The fourth global retail banking report from The Economist Intelligence Unit, sponsored by Temenos, finds an industry in flux but more certain about its future. By 2020 your bank may no longer manage your real-time digital transactions nor your new account opening, but it will still lie at the heart of your financial world.
In previous years, banks feared that financial technology (fintech) firms would steal all their lucrative business lines. But domination is harder and more expensive than assumed. Fintechs’ dreams of disrupting the entire banking industry may disappoint. Retail banks still hold—and will retain—a huge advantage. They have three “big Cs” on their side: customers, compliance and capital. As a result, fully automated banking may never happen. Although retired investors love Skyping their grandchildren, they do not want to talk finance with a chatbot.
So incumbents and fintechs must learn to mix old and new. Collaboration might even make us love our banks.
To measure how traditional players and fintechs can co-exist, The Economist Intelligence Unit, on behalf of Temenos, surveyed 200 senior retail banking executives about regulatory, customer, security and technology influences on the industry up to 2020. Respondents were drawn from across the world, with 60 banking executives from each key region—Asia-Pacific, Europe and North America—and 20 from the rest of the world. Just over half (101) work for commercial retail banks, while 20% work for private banks, 15% in savings, 12% in community banks and the remainder in credit unions. In addition, in-depth interviews were conducted with 36 senior executives from banks of all sizes, start-ups, venture capitalists and mutual fund managers.
The key points we found from this year’s survey were:
- • The regulators will decide. Capital and compliance will shape incumbents and newcomers alike. Domestic regulators warn fintechs not to expect an easy ride.
- • Into the unknown. American banks worry about regulation the most, despite a promised rollback. European policy direction is more certain, yet onerous. Geopolitics do not help.
- • Resistance is futile. The EU’s Second Payment Services Directive and open architecture are the game changers. Banks may lose their customers’ loyalty, fintechs could hit compliance barriers. Both must collaborate to survive.
- • Complacency is not a virtue. Fear of peer-to-peer lenders and robo-advice may have peaked. Non-banks could still steal deposit and lending business—and profit—unless banks improve the customer experience.
- • No cash, no cheques. If they are smart, banks may still win the war to build truly universal digital networks.
Over the past four years of conducting this survey we have seen quite a few swings and roundabouts: From banks being focused on regulatory change following the 2009 crisis to changing customer behaviour in response to new technologies to regulation re-emerging as the biggest impact on industry. Last year changing customer behaviour, increasing competition and the impact of technology were the top trends that were seen to have the biggest impact to 2020. This year the situation has changed. Changing customer behaviour is still one of the top trends to have an impact on retail banking, but it falls far behind product design and transparency and regulatory fines.
Banks recognise that although a tightening regulatory environment will impact them, it will also benefit them. The possible changes in bank capital requirements along with high compliance costs makes it that much harder for fintech firms to gain market share, particularly in traditional bank areas of advice and investment products. Nevertheless, the bankers are expecting these new entrants to still be able to gain some ground, particularly in mortgage lending and in consumer finance and credit. However, when it comes to regulation, the banks have the in-house capacity to meet compliance and security rules in a way the fintechs don’t, but they need to get the right tools in place, particularly as regards customer data and cyber security. Consumers trust banks to keep their money safe and, as banks adopt new services including for example, payment apps, they will need to be ever more vigilant. They will also need to be culturally sensitive: each country and culture requires a different approach. Some countries will be more willing to use technology such as e-wallets or mobile banking apps, while other want that human interaction that comes from bank branch visits.
It is clear that PSD2 with its requirement for banks to provide information to third parties and the introduction in 2018 of the General Data Protection Regulations will have an impact in terms of how banks and others use cyberspace; 73% of this year’s survey respondents said that the open banking API framework posed an increased threat of cybercriminals exploiting weakness in online payment and banking systems. Data and how it is handled is really is the driving story for banks moving forward. This year’s respondents said the biggest challenge was data protection (29% vs 7% last year). How well bank’s handle the data situation will definitely contribute to how much customers will continue to trust them and stay with them.
Additional content relating to the report can be viewed here including a video and infographic highlighting the key findings from the report.