance (ESG). When companies and governments incorporate sustainability into their operations—from the transition to a zero-carbon economy to the issue of rights, inclusion, and diversity—they not only participate in community progress but also achieve important business outcomes.
- Finally, companies that can read the context are digitally transforming every part of their business through investments in data management platforms, automation tools, and artificial intelligence applications. As part of a broader strategy to transform the way banks operate and communicate, the use of technology is making a major contribution to breaking down the silos, first and foremost informational, that keeps data flows separate along the value chain. If organizations are empowered with alternative business models to the outdated traditional business model, business functions, connected to each other as never before, can serve customers through new, more effective ways of interacting.
So far we have provided an overview of the three major drivers of innovation in banking. Let’s go deeper.
Rising interest rates
When rates were close to zero and even negative, we could say that for many years money has been “free.” Banks have long operated in the absence of one of their main sources of revenue, and because of this, they have had to shift their focus from the totality of customers’ financial needs to isolated products that have continued to generate fees. This shift in focus, in turn, reinforced product silos within most banks. To build their personal financial journey, consumers have found themselves having to expand their portfolio of service providers, using a mix-and-match of the best products drawn from the various silos.
At the same time, the fintech universe exploded. A multitude of new players, basing their business proposition on the possibilities offered by digital technologies, burst into the industry, flooding it with cheap capital and prioritizing the scalability of their operations over financial returns. Ignoring established business models, fintechs have targeted only particular segments of the value chain and ended up strongly influencing the design of the customer experience.
What does rising interest rates mean for banks?
According to Accenture, rising interest rates are one of the forces reshaping markets at this moment in history, helping to collapse barriers to entry and make industry boundaries much more labile. Rising rates would thus seem to provide the fuel to ignite innovation. The move from very low rates to higher rates leads to immediate and significant consequences for the entire financial services industry: rising rates increase banks’ income, and many of them are likely to choose to invest the resources accrued on new projects, offerings, and initiatives. But higher rates could also put borrowers at a disadvantage, prompting banks to question how to take on the needs that will emerge.
Investment in sustainability
Banks play a crucial role in spreading a new corporate culture of sustainability. As the industry is in a unique position to address the challenges posed by climate change, sustainability becomes the new strategic imperative. Faced with the real possibility of catastrophic environmental damage and dire macroeconomic consequences, banks are being called upon to take concrete action, demonstrating that they can meet rigorous standards when it comes to monitoring risks to the environment and acting accordingly, based on increasingly accurate analyses.
The pressure on the banking sector from many quarters has not only contributed to increased corporate adherence to social responsibility principles but has accelerated highly innovative processes on several areas of application: from data management to “green banking,” from modernization of IT infrastructure to convinced adherence to ESG principles. Let’s look at each of these areas of action in detail.
Collection, interpretation, and use of data
All institutions, including banks, need good data to measure progress and gain insight into the performance of their organization, from the supply chain to product manufacturing, to the distribution of services to customers. This means that even in the case of financial organizations, it’s critical to have high-quality, easily tracked, and quickly accessible information to make the best operational decisions. While the amount of data on the environmental and social impact of actions and processes available to banks today has reached large proportions, there is still considerable room for improvement in their management, which digital transformation can streamline and enhance (from collection to categorization and interpretation to use).
Green banking: “green” investments and customer services
Green banking encompasses all investments in renewable energy, “green” bonds, and sustainable infrastructure financing (to name a few) that otherwise, if they were the exclusive preserve of public institutions, would most likely be realized with much longer lead times or not at all.
Decarbonization, for example, is possible only in the case of large investments by the private sector. For banks, net zero means more than just reducing the emissions caused by their operations; it also means helping their customers review their lifestyles and their purchasing and consumption decisions, pointing them in a direction of financial well-being, progressive efficiency, and increased savings.
Financing a new green economy passes through an innovation plan that is able to reduce the discrepancy between financial policies and those for sustainability.
Modernizing IT infrastructure: reducing carbon print and cutting costs
Banking IT infrastructure is another area where innovation investments serve to implement business sustainability. The use of a cloud-based infrastructure reduces carbon footprint and emissions and contributes significantly to cutting business operating costs. In addition, digital transformation in banking makes banks more agile and productive. As cloud service providers improve their offerings and make the transition easier and more secure, the benefits for banks modernizing their IT infrastructure multiply: from an overall decrease in maintenance expenses and risks to the creation of tools to support collaboration, just to name a few examples.
An ESG strategy: the role of fintechs
Consumers, shareholders, employees, and regulators are demanding continued commitment to environmental, social, and governance (ESG) priorities from banks. Implementing ESG criteria in banking is complex and requires a high level of expertise. It is essential to have state-of-the-art technology and skilled staff to understand the data points that need to be captured, select metrics to share internally, comply with regulations and compliance protocols, and manage risks. Banks also need to prioritize automated workflows and invest in a robust data and analytics platform. With business models focused on environmental and social progress (climate change, diversity, financial inclusion), fintechs will be able to more easily adopt a formal ESG strategy than traditional banking institutions, covering governance actions and controls, assessments, and KPIs.
Technologies to improve customer relations and employee engagement
In what is proving to be a profoundly uncertain 2023, and not just because of economic conditions but also because of the volatile organizational and technological environments in which banks operate, a new study by Cornerstone Advisors, What’s Going On in Banking 2023, reveals what technologies banks and other financial organizations will be betting on.
Banks are increasingly deploying conversational AI technology to create chatbots that are not only useful for customer service but decisive in direct employee support (live operators can delegate the most repetitive and lowest-value tasks to chatbots). Chatbots are evolving into intelligent digital assistants that use machine learning programs to be increasingly realistic and conversational.
Compared to many other types of apps and systems, while demand is certainly not negligible, opening checking accounts and formally applying for loans are still not fully digitized interactions. In 2022, although 23% of banks planned to use an app for digital account opening, this functionality was used by only 10% of users. The strong demand for self-service modes is good news, but the gap between expectations and implementation indicates that there are still some problems to overcome, especially organizational ones.
Customer relationship management and communications (CRM and CMM)
Managing their customers’ data, personalizing communications, and developing relevant offers that are built from the data: these are the goals that a bank can establish when it invests in digital technologies that are designed to make the UX more effective. To achieve these goals, CRM and CCM will increasingly be incorporated into digital banking platforms to enhance activities such as digital account opening and onboarding and loan origination, along with other specialized apps (e.g., health and financial wellness).
Key use cases for real-time payments include B2B payments, account-to-account transfers, and accelerated payroll payments. According to McKinsey Consulting, as non-interest income declines, account-to-account transfers, last-minute consumer payments, and recurring bill payments will be the main source of return on investment for banks.
“Open banking” has become a hot topic in the banking industry with the advent of fintechs in the market that use APIs to take data from banks, open and fund accounts, and provide value-added services to their users. Banks, initially suspicious of open banking, which was perceived as a cause of profit erosion, are gradually opening up to the possibility of partnerships with fintechs (about 70% of banks have included partnerships in their strategies in 2023).
Creating innovation in banking: now is the time to invest
Innovation for banks basically means seizing every possible opportunity to reposition themselves in the immediate future.
Traditional banking culture has proven unable to keep up with the needs and preferences of customers and employees. Customers, especially the younger generation, expect much more than just a set of services for managing their financial resources. They demand that their bank take care of them and help them strategically manage their finances. Employees, on the other hand, push for the internalization of a value system that is aligned with issues they consider important: sustainability, integrity, innovation, flexibility.
Banks cannot afford to be out of tune with these two stakeholder groups, and a concerted innovation program will be needed if there is a gap between current and expected corporate culture. They will need to make the changes necessary to remain competitive: attract and retain specialized talent, meet customer expectations by fostering more human relationships, optimize operations so as to gain efficiency and quality, take full advantage of the possibilities of the cloud, and use data more effectively to create personalized experiences.