Future of Banking in Chaotic Times - winners and losers in battle for survival

What is the future of banking? Who will be the winners and losers in the massive global banking shakeout that is coming?

I have been advising global leadership teams of the world’s largest banks for over 20 years on a wide range of new opportunities, issues, banking risks and macro trends. The conversations have changed over the years far less than you might imagine: many of the old banking challenges still remain, while the urgency for radical change to financial services has never been greater.

In our densely interconnected world, every banking trend below will link to every other trend, often in complex ways, and the list below is not in order of importance, with greatest focus on the future of retail banking. 

Here are just a few of the wider banking trends that are particularly bright on my own radar screen at the moment. There are many others....

Greatest challenge for every bank CEO over the next decade

The greatest systemic risk for any leadership team of a bank over the next 10 years will be Institutional Blindness. Too many bankers, working in the same bank for too long, talking to too many other bankers or banking regulators, or banking IT companies, about banking issues. 

It was the cause of the sub-prime crisis and global banking crash in 2008 and years following – when the entire banking industry marched in step like lemmings over the same cliff.

The greatest protection against Institutional Blindness in banking will be investing in greater diversity: bringing in people from different industries, with varied experience, skills and perspectives, to challenge the status quo, test strategies and advise on managing wider risks.

Banking Agility

As we have seen countless times: the world can change faster than a bank can hold a board meeting. 

I was teaching on a Swedish bank’s Leadership Programme recently, sharing a platform with a member of the bank’s global leadership team. 

He rushed in from the bank's board meeting which had been running continuously for the previous two weeks following a major crisis, linked to the Panama Papers. Every day new media allegations appeared, based on leaked information that the bank board had no access to, and every day the CEO of the bank was being called upon for media comment. 

The future of banking will be driven by a single word that is more important than economics, technology, innovation, customer behavior or regulation. That single word is EMOTION, linked to confidence and TRUST.

Trust is the main thing that any bank has to offer. Without trust you have no bank. Customers withdraw bank deposits, close accounts, transfer their businesses to competitors. Therefore REPUTATIONAL RISK is the number one risk for any bank board. The trouble is that banking reputation takes a generation to build but can be lost in minutes.

That is why we can expect to see such vast investments in bank cybersecurity: not just because the risks of cyberattack on all retail and private banks are growing so fast, but because the negative media impact on banking image and reputation can be so severe when personal data is lost, or even worse, published online by criminals.

Banks will need to develop far greater agility – in leadership, strategy, product delivery and media response.

5 second test for every bank

Google data proves that 70% of smartphone users press the back button on any page that loads in longer than 3 seconds. And a 5 second wait can lose up to 90% of all customers. But that is today, what about 3 year’s time?

Younger banking customers are even more intolerant – many terminating a business relationship with a website after 2 seconds or less.

I have polled tens of thousands of senior executives in my audiences over the last 5 years and most of them absolutely hate being asked to press options when phoning call centres. Why is that? Because anything that wastes more than 3-4 seconds of their time makes them very irritated.

A 5 second wait will soon feel like an eternity. 

42% of Millennials would transact more payments online if the process was easier and faster.

So how long does it take to apply for a bank mortgage to get a provisional offer?

How long to get through to your credit card company about a query?

How long to be transferred to another bank department, because the person you are talking to can't sort out your problem?

How long to log into your own online bank accounts?

Banks that shave seconds off the time we wait will boost their market share significantly. Every mouse click loses sales. Every keystroke the customer has to enter, just adds to the risk that they will abandon the process altogether.

But many bank processes take weeks – take for example a financing document for a multinational. Expect banks to invest heavily in better, faster, decision-making for all products and services. Those that don’t will lose market share.

Mobile payments will boom but physical money will also grow

In most nations of the world, the amount of physical cash in circulation will continue to grow for the next decade and beyond. While cash use began to fall in the UK in 2019, across the EU use continues to rise by 6% a year. The same in America.

So that means banks will continue to incur major costs in cash handling for many years to come.

Cash is popular for many reasons, not least of which is that in many nations at least 10% of the entire economy is being hidden from the tax department. 

Another reason is that people are worrying more about privacy. Do we really want every dollar we spend to be scrutinised by companies or by the State?

We will continue to see huge differences in online retailing from one nation to another. 

Take the UK, where e-commerce accounts for over 12% of all retail spending, compared to Germany where it is less than 5%. Two similar European nations in size and use of smartphones. The difference is partly because people in the UK are more relaxed about online fraud, identity theft and giving credit card details too websites.

Another example of how the key word in financial services is Trust.

Banks will need to partner with Telcos

Banks only know what customers have paid for in the past. 

They have no idea where a customer is now, or what they are thinking about (recent web searches). 

On the other hand, Telcos know where the customer is, and can guess what they are thinking about, but often have no insight into how they are using their money. 

Therefore the logic is for many new partnerships, collaborations, shared initiatives and so on, combining data from many sources to serve customers better.

But the GDPR privacy legislation in the EU will mean that much of this will require explicit formal consent by customers.

Large banks will lose billions on Big Data experiments

Billions are being spent on Big Data projects by banks, but most of it has been wasted, just as I predicted over 5 years ago. 

Almost all the real value to banks is in Little Data: less than 0.2% of the data holds 98% of the answers that banks need. Unusual patterns of trading activity linked to fraud; basic customer data that helps shape new products and so on.

Expect a shift from bank “marketing” to “conversation”

Expect many banks to shift their marketing budgets to more personal “conversations” linked to what customers are doing or are interested in. The best conversations will be built on trust with permission given by the bank's own customers.

The most personal banking campaigns will see response rates jump significantly. Take for example a banking website offering a new savings product or a credit card. Typically up to 65% of customers abandon the application process on the final click. 

It’s the same with e-commerce retailers – most customers abandon baskets at the point of actual payment / final decision. 

But if a personal letter and brochure is sent automatically to that customer’s home within a day or two, the rate of abandoned baskets typically falls to around 49%, with overall response rates up by 6%. 

And all the tech exists to do this, using data we can glean as customers move around company websites.

Mobile payments will be driven by emerging markets

1 billion children are alive today, more than ever in history, and almost all of them were born in emerging markets, where 85% of all humanity resides. 

A billion adults will migrate from rural areas to towns, and from towns to cities, over the next 30 years, to earn money and find their future. 

As a direct result, remittances will boom as such migrants send even more money home. It is already the case that such cross-border remittances represent more than 10% of the entire economies of over 30 nations. 

Over the last decade, remittances have driven a boom in mobile payments, cutting out companies like Western Union, and the risks of entrusting cash to friends to take home to family.

Expect 3 billion people to be banking on mobile devices by 2021, as huge numbers of people make the transition from phone remittances / payments to opening proper bank accounts.

Massive growth of mobile payments / biometrics in India

In a single step, the Indian government banned the use of 80% of all bank notes. 

At the same time, the government rolled out the world’s largest biometric-based payment system, with over 850 million biometric profiles registered by early 2019. 

The aim has been to allow access by people who cannot read and write, to the digital banking revolution.

Expect further giant steps to be announced which will continue to position India at the forefront of global FinTech innovation.

Huge growth of digital profiling in China

The Chinese government has introduced a system of social scores for every citizen and every business, based on things like credit rating, criminal records, antisocial behavior online and many other factors. 

This is being linked to the most sophisticated face-recognition systems in the world.

As a result of all these steps, expect Chinese and Indian software companies to become dominant players globally in the fight to develop universal banking and security standards.

Banks will invest heavily in One Customer initiatives

Customers want to have easy, fast, simple conversations with ONE person about their banking needs and related issues such as credit cards. 

They will increasingly expect bank call centres to have a joined-up view. No more switches for hour after hour between one bank department and another. The greatest constraint on delivering this will be Legacy Systems.

More bank Legacy IT systems will be abandoned

97 out of 100 of the world’s largest banks are using Cobol systems which run on old IBM servers, technologies which are decades old. 

In every such bank there is not a single human being alive today who understands how all those systems work. As you can imagine, after a big merger, the result can be digital chaos for many years. 

On average it takes 7 years of hard, expensive work to get two bank Legacy systems to “talk” properly to each other.  

I have been in situations fairly recently, where a large banking client was unable to even work out how many male or female customers they had, without running several different reports on disconnected systems, and adding the numbers together by hand.

Expect more banks to give up the fight, and abandon Legacy systems altogether, transferring customers and services step by step onto totally new platforms, which are modular, agile, easy to add to, and which integrate with mobile.

Expect more banks to expand their presence in the Cloud - despite worries

Cloud-based banking services are now consuming 11-20% of typical bank budgets, but Cloud use will continue to be limited to less sensitive services in many large banks, because of growing concerns at board level about cyberattack risks.

So bank use of Cloud servers will lag far behind most other service industries.

Open Banking will be required by regulators

The days of closed banking are coming to an end. Closed banking means that other companies cannot integrate their own systems with bank data in any way, and that really will matter a lot to customers in future. 

Take a customer that has bank accounts in several nations, with several banks. They want to be able to see their total financial position on a single screen, but some banks refuse to allow access to APIs to make such third party Apps work.

Their motivation may be security, because Open Banking does mean greater access to systems. 

But it may also be fear of competition, and loss of customer relationship, if the customer ends up seeing each bank as just a provider of bits of their data, and their real relationship in future then becomes the FinTech company / App creator.

Expect many more Robot Advisors

More nations will tighten up laws on transparency about commissions and charges for financial products. 

In turn, this will mean that many financial advisors have to find a new way to earn money, as their customers begin to see how expensive their hidden charges have been, and how much of their personal wealth has been eaten away. 

Expect a boom in non-advised digital services, where there is no attempt to provide any personal assistance, for such things as pensions savings and investments. 

Alongside this, expect a boom in Robot Advisors in banks and financial services, where customers are asked a series of detailed questions online about their lives and their appetite for risk, before being offered a selection of “suitable” options to consider. 

As speech recognition and speech synthesisers both improve, expect more of these interactions to be by voice rather than keyboards.

More bank mergers

Despite all the problems listed above related to Legacy systems in old banks, expect a wave of bank mergers, not only among the giants but also at middle and small size. 

The reason is that banking is becoming too complex and too expensive for smaller banks to manage.

This trend to megabanking is part of a wider issue. Take retail for example: in the UK around 70% of all personal spending is captured by just 8 companies, while across the EU 50% is captured by just 10. 

Our world is too small to justify more than two global airline manufacturers, two mobile phone operating systems, 10 large pharma companies, 8 large auto companies…. 

Yet the same world has over 25,000 different banks and credit unions.

Here are several examples of the need for scale:

1. Bank Regulation and Compliance

Every time new banking regulations come into force, many hundreds of hours needs to be spent on expert legal advice, structural changes, activity changes and new kinds of bank reporting. 

For those outside banking it is hard to comprehend the devastating impact of all this on smaller banks who have similar reporting requirements and regulations to follow. Being a bank has become quite simply unaffordable for many smaller entities.

2. Capital adequacy

Banks are having to show far greater assets in the past, in many nations, to try and prevent a repeat of the last banking crisis. 

Bank resilience is the key. But this can be harder to demonstrate for a small bank than for a global giant.

3. Cybersecurity

See below. Every bank is being targeted relentlessly by criminals with ever greater power and sophistication. 

Small banks with smaller security budgets are very easy targets.

4. Smart customers

Customers are evolving at astonishing speed in how they think, feel and behave, and in their expectations of banks.

Rapid growth of non-banking payment platforms

Payment platforms don’t come under many of the normal banking regulations or requirements – so long as they are simply moving digital cash from A to B. 

Expect the number of such payment platforms to double over the next 5-8 years, but only a very few will become globally significant. 

The most valuable payments companies will be those that own the most widely used IP, rather than ones actually carrying out the most transactions.

Expect massive global FinTech battles for supremacy. Consider how few global credit card companies there are today: so who will be the mobile payments equivalent of Visa, Mastercard and American Express by 2035? The lesson of history is that it's all about global scale, not necessarily about having the smartest tech.

As you can imagine, companies like Google, Amazon, Apple, Microsoft and Facebook would all love to be part of this story.

Rapid growth of new bank entrants

Despite all the challenges of being a full service bank, expect many new entrants into retail banking in particular.

We've seen this going on for over 15 years now, with supermarkets and retail stores often leading the way. 

But new regulations will be a burden on all companies moving into banking. 

The capital adequacy rules for example are crippling to Telcos wishing to extend into banking. Suddenly a great chunk of their precious Telco capital will need to be tied up as reserves in case their banking adventures go wrong - capital that could otherwise be invested in smartphone innovations and next-generation customer services, or in expanding into new territories.

Mending the broken web

E-commerce fraud is out of control in many nations despite huge action, posing a major threat to all banks and credit card issuers, who usually have to refund personal losses from fraudulent transactions. 

Expect massive investment by banks in cybersecurity over the next 25 years. This problem will never go away, with banksin a constant race against ultra-smart gangs to employ ever greater sophistication in this global money war.

Up to 43% of all US e-commerce payments are fraud in peak months

The US alone is being hit by over $20bn a year of online fraud. 8% of online merchant revenues are fraud in America according to a Vesta / Javelin report, while up to 43% of US e-commerce orders are fraud in peak months (Lexis Nexus survey).

17m people across the United States are victims each year of identity theft, with 66% growth of account takeoever in a single year.

The fraud pandemic is not just limited to e-commerce. For just EU700 a criminal can buy 20 blank chip cards, reader and software to skim 21 cards a second at a distance of 15cms, including card number, name and address. 

Your own identity is probably for sale

The loss of personal data has been relentless, on a global scale, affecting billions of people. Chances are that some of your own passwords are already being sold online to anyone prepared to pay a few dollars:

Yahoo - 3bn user accounts - 2 years to reveal

Adult friend finder - 412m    

LinkedIn - 164m

Adobe - 164m   

eBay - 142m

Equifax - 143m - 6mths before detection

Heartland payments - 134m cards

Target Stores - 110m cards etc

TJX - 94m cards   

Uber - 57m

Dropbox - 68m  

Tumblr 65m

Banks are also very leaky – this is very sensitive for them. I have been at conferences recently where clients have asked me not to show the data below for fear of upsetting senior people in their audience.

Bank of New York Mellon - 12.5m

Citigroup - 3.9m

Bank of America - 1.2m

Unicredit Bank - 400,000 accounts stolen

Expect huge efforts to force stronger passwords

It doesn’t help that so many passwords are weak. 

1% of all people in the world use the password 123456. Another 1% use 1234567. And you guessed it, a further 1% use 12345678. If that does not work, a criminal can always try 111111, password, dragon, baseball, monkey, football, soccer, superman and so on. And how do we know? Because 10 million passwords were stolen from gmail alone recently.

43% use the same password n many sites, and 40% of companies store all their passwords in Word documents. Only 20% of people realize when their passwords have become public, and only 63% of those actually change all the passwords on all the sites where such a password is being used.

Oh, and a shocking 99.6% of all reported e-fraud cases in nations like the UK result in no prosecution.

Bitcoin will disappoint many banking investors

Many think the answer to fraud is cryptocurrencies and blockchain - if only it was that easy. 

Bitcoin transactions are extremely slow by digital standards and energy costly. 

Visa processes 24,000 transactions a second, but the Bitcoin system struggles at present to complete more than 7. 

Yet this tiny level of activity is burning up the same amount of energy as the entire nation of Austria, producing the same carbon emissions as Denmark. Bitcoin is therefore entirely unsuited to meet the demands of digital banking.

Blockchain is a permanent global digital ledger used by Bitcoin and many banks have invested heavily, hoping for an ultra-secure way to exchange documents. 

But despite $1.7bn invested, by the end of 2019 we had yet to see a single impactful innovation in any bank.

Some banking regulations will be relaxed

After the banking crisis it was inevitable that we would see waves of new regulation. 

And these are continuing to be rolled out, with unknown impact. 

However, expect some relaxation in some nations where regulations have become so severe that investing in banking in those nations has sometimes looked like a foolish idea. 

But that is in no one's interests. 

All nations need healthy strong banks that are able to make good returns to their investors who are usually tomorrow's pensioners. This is the dilemma for regulators: it will be a fine balance.

Looking back to 5 years ago

Here are predictions I made about the future of banking 5 years ago, at a Wolters Kluwer event. They asked me to return to then same annual event this year to update them - see all the above, and the video clip. 

So I began by looking at what I predicted 5 years previously.

1. Expect rapid changes in customer expectations

Yes indeed. Retail banking customers continue to evolve rapidly in their own expectations, mainly because of their growth in use of mobile devices. 

2. Mobile banking will drive radical change 

Yes. See above.

3. Market research will give some misleading answers 

Yes. Many banks have found that their customers changed more rapidly than market research suggested they might,

4. Major events will overtake many bank strategies 

Just look at the chaos created by Brexit-related decisions or the latest Tweets by President Trump.

5. Many banks will fail 2016 stress tests

Correct.

6. Lawsuits on Libor will be larger than fines

We have yet to see Libor lawsuits settled, but this statement looks correct.

7. Many banks will be paralysed by legacy IT /mergers

A major nightmare to all large banks – see above.

8. More questions in future re Active Fund charges

This certainly has the potential to create a major miss-selling scandal.

9. Expect huge growth in Cyberattacks

Yes – see above.

10. Future will require partnerships and collaboration

Absolutely vital. Banking is too complex, too costly, too rapidly evolving for banks to deliver what is needed on their own.

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