Banking and Finance: Key Predictions for 2023
Rohit Bhosale, digital banking specialist, Persistent Systems
Last year saw increased digital adoption within the finance sector, with industry organisations recognising the need for innovative technologies that enable them to deliver greater value to customers.
However, while digitalisation was at an all-time high, in 2022, financial organisations were also faced with a series of stumbling blocks due to fallout from new Brexit legislation, the pandemic, and increased geopolitical tensions. These conditions meant many institutions had yet to experience the full benefits of digital adoption.
As we begin 2023, the sector finally stands to see the consistent benefits of its digital adoption, particularly with the proliferation of embedded finance and artificial intelligence and machine learning (AI/ML). Meanwhile, previously attractive cryptocurrencies will see a downturn in investment and the role of physical bank branches will continue to change.
Financial organisations have ripe opportunity to start gaining a competitive advantage this year by harnessing technologies that drive innovation, change, and new customer experiences.
Digital and embedded finance will become more prominent
We’re already bearing witness to the spread of embedded finance where third-party organisations offer financial services through a wide range of familiar applications. For example, when you’re shopping online with your favourite retailer and opt for Buy Now Pay Later (BNPL) via services such as Klarna. This will only become more prominent in the months ahead, with additional services poised to optimise a customer’s experience across the buying journey.
This is a positive trend for financial institutions that can leverage these new levels of digitisation to boost customer acquisition and garner new revenue streams. Retail and e-commerce platforms, and payments and lending, are major use cases for embedded finance solutions today, but expect growth in insurance, tax, accounting, and other services too.
Although this trend will also contribute toward greater fragmentation within the sector, with more customers seeking service through third parties rather than directly, investing in the right capabilities will lead to multiple new opportunities.
Relevance of voice assistants will increase
AI-based assistants have become more widely used. With smart speakers such as Amazon Alexa and Google Home becoming more popular with homeowners, there will be a race to offer more services via them. This presents an opportunity for finance organisations to increase customer touchpoints and satisfaction, with the development of technology that enables account holders to access their accounts and make transactions via voice input. Theoretically, this means they’ll be able to transact simply by issuing commands to their devices, without the need for mobile apps, but importantly would provide consistency regardless of which device account holders use.
When achieved, we’ll see AI/ML adoption across the sector, with banks developing a suite of chatbots and digital assistance functionalities to improve the customer experience (CX) further.
At the same time, it’s important to note that there are many challenges that need to be overcome before AI-based voice assistant becomes a widely adopted technology. For example, security and privacy concerns will need to be addressed, both financial organisations and third-party providers will need to consider how to standardise security measures across devices.
Cryptocurrency will lose its appeal
While cryptocurrencies may continue to be popular in 2023, it’s also possible that they could lose some of their appeal as other technologies and financial products emerge.
The extent of crypto investment will decline, despite the number of investors having remained high in previous years. A series of shutdowns and issues with independent cryptocurrencies over the last 12 months have prompted doubts around their viability.
This doesn’t necessarily mean the increase of digital currencies will halt though, as many nations’ central banks are opting to launch their own digital currencies. In the UK, The Bank of England is in discussions regarding the central-bank digital currency (CBDC) and state that it would be less volatile, with ten digital pounds always worth the same as £10 in cash.
It is important to note that cryptocurrencies are decentralised and not backed by central banks, while CBDCs are centralised and issued by central banks. Cryptocurrencies are primarily used for speculative purposes, while CBDCs are being developed with the aim of improving the efficiency of payment systems and increasing financial inclusion.
CBDCs are a relatively new trend, and their future role in the financial system is still uncertain but their comparison with cryptocurrencies will evolve as both technologies continue to mature and as the regulatory landscape for digital currencies develops.
Physical bank branches will need to adapt
It’s likely that physical bank branches will continue to play a role in the banking industry, but their role will evolve and become more focused on providing specialised services and support to customers. Banks may also use physical branches as a way to showcase their brand, provide a physical presence in the community, and build customer relationships.
This means in-branch bank experiences will need to move beyond the traditional services they have always provided. While some transactions will still need to be done in-person for now, such as identity checks for a change of name on an account in some cases, most branches will find themselves becoming training hubs for customers rather than actioning financial tasks.
Training customers who still lack the digital skills to use online banking via a website or app is crucial in building customer confidence and trust in digital journeys. This means staff working in-branch will need different skillsets to those previously required.
Going forward, the most successful banks will likely be those that can effectively balance their digital and physical offerings to meet the needs and preferences of their customers.
The geographical formation of branches will also shift, with fewer physical locations in metropolitan areas compared to rural communities, where the extent of digital adoption may be limited.
External subject matter experts will help organisations succeed
With an ongoing wave of digitalisation sweeping the financial sector, it’s clear that industry organisations will need to consider which among a range of new technologies are best suited to their needs. However, it can be challenging to manage budgetary challenges and the need for technical training, and to invest in the right choices that can scale within the rapid pace of transformation.
This is where an external technology subject matter expert is poised to deliver unique value, given their understanding of the tech and finance landscapes, and knowledge of developments before they reach market-level awareness. Through consultations with these experts, financial organisations will be empowered to stay ahead of the curve in the coming year.
As financial organisations strive for growth and to improve margins, reduce complexity and optimise operations, it is imperative to deliver new, differentiated experiences. Working in partnership with technology providers is crucial to meet the pace of change to systematically manage innovation, engineering, and management across an organisation’s platform roadmap and service offerings.
With the right digital strategy there is no need to be afraid to reimagine, develop and modernise experiences across the financial sector.
Top banking trends of 2023 and global outlook of banking and fintech for the year ahead
Author: Professor Marco Mongiello, Pro Vice-Chancellor, The University of Law Business School
You’d be forgiven for assuming that the global outlook for banking and fintech will be dominated by the usual suspects:
Artificial Intelligence – AI plays an increasingly prominent role in banking and fintech by enabling personalised services, fraud detection, predictive analytics, use of chatbots and robo-advisors.
Blockchain and Cryptocurrency – the secure, decentralised and swift system for financial transactions that blockchain has brought to the fore a few years ago, is now becoming ubiquitous. An increasing number of transactions are recorded through blockchains technology, primarily in the cryptocurrency market.
Digital Banking and fintech – accelerated by COVID-19 pandemic, the adoption of digital banking is a trend that will persist as customers have become accustomed to the convenience and efficiency of digital banking. Moreover, fintech enables access to financial services for previously underserved populations in developing countries or less affluent social groups in more affluent societies. This includes mobile banking services, peer-to-peer lending platforms, and microfinance solutions.
Open Banking – another global trend is the use of open APIs (Application Programming Interfaces) that allow third-party developers to build apps to facilitate customers’ access to financial data and services from banks.
Nonetheless, the challenges posed by these rapid changes are reminders that banking, an industry that by its very nature needs to be conservative, risk averse and solid, wobbles on the unchartered grounds of fast and turbulent innovation, where entrepreneurship instead thrives. The underlying rationales of banking and fast digital innovation are not incompatible but do need solid operations and thought-through decision-making to avoid causing catastrophic collapses.
The recent examples of Silicon Valley Bank, Silvergate, FTX and Wirecard are stark reminders that digital entrepreneurship applied to banking doesn’t just bring to customers the visible transformation of valuable new services, but also dents (perhaps as an unexpected consequence) the rationale itself of the role of banks in the global economy. Moreover, the central banks’ ability to contain the effects of single banks’ defaults is no longer a certainty, as experienced just over a decade ago and more recently. The markets’ sentiments are hardly reassured by the commitments of even the most coveted players, such as the European Central Bank, the Federal Reserve, and the President of the United States himself.
Regulators are lagging behind and their attempts to catch up may cause further seismic shocks to the global banking system. For example, another trend that is emerging is one of artificial intelligence decision-centres (i.e., decentralised offices of banks which take autonomous decisions on behalf of investors) outside the most stringent regulatory environments, enabling banks to operate globally more efficiently and more competitively. And we can expect that regulators will close the gap either abruptly, as it is currently happening in China, where private banks are subject to an escalation of regulatory and monitoring restrictions, or more gradually as it is happening in Europe and in the US.
The questions we face, as individual or trade customers of our high street banks, as direct investors or clients of managed funds, are whether banking will become more user-friendly yet, for our daily use but riskier, too, or is it simply becoming more efficient, transparent and also safer.
I’m afraid that the answer is by no means an obvious one. Therefore, caution, level-headed decision- making and critical thinking have never been as important as these days. Whether you are looking after your family savings or growing your pension reserve, the imperative is that you keep updated about the providers of the financial services you rely upon as well as about the general regulations that apply to your financial transactions. This is where, for example, you need to be familiar with your rights in case of cyber fraud, as well as learning how to minimise the risk of becoming a victim thereof. Also, taking additional steps to evaluate the credibility, solidity and reliability of the online provider of that app that was recommended by a trusted friend, may prove a very good move.
Similarly, whether you are the CFO of a medium or large company, or are a sole trader wrestling with your own business’s finances, you need to reflect on what you really want from your bank in the first place. That is before you started to be swayed by the whirlpool of offers of ‘opportunities’ to multiply your financial investments. Chances are that your initial approach to your bank was dictated by either a need for financing your working capital, as per your budget and strategic plans, or to find a safe place for your temporarily idle liquidity. Perhaps you were also after some basic treasury services such as swift payments and debt collection. Maybe some other financial services closely related to your business operations, e.g. factoring. The advice is to give very careful consideration to services that are more remote from your business, because the trend for the next years is that more and more of those will be offered to you. But many new services will disappoint those who, sadly, cannot afford financial mishaps as they look to run and grow their business.
Will ‘Britcoin’ change the way we bank?
The Treasury and Bank of England recently announced a state-backed digital pound is likely to be launched in the UK later this decade, following the popularity of cryptocurrencies. However, the ‘Britcoin’ will be backed by the central bank, ensuring the digital pound will be much less volatile than its sister, cryptocurrency. Could a digital pound backed by the central bank be the answer to utilising technological developments in the finance system for the better?
Ross Thompson, Accountancy and Finance Lecturer at Arden University, considers what we can expect from ‘Britcoin’, how this will impact consumers, businesses, and the economy, and whether ‘Britcoin’ could be the revolution to restore our confidence in the banking system.
Trust in our financial system hit an all-time low post the 2008 financial crash. Even ten years on from the collapse of Lehman Brothers, a survey found 66% of adults in Britain still don’t trust banks to work in the best interests of society.
This means there remains to be apprehension for people to sign up to and use a bank to help manage their money. The UK doesn’t seem to struggle too much in this arena, however, as according to the Financial Conduct Authority (FCA), most UK consumers (96%) have a current account from a bank or building society. Regardless, there is still a significant number of adults who do not have a bank account or are what is known as ‘unbanked’.
The lack of trust plays a big part here. More people want better control over their money and to cut out the middleman, hence why cryptocurrencies and blockchain became a tempting option, as it can potentially remove the need for banks for any transactions. However, the volatility of these currencies has been a cause for concern for many investors and regulators.
Blockchain and cryptocurrency are gaining more traction and are becoming more of a viable option for businesses, especially due to talks of regulations coming into fruition. This is especially true with cryptocurrency, with the government announcing crypto assets will be subject to FCA rules in line with the same high standards that other financial promotions such as stocks, shares, and insurance products are held to.
The “Britcoin” aims to solve the issues traditional Bitcoin presents. It would be backed by the central bank, which would ensure its stability and reduce its volatility, making it a more attractive option for investors and providing greater confidence in the stability of the financial system. Britcoin will be as stable as the inherent stability of the British economy and political system. It would also provide an opportunity for the UK to stay at the forefront of technological developments in the finance system – a system in which it can sometimes be slow to react.
One of the key benefits of a digital pound is that it would be much faster and more efficient than traditional banking systems. Transactions could be completed almost instantly, regardless of where the parties involved are located. This would make cross-border transactions much easier and could even help to boost international trade.
The Bank of England’s Governor, Andrew Bailey, stated: “a digital pound would provide a new way to pay, help businesses, maintain trust in money and better protect financial stability”, pointing toward the other advantage of a digital pound. It would offer more security as transactions would be recorded on a distributed ledger, which would make it much more difficult for hackers to tamper with the system. It would also provide greater transparency, as all transactions would be recorded on the ledger and could be easily traced if needed.
However, there are also some potential drawbacks. One concern is that it could lead to a reduction in the use of cash, which could have implications for those who do not have access to digital technologies or who prefer to use cash for privacy reasons. There are also concerns that a digital pound could be used for illicit activities, such as money laundering or terrorism financing. On top of this, more details are required in relation to the levels of personal account privacy; the potential to usher in ‘big brother’ banking systems is a growing a concern regarding state digital currencies.
Around 85 central banks are currently engaged in projects to create digital currencies, according to figures from the Bank for International Settlements. But as it stands, many feel there is probably little need for a digital pound; with a growing amount of people using their debit cards, phones and watches to fulfil the same function, a digital pound is deemed unnecessary. On top of this, many of the public fear that a government digital currency could potentially infringe on their privacy – despite the BoE stating the currency would be subject to rigorous standards of privacy and data protection.
And in countries where a digital currency has already been established, there has been little uptake – widely due to the lack of trust between central banks and citizens. It seems gaining users’ confidence should be the Bank’s first priority. The House of Lords economic affairs committee stated last year that a digital pound would pose “significant risks” such as state surveillance, financial instability as people convert bank deposits to CBDC during periods of economic stress, an increase in central bank power without sufficient scrutiny and could be exploited by hostile states and criminals; it is safe to say that the nation’s ‘Britcoin’ will need to be very well thought out.
It has the potential to revolutionize the finance system, however, and could provide significant benefits to investors and consumers alike. However, the potential risks and drawbacks must be carefully considered before any decision is made to launch such a currency. Having said that, if it is implemented correctly, a digital pound could be a powerful tool for utilising technological developments in the finance system for the better.
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